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THROUGHOUT his campaign for the presidency, and ever since he was elected, Donald Trump has called for a “big border tax” on imports. At first this was thought to mean conventional import tariffs levied on goods as they enter the country. But speculation is rife that his administration will instead adopt a plan penned by Republicans in the House of Representatives. This plan emerged before the protectionist Mr Trump had even secured his party’s nomination. The so-called “border-adjusted” corporate tax is backed by several economists on the left and the right—and not because they share Mr Trump’s suspicion of imported goods. How does it work?Firms currently pay corporate taxes on their profits. Border-adjustment would change how those profits are calculated. Accountants could no longer deduct imports—say, goods brought in from China—as costs. And their exports would no longer count as revenues. For tax purposes, “profits” would be domestic sales minus domestic costs. Effectively, imports would be taxed, and exports would be subsidised. As a result, retailers, who stock their shelves with imported wares, are lobbying against the change. Exporters, such as the aerospace industry, broadly support it. Yet economic theory is conclusive: unlike tariffs, border-adjustment should not affect ...
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