'Border Adjustment Tax' Just Means New Loopholes

Republican Representatives Paul Ryan and Kevin Brady are promoting as part of corporate tax reform what is now being called the “border adjustment tax.” This complex plan would require a lengthy column just to explain it all, but in the very simplest terms you can think of it as a move toward a value-added-tax structure with corporate investment subsidies built in. Under one somewhat-neglected feature of the tax, companies could no longer deduct advertising, interest, rent and employee benefit costs from their bills for tax due. This is a recipe for major tax dodges and the further politicization of government-business relations.

To think through these problems, note that under circulating versions of the tax reform a company still can deduct its asset acquisition and inventory costs. So, to cite one potential problem, if a company acquires a building it can deduct that expense, but not if it rents a similar building. The result is that the rental market would suffer badly. Some companies would put up their own structures, but others might engage in temporary “repurchase” agreements so they are owning their space (“asset acquisition”) rather than renting it. That’s just one example of the big loopholes the new tax code could create.