Jeffrey Hoopes is Assistant Professor of Accounting at the University of North Carolina at Chapel Hill. This post is based on a recent paper by Professor Hoopes; Fabio Gaertner, Assistant Professor at University of Wisconsin; and Edward Maydew, David E. Hoffman Distinguished Professor of Accounting at the University of North Carolina at Chapel Hill. Additional posts addressing legal and financial implications of the Trump administration are available here.
We examine the effects of a proposed border adjustment tax (also referred to as the “BAT”) on the shareholder wealth of publicly traded firms. Border adjustment has emerged as a controversial feature of proposed U.S. corporate tax reform, as it would be a dramatic departure from longstanding corporate tax policy (Avi-Yonah and Clausing 2017; Auerbach and Devereux 2017; Feldstein 2017; Rubin 2017). With a border adjustment tax, export revenue would be exempt from tax, while the domestic costs to produce the revenue would continue to be tax deductible. The cost of imported goods and services, however, would no longer be deductible for tax purposes. According to some proponents, a border adjustment tax is a way of encouraging exports and discouraging imports. Conversely, many leading academics argue there are economic reasons to believe that exchange rates would adjust to offset any tax reduction to exporters and the additional taxes on importers (Auerbach et al. 2017). Belief in this prediction, however, is not universal, even among academics, and depends on several assumptions that may not hold in practice (Graetz 2017; Summers 2017). Many economists in the private sector appear to take a middle ground, predicting less than full exchange rate adjustment, such that border adjustment would result in winners and losers among corporations (Amiti et al. 2017).
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