It has been widely recognised that we are living in an age defined by an ideological conflict between globalisation and nationalism. Theresa May quickly grasped the new reality after the Brexit result and has tried to follow a ‘third way’ between the two.
May has also correctly identified problems which afflict the British economy, like crony capitalists and job insecurity, but this analysis has not been followed by any radical policies. This has largely been thanks to Philip Hammond killing off Number 10’s more protectionist and interventionist ideas. Tomorrow’s Budget also looks set to be a somewhat boring and unimaginative affair.
There is undoubtedly a crisis of confidence in capitalism, and if people’s concerns go on unaddressed then it will be more difficult for capitalism to thrive. One policy idea which could help realise May’s vision for Brexit Britain, and is gaining traction on the other side of the Atlantic, is a border adjustment tax.
In the United States, Paul Ryan, Speaker of the House and a conventional conservative, is pushing for a border adjustment tax in an alliance with President Trump’s advisor Steve Bannon, an outspoken economic nationalist. They are hoping to introduce a border adjustment tax which applies to a corporation’s consumption at a rate of 20% instead of its profits, but exempts their exports.
They believe that a border adjustment tax will slash corporate tax avoidance and attract manufacturing corporations back to the United States. The Tax Foundation predicts it will raise at least $1 trillion for the Treasury over ten years. There is also robust business support for the proposal, including the CEOs of Boeing, General Electric, and Pfizer, but the future of the policy lies firmly in the hands of Congress.
There is no reason why May and Hammond should not consider this policy, and it has already sparked the interest of prominent figures in the UK. For example, Lord Lawson made the case that corporation tax should be replaced by a border adjustment tax during an interview with Sky News, and Ed Conway expressed his approval of the policy in an article for The Times. Indeed, the border adjustment tax was first proposed by Professor Michael Devereux of Oriel College Oxford in 2002.
Implementing a border adjustment tax is a sensible and pragmatic response to how the global economy has changed. When the international rules for corporate taxation were first introduced in 1928 by the League of Nations, corporations were not as mobile as they are today. Shifting corporate taxation from source-based cash flow to destination-based cash flow reflects this change.
The border adjustment tax would also be a major simplification of the corporate tax code. Complexity in corporate taxation has allowed large-scale corporate tax avoidance by the likes of Google, Amazon, and Starbucks and fuelled dissatisfaction with capitalism. By switching a tax which targets corporate sales instead of corporate profits, multinational corporations would start to pay their fair share of revenue.
Another benefit of this approach is that the border adjustment tax would be straightforward to administer and collect. As an indirect tax it could follow a similar model to VAT and start with the same thresholds for registration. Adopting this model would also allow the tax to comply with WTO rules which prohibit border adjustment rules in direct taxes.
There is also the considerable economic benefit to be gained from introducing a border adjustment tax. Under the new corporate tax rules, a corporation’s exports would be exempt. This creates a very strong incentive for corporations to relocate to the UK so they can produce and export their goods and intellectual property at a zero tax rate. By granting this tax advantage, the UK would see a substantial increase in inward investment and exports resulting in a major boost for productivity and wage growth.
Superficially, the border tax sounds like exactly the kind of protectionist policy that free market conservatives ought to reject, but it is actually a sensible modernisation of corporate taxation. It addresses the public’s concerns with corporate tax avoidance and stagnant wages, as well as raising significant revenue. This week’s Budget might not be exciting, but the border tax could be the centrepiece for a radical Autumn Budget.