The WSJ outlines the innovative GOP tax plan in depth:
As a rule, taxing a behavior makes people do less of it, and that principle applies to anything from cigarette smoking to realizing capital gains.
That principle, though, isn’t so clear regarding a Republican proposal that for the first time would tax American imports while exempting exports from U.S. tax. And economists question whether such a policy, known as a border adjustment, would diminish imports into the country or increase exports.
The GOP election sweep of Congress and the White House has given the idea of adopting a border adjustment added momentum as part of the party’s plans to enact the most far-reaching overhaul of the U.S. tax code since 1986.
“The effects on trade of two components—the import tax and the export subsidy—are offsetting,” write economists Douglas Holtz-Eakin and Alan Auerbach in a recent paper. “Adopting them together imposes no trade distortions even though adopting either separately would.”
Most major nations levy corporate income taxes and value-added taxes that are a sort of consumption tax applied at each stage of production. VAT, however, is removed from exports, so it applies only to a country’s domestic consumption. The U.S., which has a relatively low general tax burden, doesn’t impose VAT.