Republican members of Congress (Reuters: Jonathan Ernst)

House Republicans’ ‘border adjustment’ has run into serious resistance that could jeopardize corporate tax reform.

In June 2016, the House GOP released a tax-reform plan that would fundamentally change how the United States taxes business income. While such a large overhaul was bound to raise concerns with interest groups, criticism of the proposal has overshadowed a bigger problem — there is currently no viable alternative for fixing the corporate-tax code.


The House plan would transition the current tax code into a “destination-based cash-flow tax,” or DBCFT. There are many reasons to like this approach to tax reform. It would eliminate the corporate tax’s bias against investment by enabling businesses to fully write off capital investments at the time of purchase (full expensing). It would eliminate the interest deduction and no longer encourage companies to fund new projects with debt over equity. The proposal would also lower the U.S. corporate-tax rate (at 35 percent, currently the highest among members of the Organization for Economic Co-operation and Development) to a much more competitive 20 percent. Companies would no longer have the incentive or ability to shift their profits or their headquarters to foreign countries to avoid U.S. tax liability.

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Although the economics of the DBCFT make a lot of sense, its key component — the border adjustment — has run up against resistance. The border adjustment, which would apply the cash-flow tax to imports and exempt exports, is what gives the DBCFT a “destination base.” This component of the GOP plan, found in most value-added taxes and retail sales taxes throughout the world, would be trade-neutral and limit profit shifting by U.S. multinational firms. It would also attract high-return investment to the United States and raise about $1.3 trillion in additional revenue over the next decade to help fund the transition to a cash-flow tax and the lower corporate-tax rate.

Even with these positives, import-heavy industries such as retail and oil refiners are opposed to the provision. They believe that the border adjustment would greatly increase their costs and require them to pass them on to consumers. Although a lot of opposition is based on a fundamental misunderstanding of the provision, these concerns have been echoed among some lawmakers in the House and many in the Senate.

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Unfortunately, critics of the border adjustment have not yet offered any comprehensive alternative for corporate-tax reform. One big reason for this is that there are simply not that many $1 trillion corporate base-broadeners floating around out there that could replace the border adjustment’s revenue.

Policy-wise, there is nothing wrong with the House GOP proposal without a border adjustment — in fact, Estonia has a corporate tax that looks very similar to the House plan without border adjustment. However, the plan would no longer be anywhere near revenue-neutral, which is important given the budget-reconciliation rules that Republican lawmakers are hoping to use to pass tax-reform legislation. This would necessitate lowering the corporate-tax rate to only 30 percent to break even; companies may be unwilling to trade away their current deductions and credits for a rate cut of just five percentage points.

With these revenue constraints, it is possible that lawmakers abandon the cash-flow model of corporate-tax reform if the border adjustment is not politically possible. So, in a world without the border adjustment and the DBCFT, what could pro-growth corporate-tax reform look like?


The easiest path that lawmakers could take would head in the same direction as the DBCFT, but in a much less bold manner. A proposal like this could include permanent and expanded bonus depreciation (instead of full expensing), a territorial tax system, limits on the interest deduction, and a lower corporate-tax rate to somewhere around 25 or 28 percent. This smaller reform would have some of the positive qualities of the DBCFT. But a smaller reform would have a smaller impact on the long-term size of the economy. And this would still leave policymakers to deal with complex anti–base erosion rules (which DBCFT would resolve) and international tax-treaty compliance issues.

Another avenue for reform is the Senate reviving its proposal to integrate the individual- and corporate-tax systems. This proposal would eliminate the double tax on corporate investment. It would allow companies to deduct their dividend payments to shareholders and then tax investment income as ordinary income. As with the DBCFT, this proposal would fix a lot of the issues with the corporate tax by pushing the full tax burden onto U.S. shareholders. However, corporate integration could also run into issues with our tax treaties and complex rules for dealing with the taxation of capital gains.

Perhaps a bigger danger is that lawmakers see the opposition to the border adjustment and think that fundamental reform is too difficult. Then, rather than pursuing other reform options, lawmakers might simply cut the corporate-tax rate and call it a day.

Perhaps a bigger danger is that lawmakers see the opposition to the border adjustment and think that fundamental reform is too difficult.

A straight corporate-tax cut has significant downsides. For one, the budget-reconciliation rules Republicans are likely to use to pass a straight corporate-tax cut puts a significant limit on how long the tax cut could last. Under rules of reconciliation, no tax change can increase the budget deficit outside the budget window. At best, this means that a straight rate cut could satisfy this rule only if it expired after ten years. And the Joint Committee on Taxation has indicated that these cuts may only last up to three years, since corporations can time the recognition of income in a way that will reduce revenue far into the future.

Furthermore, a temporary corporate-tax cut would be rather disappointing economically. While we estimate that the House GOP’s DBCFT proposal would grow the size of the economy by 5.8 percent in the long run, a temporary tax cut would have virtually no impact on growth. Under temporary policies, companies would mostly alter their behavior to reduce their tax burden rather than investing more.


The House GOP put forth a bold proposal to reform the corporate tax. Although it would fix most of the significant issues with current law, one of its major components, the border adjustment, has run into resistance among some industry groups. Without the border adjustment, lawmakers may need to pursue alternative tax reforms. Alternatives could make meaningful improvements to the tax code, but also come with tradeoffs. Lawmakers should recognize this and pursue fundamental reform and try to avoid temporary corporate-tax policy.

— Kyle Pomerleau is the director of federal projects at the Tax Foundation.