Paul Ryan and Kyle Pomerleau offer the president advice about achieving his tariff goals in a more effective way.
The Supreme Court will hear arguments next month about the legality of President Trump’s use of the International Emergency Economic Powers Act to impose tariffs on nearly all imports to the U.S. If the court finds the White House has exceeded its authority, the Trump administration may seek other ways to tax imports.
Rather than pursuing new tariffs, Mr. Trump should work with Congress to adopt a destination-based cash flow tax, or DBCFT. This business-tax reform would address many of the president’s concerns over trade, expand the American economy, and offset the lost tariff revenue.
The DBCFT has three important features. First, all investment costs can be immediately deducted rather than depreciated over years or decades. Second, there is no deduction for borrowing costs. Third, a “border adjustment” would subject all imports to a single rate tax while providing all exports with a subsidy at the same rate.
Adopting a DBCFT would finish the job that Congress and Mr. Trump began in 2017 with the Tax Cuts and Jobs Act. That legislation made it more attractive to invest in the U.S. by cutting the corporate income-tax rate and introducing temporary 100% bonus depreciation. Mr. Trump’s One Big Beautiful Bill Act built on this by making the expensing provision permanent and temporarily expanding it to manufacturing structures. The DBCFT would make expensing universal and permanent, eliminating all remaining penalties on investment.
A DBCFT’s border adjustment is a smarter way than tariffs to tax imports. Border adjustments are widely accepted tax policy in most of the world. More than 170 countries, including America, use border-adjusted taxes. U.S. state and local sales and excise taxes are border adjusted. As a result, the DBCFT would be much less likely to prompt retaliation from trading partners.
