House Speaker Paul Ryan’s proposed corporate income tax reform includes a border adjustable cash flow tax. Under the proposal imports would be hit with a 20-percent tax while exports would enjoy a 20-percent tax subsidy.

But a recent report published by the American Enterprise Institute shows a key piece of the policy is missing, and that it will have economic and budgetary consequences. These macroeconomic consequences could also hit US exporters in their bank accounts.

A border adjustable cash flow tax would drive an appreciation of the US dollar. Basic economic theory holds that exchange rates would adjust to the increased demand for subsidized US exports and the decreased demand for foreign products in the US. A 25-percent increase in the dollar would offset the border adjustment tax. Importers would benefit from lower-cost imports, offsetting tax increases.

Also, because the United States runs trade deficits, an import tax would raise more money than would be given up by the subsidy for exports. With the US trade deficit running at $500 billion a year, a 20-percent border tax would yield $100 billion of revenue per year. This revenue gain would offset the budget cost of reducing the corporate income tax rate from 35 to 20 percent.

But the tax scheme has a hole in it because companies that run negative tax liabilities would be entitled only to a carry-forward and not a refund on taxes. US exporters could face a perpetual negative tax liability thanks to the export subsidy, in which case the carry-forwards are worthless.

The implications for the US budget are that, if the border adjustment is not refundable, the revenue cost of the export subsidy is diminished. Diminished, economists say, to the tune of $260 billion.

“These additional revenues,” the AEI report concludes, “could offset the cost of an additional two-point reduction in the corporate rate with money left over to pay for a wall. Congress, proceed with caution.”