Republicans in the House of Representatives are planning to propose a major reform of US corporate taxation and President Trump is reported to be "warming" to it after terming the plan "too complicated" last month. Last Friday Kevin Brady, the Ways and Means Committee chairman, said "when combined with the other historic reforms we are proposing, it will eliminate every tax incentive for businesses to move jobs, headquarters, and research and development outside the United States."

 

The Republicans are proposing to replace the worldwide US corporate tax system with a territorial tax approach to end what is termed ‘Made in America’ tax on US exports.

The border adjustment tax proposal is to replace the current headline corporate tax of 35% (the average effective corporate tax rate in the US from 2007 to 2011 was 22%) with a 20%  corporate tax or less, with imports taxed and no deduction as an expense but companies that exported American goods and services for sale abroad would be exempt from the tax.

Representative Brady said:

Unlike our foreign competitors, the United States does not currently tax the sale of products based on where the sale takes place. Instead, we tax the sale of products based on whether those products are made in America or if the business making them is headquartered here — hence the ‘Made in America’ tax.
This ‘Made in America’ tax is one of the most antiquated, uncompetitive, and anti-growth features of today’s US tax code. It puts our ‘Made in America’ goods, services, and intellectual property at a direct tax disadvantage here at home and around the world. And, worst of all, it provides a direct tax incentive for businesses to move jobs, investment, and operations outside the United States. After all, if it’s not made in America, it’s not subject to the ‘Made in America’ tax.

The tax would be less easily avoided than the current corporate tax as it would be harder to fiddle with sales data compared with other corporate activities such as intra-company transfers.

The Financial Times says that the "tax would be levied on cash flow — the cash entering the business less the cash leaving it. This makes it the equivalent of VAT with a deduction for labour costs.

By moving from a conventional corporate tax that taxes exports, the border adjustment tax would — all else being equal — make exports cheaper on the world market. Conversely, the domestic cost of imports would increase because of the tax on imports. This aspect of the proposal has sparked intense opposition from Walmart and other big importers.

But advocates of the new tax insist it would not harm importers. Nor would it create a windfall for exporters in the way its critics suggest. Economic theory predicts the dollar would appreciate by 25% against other currencies if a 20% tax was imposed, since the new tax would reduce demand for imports and so result in fewer dollars being exchanged with foreigners."

Discussions are at an early stage and it has the attraction that Trump could avoid trade wars with his proposed border taxes/ tariffs on for example Mexico and China.

However, it's unclear if the imports tax with be in conflict with World Trade Organisation (WTO) rules.

The Irish Times today reports that "Sean Spicer, press secretary to president Donald Trump, praised Ireland’s economic policies, holding them up as examples that the US administration should follow."

"The proposed changes should not be viewed as a threat to Ireland, he stressed," the newspaper reports.

The press secretary has no involvement in the emerging tax proposals and the assurance that there is no threat to the Irish FDI (foreign direct investment) model is worthless.

 

  Alan Auerbach, University of California, Berkeley professor of economics and law

 

Wall Street Journal

 

Peterson Institute for International Economics

Ireland needs new economic development plan for next 20 years

US Tax Foundation FAQs about the Border Adjustment Tax

Reuters reports that US companies including major exporters General Electric and Boeing launched a coalition on Thursday to back the House Republican plan to tax all imports, saying the proposal would "support American jobs and American-made products."

The group, comprised of more than 25 US companies and dubbed the 'American Made Coalition,' also includes Dow Chemical, Eli Lilly and Co, Pfizer Inc, and Oracle Corp, the companies confirmed.

Reuters also reported that the Retail Industry Leaders Association, which represents more than 120 trade associations and companies, launched a separate coalition on Wednesday to fight the House Republican proposal known as the "border adjustment" tax.

“The border adjustable tax is harmful, untested, and would put American retail jobs at risk and force consumers to pay as much as 20% more for family essentials,” said Sandy Kennedy, president of the group.