The BAT proposal implicitly acknowledges capital mobility consequences, but its structure is a throwback to when policymakers anointed economic winners and losers without regard to the aggregate economic consequences.

House Speaker Paul Ryan and other Republican House members have proposed a lower corporate tax rate of 20 percent with a border adjustment. A border-adjusted tax (BAT) would apply to profits on domestic sales and on imports, but would not apply to profits from U.S. exports to other countries.

The self-defeating effects of BAT:

  •     Since U.S. producers would not pay the tax on profits from exports, the BAT would increase their efforts to sell goods and services abroad, and reduce the resources they devote to producing goods for the domestic market.
  •     The higher prices U.S. producers and retailers must pay for their inputs from both domestic and foreign sources will drive up prices for consumer goods, undercutting any real wage increases for worker groups in the export industries that directly benefit, and reducing the real wages of workers in industries that do not experience an increased demand for their labor.
  •     Proponents of the BAT say the dollar will appreciate to mitigate the increase in import prices, but that would defeat the purpose of the BAT’s goal to reduce imports in the first place.

“The BAT proposal implicitly acknowledges capital mobility consequences,” argues…