Trump's Possible 'Border Adjustment Tax,' Explained

President Trump has made American manufacturing a central concern. Can a complicated approach called a border adjustment tax make it happen? Planet Money looks at how it's supposed to work.

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President Trump says he will announce his tax plan in a couple of weeks. He did not give details, saying only it will be, quote, "phenomenal." One thing the president has hinted he will include is something called the border adjustment tax. Robert Smith of NPR's Planet Money team explains what that is.

ROBERT SMITH, BYLINE: The border adjustment tax is a way to lower the corporate tax rate. University of California professor Alan Auerbach has been talking about it for a decade, although he calls it the DBCFT.

ALAN AUERBACH: It's a destination-based cash flow tax. But we just all call it...

SMITH: That sounds terrible.

(LAUGHTER)

SMITH: That's terrible.

AUERBACH: Yeah, we need some PR help. I realize that.

SMITH: Recently, he got that PR help from an unlikely source, from President Trump.

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PRESIDENT DONALD TRUMP: Well, we're working on a tax reform bill that will reduce our trade deficits, increase American exports and will generate revenue from Mexico that will pay for the wall, if we decide to go that route.

SMITH: At first, everyone thought the president was talking about a new tax on Mexican imports. But then it became clear - Trump was embracing the border adjustment tax, although professor Auerbach says it doesn't quite do everything that Trump promised.

AUERBACH: If his objective is to punish other countries, this may not be the way to do it.

SMITH: What it does do is fix a couple of big problems with the way we tax corporations. It would lower the tax rate. Right now, U.S. corporations pay one of the highest tax rates in the world, 35 percent. The new plan would take that down to 20 percent. The border adjustment tax would also close this big loophole. Under current law, companies have an incentive to squirrel away their profits overseas. And Auerbach says, in a global economy, it's hard to know who should pay what.

AUERBACH: Where does a company like Apple earn the money that it makes on an iPhone? Does it earn it in Silicon Valley? Does it earn it in China? Does it earn in Ireland, where it has some of its intellectual property? It's really hard to know.

SMITH: Under the border adjustment tax, it would no longer matter where a corporation puts its offices. If a corporation sells in the U.S., it will have to pay tax on those profits, which leads to an interesting set of incentives. American exporters don't sell in the U.S., so companies that sell overseas, like Boeing and GE, would pay lower taxes. On the flip side, companies that import products to the U.S. and sell them here, they will pay tax - more than they do now. Megan Greene, the chief economist at John Hancock, says this means that companies like Wal-Mart, Best Buy, even car companies will have to pay the government more money.

MEGAN GREENE: They're probably going to pass the price of that on to the end consumer, so that means consumers are going to have to pay more for goods.

SMITH: There was a debate among economists about what would happen next. Some think that it will change the balance of trade - more exports, fewer imports. That's essentially what the president was promising. But the UC Berkeley professor Alan Auerbach says nope, there is one more step. The value of the U.S. dollar will adjust. Under this plan, it will get stronger and that would help importers like Wal-Mart, and the whole thing will be a wash. I had the obvious question for professor Auerbach.

So (laughter) if you go to all this trouble and then, at the end, everything's the same, why do it?

AUERBACH: Not quite. The issue we discussed before about multinationals no longer being able to shift where they report their profits is still there.

SMITH: In other words, it closes the loophole. Still, even with support from the president, the border adjustment tax will be a hard sell. Every tax plan creates winners and losers. And big U.S. importers are already promising to fight it.

Robert Smith, NPR News.

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