Tax Reform and Trade Policy

President Trump has returned trade policies and related taxes to the spotlight. The Trump administration floated the idea of a 20% border tax adjustment or a tariff on Mexican imports to have Mexico pay for the wall. This article looks further at the issue of border tax adjustments, tariffs and trade policies.  According to basic economic theory, a standard tariff is a tax applied to imported products and is therefore generally expected to increase their cost. Accordingly, much of the burden of a tariff would fall on US consumers. By comparison, a border tax adjustment is a recalibration of a domestic tax, such as a sales tax or a value-added tax, designed to put traded and domestically produced goods on the same tax footing In other words, a border tax adjustment isn't a border adjustment if it isn't adjusting for a specific approach of domestic taxation, like a value-added tax. Nor is a border tax adjustment applied to a single country. In fact, if it isn't adjusting for domestic tax rules, it looks a lot like a tariff, and, like a tariff, it would run counter to US trade commitments and would therefore likely generate trade retaliation.