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The Border-Adjustment Sleight of Hand

Summary:
With Republicans in control of Capitol Hill and the White House, this should be an opportune time for major tax cuts to boost American growth and competitiveness. But much of the reform energy is being dissipated in a counterproductive fight over the “border adjustment” tax proposed by House Republicans. The plan calls for dropping the top corporate tax rate to 20% from 35%, while exempting exports and taxing imports. House Republicans have latched onto the border-adjustment tax for a very practical and understandable reason. It supposedly would generate more than trillion of tax revenue over 10 years. That money could finance other parts of their agenda to generate growth, such as replacing today’s onerous depreciation rules with immediate expensing. Although their intentions are reasonable, this strategy is questionable. Start with the political blunder: Republican tax plans normally receive overwhelming support from the business community. But the border-adjustment tax has created deep divisions. Proponents claim border adjustability is not protectionist because it would automatically push up the value of the dollar, neutralizing the effect on trade. Importers don’t have much faith in this theory and oppose the GOP plan.

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With Republicans in control of Capitol Hill and the White House, this should be an opportune time for major tax cuts to boost American growth and competitiveness. But much of the reform energy is being dissipated in a counterproductive fight over the “border adjustment” tax proposed by House Republicans.

The plan calls for dropping the top corporate tax rate to 20% from 35%, while exempting exports and taxing imports. House Republicans have latched onto the border-adjustment tax for a very practical and understandable reason. It supposedly would generate more than $1 trillion of tax revenue over 10 years. That money could finance other parts of their agenda to generate growth, such as replacing today’s onerous depreciation rules with immediate expensing.

Although their intentions are reasonable, this strategy is questionable. Start with the political blunder: Republican tax plans normally receive overwhelming support from the business community. But the border-adjustment tax has created deep divisions. Proponents claim border adjustability is not protectionist because it would automatically push up the value of the dollar, neutralizing the effect on trade. Importers don’t have much faith in this theory and oppose the GOP plan.

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Veronique De Rugy
Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. Her primary research interests include the U.S. economy, the federal budget, homeland security, taxation, tax competition, and financial privacy. Her popular weekly charts, published by the Mercatus Center, address economic issues ranging from lessons on creating sustainable economic growth to the implications of government tax and fiscal policies. She has testified numerous times in front of Congress on the effects of fiscal stimulus, debt and deficits, and regulation on the economy.

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