Both the Trump Administration and the Republican majority in the Congress are engaged in a series of policy initiatives to promote higher rates of economic growth for the national economy. A central piece of the pro-growth initiative is tax reform, specifically lowering rates for individuals across the board, and more importantly, lowering the corporate tax rate so U.S. companies are competitive with our major trading partners. Corporate income taxes represent approximately 10% of total federal receipts, varying from $300 billion to $344 billion from 2014 to 2016.
Tax reform is essential to restore growth, but it is also expensive. To pay for tax reform, the leadership in the House of Representatives is proposing a border adjustment tax or BAT. The BAT seeks to adjust the difference between the lower taxes on the production of goods and services in internationally traded goods among many of our trading partners vs. the higher cost structure faced by U.S. firms.
The reason for this difference is many of our trading partners raise more of their revenue from value added taxes (VAT) instead of corporate taxes. This places U.S. firms at a disadvantage as goods sold both domestically and abroad face the same tax cost structure, much of it tied to the relatively high U.S. corporate tax rate. The proposed remedy is to place a tax on all imported goods, lower the corporate tax rate, and remove all taxes on exports. However, considerable opposition to this tax is already underway among firms with substantial imports (retailers, many refiners, etc.) and substantial opposition to the BAT is likely in the Senate, even if it is likely to pass the House.