Border Adjustment Tax – Definition

Cite this article as:"Border Adjustment Tax – Definition," in The Business Professor, updated January 26, 2020, last accessed October 19, 2020,


What is a Border Adjustment Tax?

Border adjustment tax is a value-added tax charged on imported goods while exported goods are exempted. This tax can also be referred to as a border-adjusted tax, destination tax or border tax adjustment. This tax is also known as a destination-based cash flow tax (DBCFT).

A Little More on What is a Border Adjustment Tax

The border adjustment tax (BAT) was introduced in 1997 by economist Alan J. Auerbach. He stressed that the tax system should be in tangent with business goals and the national interest. The border adjustment tax refers to a tax levied on consumption rather than production. In other words, if there is a trade of tires between Mexico and the United States where a company in Mexico produces and sells, then the united states used these tires to make cars. The United States is taxed whereas the Mexico profit on selling the tires is not taxed.

The Theory Behind the Border Adjustment Tax

Auerbach’s theory strongly affirms that BAT will strengthen the domestic currency and this, in turn, will reduce or the price of imported goods and leave out import tax. However, Taxing consumer goods will eventually lead to a hike in prices that consumers have to pay for goods and services.

The DBCFT is more of a tax than a tariff because it was created to improve money flows and lead to a reduction in corporations’ incentive to off-shore profits. DBCFT is basically a tax on imports and export subsidy, and their effects on trades are offsetting. Their application together will not affect trade, but focussing on one will result in a distortion in trade.

Pioneers of this tax have strongly affirmed that the tax will result in an increase in demand for US exports, therefore strengthening the value of the dollar, increasing demand and the neutralizing net effect on trade. But criticisms of this tax claimed that the prices of imported goods will be high and this will cause a general increase in the price of goods and services (inflation).

BAT entails that companies who sell in the United States must pay tax regardless of where the products are manufactured. On the contrary, if the company does not make sales in the United States, such a company will not be taxed. This also applies to American products consumed outside the U.S as the tax will not be deducted. Finally, the U.S tax rate does not contribute to a firm’s decision of location.

Pioneers of this tax claimed that the tax will create more employment as businesses and investments will be established in the United States and not abroad. Likewise, workers don’t have to pay the corporate tax. However, the tax was kicked against. It was first presented by the republican party in 2016 in a policy paper promoting destination basis tax systems. It was then presented in February 2017, it was the subject of the debate with Gary Cohn, director of the National Economic Council.

Reference for ‚ÄúBorder Adjustment Tax‚ÄĚ

Academic research on ‚ÄúBorder Adjustment Tax‚ÄĚ

Tax harmonization and tax competition in Europe,¬† Sinn, H. W. (1990).¬†Tax harmonization and tax competition in Europe¬†(No. w3248). National Bureau of Economic Research. Opening Europe’s borders in 1993 makes the allocation of resources more vulnerable to differences in the national tax rates. The first part of the paper demonstrates that direct consumer purchases will imply distortions resulting from diverging VAT rates and it clarifies why the frequently cited exchange rate argument is of no help. The second part shows that, in the case of direct taxation, a harmonization of tax bases is more important than a harmonization of tax rates. Either the combination of true economic depreciation and residence taxation or the combination of immediate write-off and source taxation will result in an efficient international allocation of capital, independent of the national tax rates. The paper concludes with a verdict on tax competition arguing that free migration renders a policy of income redistribution, which is interpreted as insurance against the risk of lifetime careers, impossible.

Unilateral European Post-Kyoto climate policy and¬†economic adjustment¬†at EU¬†borders, Godard, O. (2007). Unilateral European Post-Kyoto climate policy and economic adjustment at EU borders.¬†EDF‚ÄĒEcole Polytechnique: Cahier No,¬†1010, 07-15.

Market access and WTO border tax adjustments for environmental excise taxes under imperfect competition, McCorriston, S., & Sheldon, I. M. (2005). Market access and WTO border tax adjustments for environmental excise taxes under imperfect competition.¬†Journal of Public Economic Theory,¬†7(4), 579-592. The literature identifies linkages between domestic environmental policies and trade, the treatment of imports being an important issue in administration of domestic environmental excise taxes. With the aim of ensuring foreign exporters do not attain a competitive advantage, border tax adjustments are used. Since most environmental excise taxes apply to intermediate goods, the relevant border tax adjustment applies to final imported goods. However, when both intermediate and final goods markets are oligopolistic, border tax adjustments may be non‚Äźneutral. Moreover, even if market access is unchanged, border tax adjustments can still lead to redistribution of profits between domestic and foreign firms.


Is there a Case for Carbon-Based Border Tax Adjustment?, Burniaux, J. M., Chateau, J., & Duval, R. (2010). Is there a Case for Carbon-Based Border Tax Adjustment?. Concern that unilateral greenhouse gas emission reductions could foster carbon leakage and undermine the international competitiveness of domestic industry has led to growing calls for carbon-based border-tax adjustments (BTAs). This paper uses a global general equilibrium model to assess the economic effects of BTAs and comes to three main conclusions. First, BTAs can reduce carbon leakage if the coalition of countries taking action to reduce emissions is small, because in this case leakage (while typically small) mainly occurs through international trade competitiveness losses rather than through declines in world fossil fuel prices that trigger rising carbon intensities outside the region taking action. Second, the welfare impacts of BTAs are small, and typically slightly negative at the world level. Third, and perhaps more strikingly, BTAs do not necessarily curb the output losses incurred by the domestic energy intensive-industries (EIIs) they are intended to protect in the first place. This is in part because taken as a whole, EIIs in industrialised countries make important use of carbon-intensive intermediate inputs produced by EIIs in other geographical areas. Another, deeper explanation is that EIIs are ultimately more adversely affected by carbon pricing itself, and the associated contraction in market size, than by any international competitiveness losses. These findings are shown to be robust to key model parameters, country coverage and design features of BTAs.

Border adjustment for European emissions trading: Competitiveness and carbon leakage, Kuik, O., & Hofkes, M. (2010). Border adjustment for European emissions trading: Competitiveness and carbon leakage. Energy policy, 38(4), 1741-1748. Unilateral or sub-global policies to combat climate change are potentially sensitive to free-riding and carbon leakage. One way of dealing with carbon leakage and competitiveness is the imposition of border adjustment measures for competing imports, for example in the form of the obligation to importers of goods to purchase and surrender emissions allowances to the authorities when importing. In this paper, we explore some implications of border adjustment measures in the EU ETS, for sectors that might be subject to carbon leakage. We examine the implications of two variants of these measures on the competitiveness of these sectors and on the global environment with the help of a multi-sector, multi-region computable general equilibrium (CGE) model of the global economy. Our calculations suggest that border adjustment might reduce the sectoral rate of leakage of the iron and steel industry rather forcefully, but that the reduction would be less for the mineral products sector, including cement. The reduction of the overall or macro rate of leakage would be modest. So, from an environmental point of view border tax adjustments would not be a very effective policy measure, but might mainly be justified by considerations of sectoral competitiveness.

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