One of the central features of the GOP’s Blueprint is a “border adjustable” tax that has raised questions from taxpayers, tax practitioners, academics and foreign sovereigns.

Border adjustability is one of the most controversial points of the House GOP proposal (the “Blueprint”) for tax reform (available here). President Trump has been seen to be on both sides of the issue (see articles here and here). Some public figures like Steve Forbes and the Koch Brothers argue that border adjustments would be a “poison pill” or “devastating,” such that border adjustability would likely diminish the popularity of the entire tax reform proposal.

Under a “border adjustments” regime, exports are not taxed, and imports are not deductible. The proposed tax treatment of sales of goods would be as follows:

Domestic Production Foreign Production
Domestic Sales Fully taxable (full deduction for costs of production) Fully taxable (no deduction for costs of purchasing goods from abroad)
Foreign Sales Not taxable (full deduction for costs of exported goods) Not taxable (foreign source income not taxed in territorial system)

Although a border adjustment tax may hurt net-importers, such as retailers, oil refiners, and auto manufacturers, many academic economists expect that prices of goods and currencies would adjust such that net-importers would not end up being affected.

Economists have theorized that the U.S. dollar would appreciate relative to foreign currencies to eliminate the change in prices created by the border adjustment. However, commentators have referred to this theory as “foreign exchange magic” because the theory is untested and unproven. Retailers and other net-importers have been organizing to fight against this change, and have written Congress formally opposing border adjustments (see letter from Americans for Affordable Products, here).

Because the United States imports much more than it exports, border adjustments are expected to generate a substantial amount of revenue—by some estimates (assuming no adjustments to currencies), up to $1.1 trillion over the first ten years. So, without border adjustments, alternative sources of revenue would be required to offset the proposed reductions in rates, or the plan would no longer be revenue neutral.