Border Adjustment and U.S. Competitiveness

Tuesday morning the House Ways and Means Committee held a hearing with major business leaders to discuss “Increasing U.S. Competitiveness and Preventing American Jobs from Moving Overseas.” The bulk of their discussion revolved around reforming the Tax Code to increase America’s competitiveness in the globalized economy.

The U.S. tax system compares unfavorably with other developed countries, as NTUF has noted. Currently, the U.S. has the highest statutory corporate tax rate in the industrialized world at 35 percent, and has numerous provisions that effectively create incentives for American businesses to relocate to countries with less onerous tax policies. Moreover, the current system that applies taxes to overseas earnings discourages business from bringing profits to the United States. It is estimated that over $2.5 trillion in earnings are currently held overseas.

At the heart of the hearing was a discussion on the much-debated “border adjustment,” which is included in the House Republicans’ Better Way Plan. The border adjustment would transition corporate taxes from an “origin-based” tax system to a “destination-based” system. This would mean businesses will no longer have an incentive to profit-shift from one country to another to avoid or lower their U.S. tax liability. Also, the border adjustment would end the “Made in America Tax,” which many experts have claimed encourages imports and punishes domestic made exports.

Ways and Means Chairman Kevin Brady (R-TX) expressed confidence in the ability of the Better Way Plan and border adjustment to increase U.S. competitiveness globally, level the playing field for U.S. manufactures, and encourage U.S. businesses to repatriate profits home for investments. Juan Luciano, President and CEO of Archer Daniels Midland Company, agreed with Chairman Brady and noted that border adjustment would level the playing field so American agriculture can compete with well-capitalized, non-U.S. companies. According to Luciano, “If we eliminate this imbalance, more investment, and more jobs, should come to the U.S.”

However, other business leaders on the panel, such as Target’s CEO Brian Cornell, expressed concerns about the “untested theory” behind the border adjustment, and claimed that it could result in not just an increase in corporate tax rate for American businesses like Target, but could also raise the prices of everyday essentials, like groceries and clothing, by up to 20 percent. Additionally, Brian Anderson, the former CEO of Best Buy, in a statement for the record, echoed Cornell’s concerns when he predicted major job losses for the retail industry if border adjustment is enacted within tax reform.

The “untested theory” which Cornell and others at the hearing referred is that any price increases in goods resulting from border adjustment would be offset, or largely mitigated by a stronger U.S. dollar. How would the U.S. dollar and the global market respond to border adjustment? The ability of border adjustment to do what is promised heavily depends of the answer to this question. As Senator Mike Lee (R-UT) has said, “[Border adjustment’s] success depends on a theory about international exchange rates that, if it doesn’t work, could ravage huge swaths of our economy.”

Among both politicians and business leaders, there is currently a great divide between proponents and opponents of border adjustment. As can be seen from the Committee’s hearings, the impact of the border adjustment’s inclusion or exclusion from tax reform legislation could be significant, but taxpayers should encourage lawmakers to not miss the forest for the trees. While the details of tax reform are significant, and the discussion and debate on border adjustment is also important, getting tax reform done is an imperative. Lawmakers cannot squander this historic opportunity to simplify the code, protect taxpayer rights, and spur economic growth.