US Mulls Tax Holiday on Exports, Disallowance of Imports in Profit Calculation

Speaker Paul Ryan and other leading House Republicans are pushing a tax plan that would exempt income from exports from US corporate taxes while denying tax deductions for the costs of imported inputs of goods and services into US production. This proposed “border adjusted tax” could cause cascading harm to US consumers, workers, manufacturers, retailers and, indeed, the entire US economy.

What does the plan entail?

In effect, this so-called BAT would tax imports and subsidise exports. It would discriminate against imported products by denying them equal competitive opportunities with like domestic products in the US market. At the same time, it would help US exports shove aside competing products in foreign markets. Sound good?

Almost any economist will say that the purpose of trade is not to export but to import. Why make or do for ourselves something we can pay others to make or do for us for less cost, freeing us to use our limited time and limited resources to make and do what we can make and do relatively better than others?

This basic economic principle – called “comparative advantage” – is the same whether we import by buying a good or a service from next door or from the next neighboring country. The wealth of nations – including our own – is maximised when we pursue our comparative advantage. Yet this fundamental premise for producing more national wealth in the form of more competitive jobs and more competitive industries is overlooked in the “border adjusted tax.”

What would happen if the BAT were enacted?

Some early predictions should give us pause about the impact of a BAT. Among these predictions, the taxes due from US companies reliant on imports could exceed their profits, the retail price for gasoline could increase by 30 cents per gallon, and the average cost of a car could increase by US$3,300. Moreover, with taxes used to rig the US market against imports, America would not gain jobs. Instead, many Americans would lose their jobs.

In fact, imports create jobs, directly and indirectly. As Anne Krueger, former chief economist for the World Bank, has explained, many US jobs are directly connected to imports and therefore depend on imports, and still more US jobs are created and supported by imports because using cheaper (and sometimes better) imports as inputs enables American manufacturers to compete more effectively with foreign firms in the US and worldwide.

Furthermore, low-cost imports do not destroy American jobs. Companies that become more competitive by importing at lower costs can afford to expand at home and abroad, and, thus, to create more jobs. In sum, Krueger concludes, “Without imports, many jobs that exist today would disappear.” And still more American jobs would never be created.

What of WTO obligations?

There is also the little matter that the proposed “border adjusted tax” would violate US treaty obligations as a member of the World Trade Organization.

President Trump has sent conflicting signals lately about whether he supports a “border adjusted tax.” He would be best advised to oppose it – and to advance, instead, policies that value imports as well as exports as part of an economic policy that reflects an understanding of the vast value of international trade to the prosperity of the American people.