Taxes What Is The Border Adjustment Tax? By Beverly Bird Updated on January 27, 2023 Reviewed by Ebony J. Howard Reviewed by Ebony J. Howard Ebony Howard is a certified public accountant and a QuickBooks ProAdvisor tax expert. She has been in the accounting, audit, and tax profession for more than 13 years, working with individuals and a variety of companies in the health care, banking, and accounting industries. learn about our financial review board Fact checked by Mrinalini Krishna In This Article View All In This Article How the Border Adjustment Tax Works The Goal of the Tax Arguments For and Against the BAT Where Does the BAT Stand? Frequently Asked Questions (FAQs) Photo: michaeljung / Getty Images Definition Border Adjustment Tax (BAT) is a destination-based tax system where goods are taxed based on where they are consumed. By that logic, goods exported from a country would not be taxed there, but goods imported and sold in that country would be taxed there. The BAT was a part of a U.S. tax reform proposal introduced in 2016, but it failed to become law due to stiff opposition. Key Takeaways Border Adjustment Tax (BAT) is a destination-based tax system where goods are taxed based on where they are consumed.Economist Alan A. Auerbach is credited with coming up with the BAT in 1997Proponents of BAT content that it would help create more jobs and strengthen the dollar but will not have any long-term price increase or impact on trade.Critics of BAT say it would trickle down to consumers, raising prices for them and would impact trade negatively.Lawmakers proposed a version of BAT as a part tax reform in 2016, but it failed to gather enough support and was not a part of tax reform that went into effect in 2018. How the Border Adjustment Tax Works The BAT is a destination-based tax that works on the principle that goods should be taxed based on where they are consumed as opposed to where they are produced. It doesn’t matter where a company is based or headquartered. It all comes down to where its products are sold. Economist Alan A. Auerbach is credited with coming up with the BAT in 1997. For example, if U.S. had a BAT, imported goods that are sold in the U.S. would be taxed while goods exported from the U.S. would not be taxed. The BAT was proposed as a part of the sweeping tax reform in the U.S. in 2016. However, it received stiff opposition and ultimately failed to be a part of the tax rule changes that were implemented in. 2018. Note The BAT also prohibits tax deductions for goods brought into the U.S. for the purpose of manufacturing other products. Suppose XYZ Company manufactures housecleaning robots. The robots require a certain computer chip that tells them when it’s time to mop your floor. XYZ Company purchases these chips from a source in Taiwan. It then assembles its robots and sells them to consumers in the U.S. Because U.S. buyers purchase the robots, the money they bring in for XYZ Company is subject to the BAT and is taxed. This would be the case even if XYZ were to manufacture its robots in another country where labor might be cheaper, not actually on U.S. soil. XYZ Company cannot deduct the cost of the chips as a business expense either. Theoretically and in the long run, it’s anticipated that these rules would have had a balanced effect on trade, because exports aren't taxed. That portion of sales would escape the BAT if XYZ also were to sell some of its robots in Canada. The Goal of the Border Adjustment Tax Why make such a significant change? The goal was that it would strengthen the U.S. dollar and that this, in turn, would eventually cut the cost of imported goods. Manufacturers would additionally be deterred from increasing their profits by purchasing cheaper parts from other countries. The BAT would discourage U.S. firms from establishing locations in other, low-tax countries as well, then selling what was produced there to U.S. consumers. And it would create more American jobs if they were to stay on U.S. soil. Proponents have argued that implementing the tax would raise something in the neighborhood of $1 trillion over 10 years. The Tax Foundation put the number at closer to $1.1 trillion in 2017. Note U.S. businesses have historically sold more in the U.S. than they’ve produced here. That much money would nicely offset the deficit that might yet result from slashing corporate tax rates, which happened in 2018 when the Tax Cuts and Jobs Act (TCJA) reduced the rate to 21% from 35%. Arguments For and Against the BAT The biggest push against implementing a BAT is that the tax would trickle down to U.S. consumers. Companies would effectively pass the tax onto them. A BAT would raise prices for consumers even as it produced more jobs, making it something of a wash. Arguments for BAT Raise revenue for government offset taxes lost through TCJA Negative impact would even out over the long run Create more American jobs Arguments Against BAT Will trickle down, raising prices for consumers Strong dollar would reduce U.S. exports The tax would affect taxpayers who were collecting paychecks but would have to spend more for everything from automobiles to clothing to those robotic maids. Numerous American businesses immediately cautioned that they would raise their prices in response if the BAT were implemented. The argument in favor of the BAT is that this effect would not last forever. It would balance out in the long-term, and wages would rise as well. But taxpayers can’t be blamed if they don’t want to wait for relief. Opponents claim that the tax would increase inflation as the costs of imported goods and parts would rise. Exports could be expected to decrease, because a stronger dollar would make it more expensive for other countries to buy from the U.S. Where Does the BAT Stand? Republicans first launched the idea of Auerbach’s version of the BAT in 2016. They did it hand-in-hand with their proposal to cut the corporate tax rate. By early 2017, the tax was the subject of hot debate among legislators and lobbyists alike. The Republican Party was divided, or at least ambivalent, on the issue. The final version of tax reform that went into effect in 2018 did not include a border adjustment tax. Frequently Asked Questions (FAQs) How does border adjustment tax differ from a tariff? A country imposes tariffs on goods it imports from other countries. Tariffs are usually imposed to provide domestic industries a competitive edge, as they raise prices of imported goods. Border adjustment tax is similar since it taxes imported goods consumed within the country, but its proponents claim that it wont lead to increased prices or lower trade in the long run. What happened to border adjustment tax? Economist Alan A. Auerbach is credited with coming up with the BAT in 1997.Republican lawmakers proposed a version of Auerbach's BAT as a part of their sweeping tax reform plan in 2016. One push for BAT at the time was to make up for the shortfall that would emerge from a proposed reduction in corporate tax rates. However, the BAT could not gather enough support and was not a part of the tax rule changes that became law in 2018. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. University of California, Berkley. "The Role of Border Adjustments in International Taxation." Brookings.edu. "Demystifying the Destination-Based CashFlow Tax," Page 9. Tax Foundation. "FAQs About the Border Adjustment." Tax Policy Center. "How Did the Tax Cuts and Jobs Act Change Business Taxes?" Brookings.edu. "Going to BAT for American workers: Why the border adjustment tax was a genuinely good idea." Columbia University. "Exchange rate implications of Border Tax Adjustment Neutrality." Tax Policy Center. "President Trump Opposed the Border Adjustable Tax But Loves Tariffs. Here's Why." Tax Foundation. "FAQs about the Border Adjustment."