A Destination-Based Tax Code to Increase American Competiveness

John Boehner

One of our top priorities with a unified Republican government in 2017 will be to replace our broken tax code with one that’s more fair and competitive. A key component of this plan is adopting a destination-based tax code by using a mechanism known as border adjustability to level the playing field for American businesses and bring jobs back home. That’s a mouthful, so let us cut through the jargon. Here’s how this works and why it’s so important for economic growth:

What is a destination-based tax code?
Today, the U.S. operates an origin-based tax code, which means goods are taxed based on where they are produced rather than where they are consumed. A destination-based tax code means taxing goods based on where they are consumed rather than where they are produced.

What is border adjustability?
Border adjustability is simply the mechanism used to achieve a destination-based tax code. An export border adjustment exempts exports to foreign markets from U.S. taxes—just like foreign-to-foreign transactions. An import border adjustment taxes imports to the U.S. at the same rate as U.S.-to-U.S. transactions. Both of these adjustments are included in our tax plan.

Why is it so important?
Today, American businesses that manufacture goods here at home and ship them overseas pay a U.S. domestic production tax and a tax enforced by the foreign country importing our goods—Made in America goods get hit twice. As a result, many companies move their production offshore to avoid paying the U.S. taxes, and then sell goods back into the United States. That means lost American jobs. Meanwhile, most of the industrialized world operates a destination–based consumption tax, which means the U.S. is currently at a self–imposed disadvantage to our foreign competitors. Therefore, adopting a destination–based consumption tax would level the playing field for American businesses and incentivize them to produce their products stateside. This would help bring countless jobs back to America, increase exports to the rest of the world, and improve our energy independence by encouraging greater domestic production.

How does this fit into the broader GOP tax plan?
A destination-based tax code with a border tax is necessary to enact the broader House Republican tax reform agenda, which the Tax Foundation estimates will boost wages by 7.7 percent, increase GDP by 9.1 percent, and create 1.7 million full-time American jobs. For example, the estimated $1 trillion dollars in revenue generated through a border tax will help offset slashing the corporate tax rate from 35 percent to 20 percent. In addition, this proposal would allow for the establishment of a pure territorial system in which taxes are paid based on the location of the customer rather than the company. What does that mean? This will incentivize Americans businesses to bring home the trillions of dollars they have parked overseas, not to mention bring jobs back home and make us more competitive in the global economy.

Will this lead to increased consumer prices?
No. Many experts agree with our assessment that the export exemption combined with the taxation of imports will lead to dollar appreciation that, combined with our new 20 percent corporate tax rate, will counterbalance any price increases on imports. Therefore, a destination-based consumption tax leading to a stronger dollar coupled with a lower corporate tax rate will prevent consumer prices from rising.

Is this a VAT tax?
No. A VAT (value added tax) is a consumption tax that includes a hidden tax on employee wages that is paid instead by the employers. The concern with VATs is that employees don’t realize their wages are being taxed, which allows governments to raise enormous sums of money at low rates. Our proposal is a cash-flow tax that removes wages from the business tax base with a deduction, and instead taxes employees at the individual level. By allowing employees to directly see how much they are being taxed, our plan eliminates the possibility of stealth tax hikes on hardworking Americans.

Is this WTO compliant?
Yes. The WTO allows for this type of border tax on indirect taxes such as VATs or sales taxes, but not for direct taxes like income taxes or the estate tax. Our proposal is a hybrid that doesn’t fit into either of these categories, and there is no clear guidance from previous WTO decisions. As a WTO ruling would take a decade or longer to produce, we shouldn’t tie our hands on pro-growth tax reform due to the remote possibility of issues many years from now. The longer we wait to level the playing field, the further the U.S. will fall behind the rest of the world.

The current tax code is broken. Instead of incentivizing businesses manufacture goods here at home, our system today encourages them to move their plants offshore. This needlessly self-imposes a competitive disadvantage that is hurting our economy. Moving to a destination-based tax code will help bring jobs back to America, encourage investment at home, and increase our economic competitiveness abroad.

Read more:

Douglas Holtz-Eakin: International Tax Policy for a Vibrant American Economy (The Hill)

Stephen Moore: We Need Tax Reform, Not Tarrifs (Investors.com)

Ryan Ellis: Tax Reform, Border Adjustability, and Territoriality (Forbes)

Martin Feldstein: The House GOP’s Good Tax Trade-Off (Wall Street Journal)

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