In addition to a reduction of the corporate tax rate, Congress is considering a border-adjustment tax. Under this tax regime, companies would not be able to deduct the costs of imported inputs from their taxable income however their export-sales revenue would not be taxed.

According to an article in Project Syndicate by economists Emmanuel Farhi, Gita Gopinath and Oleg Itshkoki, a border-adjustment tax in the U.S., which maintains a flexible exchange rate, would cause the dollar to appreciate along with demand for U.S. goods.  If the Federal Reserve were to counter the appreciation by lowering interest rates then there would be a rise in domestic inflation. The currency appreciation (i.e. a 20 percent tax cut would push the value of the dollar up by 20 percent) would offset the competitiveness gains afforded by border-adjustment.
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Eighty-five percent of U.S. foreign liabilities are denominated in dollars while about 70 percent of its foreign assets are denominated in a foreign currency. As such, the authors believe that an appreciating dollar would diminish the country’s net foreign-asset position. U.S. foreign assets amount to 140 percent of its GDP and its foreign liabilities amount to 180 percent of GDP. A 20 percent gain in the value of the dollar would result in a capital loss equal to about 13 percent of GDP.

Last Updated on January 11, 2017 by Ramin Seddiq