border adjustment?

[MattHJensen]

A border adjusted business cash flow tax proposal is under heavy consideration right now. Would it be possible to accomodate a border adjustment in B-Tax? Ideally, there would be a lever for looking at outcomes under different currency adjustments.

For background, see

• https://ospc.shinyapps.io/border-adjustment-calculator/
• http://www.vox.com/2016/12/25/14069822/corporate-tax-border-adjustability
• http://blogs.wsj.com/economics/2016/12/26/republicans-radical-new-business-tax-proposal-simplified-sort-of/

[jdebacker]

I think this could be done.

Conceptually, I think the cost of capital equation could be adjusted to account for these effects. Currently the cost of capital is:

Implicit here is that the price of all capital goods has been normalized to 1. If we are considering border adjustment, where there are now foreign and domestic capital goods, then we would want to differentiate between the price of the two. We can do this by normalizing domestic capital to a price of 1 and capital purchased from abroad as having a price of (1-x), where x represents differences in the price of foreign capital due to differences in the exchange rate. For example, if we think a DBCFT would increase the value of the dollar by 25%, then x = 0.2. With this, the cost of capital equation would become:

A businesses could not expense foreign capital goods under the DBCFT and so the cost of capital for foreign capital goods would become:

One could then see that currency appreciation of 25% (i.e. x=0.2) would offset a rate on domestic profits of 20% (u=0.2).

Assuming this is the right specification, I do still see at least one other issue that deserves attention. That is, does it make sense to allow dynamics w.r.t. exchange rate changes, but not in other areas? E.g., should we allow feedback effects such as changes to the rates of return due to more or less demand for capital? Or changes in corporate financial policy in response to tax policy?

Finally, I haven't yet looked into the data, but it does seem like it might be very important to find data on imported capital goods by type of capital since there is significant geographic variation in the production of capital goods. To get weighted average costs of capital, one would want to know the share of imported capital goods.