Economist Alan A. Auerbach is credited with coming up with the BAT in 1997. For example, if U.S. had a BAT, imported goods that are sold in the U.S. would be taxed while goods exported from the U.S. would not be taxed. The BAT was proposed as a part of the sweeping tax reform in the U.S. in 2016. However, it received stiff opposition and ultimately failed to be a part of the tax rule changes that were implemented in. 2018. Suppose XYZ Company manufactures housecleaning robots. The robots require a certain computer chip that tells them when it’s time to mop your floor. XYZ Company purchases these chips from a source in Taiwan. It then assembles its robots and sells them to consumers in the U.S. Because U.S. buyers purchase the robots, the money they bring in for XYZ Company is subject to the BAT and is taxed. This would be the case even if XYZ were to manufacture its robots in another country where labor might be cheaper, not actually on U.S. soil. XYZ Company cannot deduct the cost of the chips as a business expense either. Theoretically and in the long run, it’s anticipated that these rules would have had a balanced effect on trade, because exports aren’t taxed. That portion of sales would escape the BAT if XYZ also were to sell some of its robots in Canada.
The Goal of the Border Adjustment Tax
Why make such a significant change? The goal was that it would strengthen the U.S. dollar and that this, in turn, would eventually cut the cost of imported goods. Manufacturers would additionally be deterred from increasing their profits by purchasing cheaper parts from other countries. The BAT would discourage U.S. firms from establishing locations in other, low-tax countries as well, then selling what was produced there to U.S. consumers. And it would create more American jobs if they were to stay on U.S. soil. Proponents have argued that implementing the tax would raise something in the neighborhood of $1 trillion over 10 years. The Tax Foundation put the number at closer to $1.1 trillion in 2017. That much money would nicely offset the deficit that might yet result from slashing corporate tax rates, which happened in 2018 when the Tax Cuts and Jobs Act (TCJA) reduced the rate to 21% from 35%.
Arguments For and Against the BAT
The biggest push against implementing a BAT is that the tax would trickle down to U.S. consumers. Companies would effectively pass the tax onto them. A BAT would raise prices for consumers even as it produced more jobs, making it something of a wash. The tax would affect taxpayers who were collecting paychecks but would have to spend more for everything from automobiles to clothing to those robotic maids. Numerous American businesses immediately cautioned that they would raise their prices in response if the BAT were implemented. The argument in favor of the BAT is that this effect would not last forever. It would balance out in the long-term, and wages would rise as well. But taxpayers can’t be blamed if they don’t want to wait for relief. Opponents claim that the tax would increase inflation as the costs of imported goods and parts would rise. Exports could be expected to decrease, because a stronger dollar would make it more expensive for other countries to buy from the U.S.
Where Does the BAT Stand?
Republicans first launched the idea of Auerbach’s version of the BAT in 2016. They did it hand-in-hand with their proposal to cut the corporate tax rate. By early 2017, the tax was the subject of hot debate among legislators and lobbyists alike. The Republican Party was divided, or at least ambivalent, on the issue. The final version of tax reform that went into effect in 2018 did not include a border adjustment tax.
