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Legislative Efforts to Enact a Border Adjustment Tax Abandoned

House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, Senate Finance Committee Chairman Orrin Hatch, House Ways and Means Committee Chairman Kevin Brady, Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn on 27 July issued a joint statement on tax reform. Among other things, the officials stated that “while we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform.” Consequently, efforts to include a border adjustment tax (BAT) as part of a comprehensive overhaul the U.S. tax code are now officially defunct.

Under a House Republican plan unveiled in 2016, the U.S. corporate income tax would have been converted from an origin-based tax (based on where goods are produced) to a destination-based cash flow tax (based on where goods are consumed). This shift was to be achieved via the BAT, which would have disallowed the existing tax deduction for costs associated with imported articles or inputs while exempting export revenue from corporate income tax calculations. This change would have ostensibly brought the U.S. tax system more into line with those of major trading partners, which impose value-added taxes that are rebated when a product is exported and imposed when a product is imported.

The BAT met with opposition from a number of businesses and trade associations, who warned that it would “significantly hurt” U.S. consumers and employers by increasing the cost of everyday products such as food, gas and clothing by up to 20 percent. There was also concern that the BAT could run afoul of WTO rules, particularly those that prohibit discrimination against imports in favour of domestic goods, which could have led to foreign countries levying an unprecedented amount of retaliatory duties on U.S. exports.

In their 27 July statement, the officials expressed confidence that “a shared vision for tax reform exists” and said they are “prepared for the two committees to take the lead and begin producing legislation for the President to sign.” The goals of this approach include reducing tax rates as much as possible and creating a system that encourages U.S. companies to repatriate jobs and profits from overseas, and the officials’ expectation is for legislation to move through the committees in autumn 2017 under regular order followed by consideration on the House and Senate floors.

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