Why the Border Adjustment Tax is a Horrifically Bad Idea

If you’re a store owner you may have heard about the Border Adjustment Tax, or BAT.  On the surface, it sounds potentially appealing.

It promises to simplify the tax code and bring down U.S. corporate tax rates (one of the highest in the world) to a more reasonable 20%. It would impose a 20% tax on all imported products (and raw goods) and drop the tax rate on profits from exports to 0%.

Simplifying the tax code and encouraging domestic manufacturing – sounds great, right?

No. It’s a terrible idea.

Worse, possibly, than a politician body slamming a reporter the night before the election.

(OK, maybe not that terrible – but still pretty bad).

Here’s why:

It’s a Massive Tax on Consumers

If passed, the BAT would end up as an enormous tax on consumers.

The majority of what Americans purchase are made overseas.  If a 20% tax was levied against all imports businesses would pass the majority of that extra cost on in terms of higher prices.

Prices on just about everything you’d buy at Target or Wal-Mart would go up 20%.

Overnight.

It Ignores the Benefits of Free Trade

The great majority of economists agree:  free trade is good.

It’s not perfect and there are certainly winners and losers, but the professionals who study this stuff say the pros far outweighing the cons.

By passing the BAT, we’d be giving up:

The Benefits of Competitive Advantage

I live in Montana where it’s freezing cold nine months of the year.  An orange tree would barely have time to laugh at me before dying under 36 inches of snow.

So we get our oranges from Florida.  I’m guessing a few Floridians enjoy steak raised on the ranches of some of my fellow Montanans.  Or travel to and enjoy the gorgeous mountains of Glacier National Park given their relatively flat terrain.

Our states both have unique strengths and providing equal access makes everyone better off.

And the BAT completely ignores that basic principle.  The United States shouldn’t focus on weaving basic fabrics, making Brie cheese or trying to best the Cubans at cigars.  Those are things other countries can do better than we can.

Increased Security

You’ve likely heard the famous quote:  “When goods don’t cross borders, armies will”.

It’s why the Marshall Plan – the U.S.’ effort after World World II to help rebuild Europe – placed an emphasis on removing trade barriers.  It was seen as a crucial element of building a peaceful post-war continent.

We’re likely not going to go to war with China over a 20% import tax.  But it is a slippery slope and eat away at……

Protection from Trade Retaliation

If we slap a 20% tax on all imported goods, there’s a very good chance (or at least, an emotional incentive) for other countries to do the same to us.

This could actually hurt the exporters that the BAT is trying to help by making their good more expensive abroad.

It Will Hurt Most Businesses

Businesses will feel the pinch of the BAT alongside consumers faced with higher prices.

Consumers will purchase fewer products due to the newly raised prices.  Especially in highly competitive markets, it’s likely that businesses won’t be able to raise their prices by the full price of the import tax which will hurt profit margins.

I’ve talked to multiple store owners who are terrified of this passing.  They fear it could easily put them out of business.

Ultimately, the BAT Addresses the Wrong Problem

Ultimately, the BAT is trying to solve an unsolvable problem:  bringing manufacturing back to the U.S.

People are often surprised to learn that as a country we’re manufacturing twice as much stuff here at home as we did a decade ago.

It’s not manufacturing that’s in decline.  It’s the number of manufacturing jobs.  The need for humans – particularly raw labor – has plummeted with advanced technology.

There are good and bad things about this.

I can strongly empathize with someone who has worked on an auto line all their life only to lose a job in their late 50s. Retraining at that age is a difficult proposition.

The good news is that there are increasing number of higher-skilled opportunities in the sector.

The Atlantic reports that “The U.S. economy will need to fill 3.5 million skilled manufacturing jobs over the next decade…..skilled and educated workers such as engineers and scientists.”

Currently, as many as 90% of domestic manufacturers have trouble finding workers who can perform the jobs they need. Opportunities are there, but our current workforce doesn’t have the skills needed to fill them all.

So where am I going with all this?

Ultimately, the BAT is trying to solve the wrong problem.

Instead of trying to bring back jobs that aren’t viable through tax incentives we should be focusing on our competitive advantage:  adding value through design and innovation.

A better solution is to invest in education.  Perhaps that takes the form of subsidizing advanced training for displaced workers. Maybe it’s subsidizing tuition at universities in high demand manufacturing degrees.

It’s not a straightforward or problem-free path.  Retraining programs have seen varying degrees of success.  Not everyone has the aptitude (or the desire) to perform these higher-level jobs.

But an imperfect approach to addressing the real underlying problem is far superior to trying to fight the forces of globalism and technology that are radically re-shaping our economy and the world.

Your Thoughts?

Think the BAT actually would be a positive for us here in the U.S.?  Are you one of the few economists who takes issue with the “free trade is always good” mantra?  Or are you outside of the States and tired of all this U.S.-based news?

Let me know in the comments below!

Photo credit to Roger W.

Post tagged in: Articles, News

17 Comments

  1. Do you really feel the BAT has a chance of passing? It seems more like Trump following through on a unachievable promise of bringing jobs back, protectionism and border walls then pointing a finger at congress when none of it happens.
    You are 100% right, its bad policy and the real issue is a skills gap, as they say in business and in life, innovate or die.

    1. I think the chances are low, but not existent. Fortunately it sounds like the bill has been losing support the last few days in Congress.

      But it’s been a pretty wild year in politics, and I know some smart people who think there’s a much larger chance of this passing than I would have given it.

      So I figured I’d be safe and write a fire-and-brimstone piece just in case. 🙂

  2. Ever since Trump was just a candidate and proposed this import tax, I said it would never pass for the very reasons you pointed out. Our (American) way of life hinges on buying many consumable and durable goods from over seas or just across our southern and northern boarders. Retailers like Walmart would be forced to pass on the 20% BAT onto customers. This single act would destroy low and middle income households. I would be shocked to see the House and Senate approve it.

    1. Agreed! Yeah, it’d be an incredibly regressive tax assuming other things (like a dollar rebalancing) didn’t happen. Fingers crossed it doesn’t go anywhere.

      Thanks for reading!

  3. Great article Andrew. Part of me feels like Trump voters should just get what they signed up for, while the more rational part of me is frightened about the outcome of this legislation and the impact on my business and the economy. It’s a perilous time we live in.

  4. I’m certainly not an economist. So I [listened to Planet Money](http://www.npr.org/sections/money/2017/02/01/512921756/episode-751-the-thing-about-that-border-tax). 🙂

    Prices would go up immediately – however the dollar would eventually strengthen because of currency exchange rates. So prices wouldn’t *feel* higher (listen around minute 13 in the PM podcast).

    The issue is that economists don’t agree *when* the dollar would strengthen. It could be a day, a week, a decade, or a century. And that’s certainly a huge gamble.

    Other benefits: replace the tax revenue lost in the corporate tax holes with this tax. We’ve all heard about giant companies like Apple & Google not paying any taxes. We could fix that problem, strengthen the dollar, and encourage more industries in the US.

    Not saying I’m for it. I’m a fan of Adam Smith & The Wealth of Nations. But it is a very complicated problem. And closing the corporate tax loop holes could bring in a ton of revenue which could do all sorts of things to benefit the US economy. Also a stronger dollar is always a good thing.

    Of course this doesn’t take into account what other countries will do in retaliation. The policy has to be explained calmly and rationally so other countries don’t retaliate. And I don’t think the Trump administration could do that (minute 16).

    The creator of the BAT has been working on this for 10 years. Would love more economists to start looking into it so we understand it more.

    1. Hey Patrick! Great thoughts, thanks for weighing in!

      I listened to that podcast too (love Planet Money) and was pretty surprised at how sanguine they were about it. They are a pretty smart crew, so perhaps that is not a good sign for my argument.

      To your points: if the dollar did increase somewhat soon (as described in theory) than I agree – I’d have to reconsider. But I’m not convinced it would do it quickly and (perhaps I’m going to draw some scorn here) am not convinced that economic theory always plays out how it’s suppose to in reality.

      For example: One of the big cornerstones of economic theory is that people act rationally. However, people are often anything but:

      https://www.theatlantic.com/business/archive/2013/01/the-irrational-consumer-why-economics-is-dead-wrong-about-how-we-make-choices/267255/

      Also, I feel like we’re living in unprecedented fiscal times in terms of interest rates, money supplies and globalization. I’m not saying that basic economic theory doesn’t apply, but I do think the environment we’re in is a fairly unique (and complex) one. I’m not super confident people will be able to predict exactly how things will pan out for something this involved and complex in terms of how free floating currencies adjust.

      On the tax loophole: 100% agree, that’s a great advantage. And the BAT does deal with it nicely. I just wish there was a way to accomplish it that didn’t have to be bundled with the other problematic issues in the bill.

      Side note: This is a great article that explains why – in theory – the BAT would result in a stronger dollar that would offset the increase in import prices. Helped me wrap my head around the issue as it’s not a super intuitive concept:

      https://taxfoundation.org/exchange-rates-and-border-adjustment/

      Thanks again for your thoughts Patrick!

      1. Andrew, maybe the economists need to do some reading up on psychology and marketing. The accepted opinion with these crowds is that people act emotionally, not rationally. Isn’t it fascinating how so many “experts” and studies can be so different? Not to mention the political parties.

  5. This law will definitely put a serious crimp in my new (3 years) very small ecommerce business. Most of the things I sell online are made by me but I do have a sewing shop where many of the items I order from my supplier will be imported. They’ll raise their prices and mine will have to go up to compensate leaving my sales pretty much at zero. Another small business destroyed by unreasonable taxes.

    1. Good news is that it’s looking less likely that it will. Hopefully it stays that way. Thanks for sharing Kathrine.

  6. According to today’s Washington Post, John Boehner says the bill is as “dead as a doornail.”

  7. I’m an importer and I think this is BAD policy and BAD Politics. Something I have in common with Walmart? I will pass this on to the consumer and THEY will ultimately pay as you suggest. A good portion of whom are living from paycheck to paycheck & spend a large % of their income there. They also wanted to shake up the establishment and don’t care about who is lying or what version of the truth anybody wants them to believe; they want outcomes that make their lives better. BTW while I agree that body slamming is absolutely indefensible from your new Congressman, it is also a new reality that a sizable portion of the electorate doesn’t care; they feel body-slammed everyday.

    Looking at Corporate Tax Rate in absolute terms is non-sensical; you have to look at the EFFECTIVE rate corporations pay. A little guy like me does not have a lobby group in DC so unlike Google/Apple/Big Oil I won’t be able to have slew of deductions to allow me to get it as close as possible to zero. Like lunches, trade isn’t 100% free and should not be; some regulation is required and I suppose that will now be up to our representatives.

    Great article – thank you.

  8. It is my understanding that there used to be a something called the Research and Experimentation Tax Credit. Bringing that back might help in the same way as education, but even more quickly.

    I agree with James Grasty that Trump might just be blowing smoke. It’s a simplistic approach, which has already met it’s goal, garnering a certain segment of voters.

    That being said, the suggestion that it may happen has changed my own product development plan. I was intending on splitting the manufacturing of a new product between separate domestic and foreign plants. Now, I’m sticking with just the one in the U.S.

  9. The border adjustment tax is part of the America First concept. I wouldn’t call it a policy or strategy since it is not very clear what that actually means in reality. It’s based on the flawed idea that the trade deficit is per se bad for the US. It is also intended to protect American jobs.

    Not that trade imbalances should not be addressed if their source is a deliberate intervention by another country’s government. China has industries that operate under heavy government protection. Europe’s agriculture is heavily protected.

    Well, protectionism doesn’t work, and this border adjustment tax is hopefully destined for the dust bin. The Senate is certainly not going to go for it. It won’t bring back jobs.

    Instead of addressing the educational crisis in this country and the lack of skilled labor by for instance making a major push into vocational training, and more affordable higher education, the administration goes with what sounds good to a part of their constituency. And I havn’t even mentioned the rise of AI and robotics yet.

    Full disclosure: The border adjustment tax would be a major blow to my business. I am importing what isn’t made in the US any longer for over 50 years: Baskets, believe it or not.

  10. Most of the comments credit Trump with proposing the border adjustment tax. In fact, Trump opposed the border adjustment tax when it was proposed and continues to oppose it to this day.

    “Credit” for this proposal belongs to House Speaker Paul Ryan, House Ways and Means Chairman Kevin Brady and other Congressional allies of Paul Ryan.

    This proposal, as currently drafted, is much more radical than Andrew’s article suggests. By eliminating the ability to deduct cost of goods sold from taxable income on imported goods, it would effectively make tax obligations exceed income for the vast majority of importers. In other words, it would put them out of business.

    Do Ryan, Brady, et. al realize this?. Probably, but they also know that the idea has no support from the Trump Administration and fewer than 10 votes in the Senate, so it has essentially zero chance of becoming law.

    Stop why do they propose it?. Because establishment GOP politicians specialize in proposing things, such as full Obamacare repeal under Obama and now the border adjustment tax (BAT), that they don’t believe have any chance of passage.

    When a partial Obamacare repeal bill finally came to an actual vote in the House, moderate Republicans were puking their guts out and it wouldn’t have passed at all if it weren’t for Trump’s lobbying efforts. The GOP-controlled Senate may not be able to pass an Obamacare repeal bill at all.

    All of the Congressional hot air on the border adjustment tax is just a smokescreen to divert attention from the fact that many of these guys don’t actually support Trump’s proposed tax cuts any more than they actually support Obamacare repeal.

    Trump will have his work cut out for him in persuading the GOP Congress to support both Obamacare repeal and major tax cuts (most certainly not including the BAT, a major tax increase if there ever was one). Those of us who support pro-growth economic policies need to be lending our support to Trump instead of taking unfair pot shots at him.

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