By John Gimigliano, Principal in Charge, Federal Legislative & Regulatory Services, Washington National Tax, KPMG LLP
Mar 17, 2017
In proposing to migrate the U.S. tax system from an income tax to something closer to a consumption tax, House Republicans unlocked the possibility of enacting a border-adjustable tax (BAT).
The House Blueprint’s proponents argue that the BAT is essentially the same approach our trading partners apply with their value-added taxes (VATs), and that the proposed BAT will, as stated in the Blueprint, “end the self-imposed unilateral penalty for exports and subsidy for imports that are fundamental flaws in the current U.S. tax system.”
So the question arises: If border adjustments are the goal, why not join most of the world and simply adopt a VAT instead of implementing an untested BAT? After all, many OECD countries have been able to lower their statutory corporate income tax rates, below the U.S. statutory rate, through the use of VATs. Furthermore, the World Trade Organization has long since concluded that VATs, which are generally border adjustable, do not violate trade rules prohibiting export subsidies.
The VAT-BAT debate: The Blueprint suggests that many Republicans are conceptually okay with some type of consumption tax, but only in lieu of, not in addition to, the current corporate income tax system. The theory being that adding a consumption tax regime on top of the income tax system will inevitably lead to higher tax revenues and, in turn, larger government.
So, if we are left with a single system of tax, making that one system a VAT raises concerns. Namely, if the VAT replaces the corporate income tax, then end-users—generally individuals, not corporations—would bear the tax burden. And pushing the burden of tax entirely to individuals, not corporations, raises political and fairness concerns.
This is one reason why the Blueprint was designed to include features of both the corporate income tax and consumption tax. It retains the corporate-level tax obligation and maintains desirable income tax provisions such as wage deductibility, R&D tax credits, and the LIFO method, while simultaneously introducing new concepts such as border adjustability into the tax system.
At this time, it is not yet clear whether this experiment with a hybrid tax system can achieve both the policy and political goals necessary to earn passage. If it cannot, this path may lead in one of two directions: back to a full income tax or perhaps toward a full VAT. This debate will likely be played out in the coming months.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.