Two Wrongs Don’t Make a Right: A Response to Glenn Hubbard’s Case for the Border Adjustment Tax
The best alternative to no tariffs is less government
In his recent Wall Street Journal op-ed, Glenn Hubbard lays out a case for a so-called “TCJA+” package. This package is an expanded version of the 2017 Tax Cuts and Jobs Act that would replace tariffs with a border-adjustable, cash-flow-based corporate tax system. Hubbard rightly wants to avoid another round of economically destructive tariffs, but what he proposes in their place is no better. In fact, it’s another form of protectionism, this time cloaked in technocratic tax language. And it’s a mistake.
Let’s start with the central premise: that we must offer a government intervention that’s an alternative to Trump’s tariffs. No we don’t. Tariffs are bad policy. They should simply be eliminated rather than replaced with another bad policy. Conservatives shouldn’t fall into the trap of thinking that to remain relevant we must always compromise with economic nonsense. The role of sound economic policy is to push back against populist and other policy gimmicks, not to dress them up in new clothes.
That’s precisely what a border adjustment tax (BAT) is: a dressed-up, complicated, distortionary substitute for tariffs. Last time we fought this fight, many of us argued that a BAT might on paper look like tax reform, but in practice it is likely to function as a trade distortion and a consumption tax on imports—one that raises consumer prices, hurts import-intensive businesses, and invites international retaliation not to mention that it may not sustain a constitutional challenge.
BAT is Not Free-Market Tax Reform
The BAT proposal, first floated in the 2016 House Republican blueprint, would tax goods and services based on where they are consumed rather than where they are produced. Exports would be untaxed, and imports would no longer be deductible—effectively subjecting them to a hidden tax. Hubbard claims this would encourage U.S. production, but this justification is the exactly the same as used to promote Trump’s tariffs.
As Adam Michel at the Cato Institute has explained, the BAT violates the principle of neutrality, which holds that the tax code should not favor one form of economic activity over another. By giving exports a tax advantage and penalizing imports, the BAT encourages businesses to reorganize their operations not to improve efficiency or serve customers better, but, rather, to chase tax savings.
It also invites retaliation. The BAT would likely run afoul of World Trade Organization rules because it functions as a subsidy for exporters and a tax on imports, even if it’s embedded in the corporate tax code.
The Currency Adjustment Illusion
Defenders of the BAT argue that exchange rates would automatically adjust to offset any negative impact on trade—i.e., the dollar would appreciate by 25%, making imports cheaper and exports more expensive, neutralizing the BAT’s effects. But this theoretical elegance collapses in the real world. Again, Michel did a good review of the literature on this issue.
As Stan Veuger at AEI writing for Mercatus back in 2017 noted, if the exchange rate adjusts less than fully, the result would be a massive hit to U.S. consumers and import-reliant businesses. His estimates at the time of publication placed the loss to Americans at $2.5 trillion, or roughly $8,000 per person. This is not a small loss. It’s a disruptive economic shock dressed up as “reform.”
Moreover, currency markets are influenced by more than just tax policy. They are shaped by interest rates, trade flows, geopolitical risks, and investor sentiment. Betting the integrity of the tax code on automatic currency appreciation is a dangerous and unnecessary gamble.
The BAT is Bad Politics and Bad Policy
The BAT supporters like Hubbard also claim that the BAT would raise revenue, which could then be used to cut rates or offset the costs of repealing tariffs. But at what cost? I have argued, this line of thinking concedes too much to the left’s premise that tax reform must always be “paid for” in static budget terms. Instead of broadening the base and lowering rates in a growth-friendly way, the BAT layers complexity and distortion onto a corporate tax code that should be moving in the opposite direction—toward simplicity, neutrality, and transparency.
It’s also worth noting that the BAT would impose disproportionate costs on lower-income households, who spend a greater share of their income on imported goods. So while it might raise revenue, it does so by taxing consumption regressively. That’s not pro-growth, and it’s certainly not pro-worker.
Conservatives Should Say No
What’s most baffling about the renewed push for the BAT is the defeatist mindset it reflects. It suggests that, because the current president is enamored with tariffs, conservatives must appease him and his supporters by inventing a slightly less offensive version of economic nationalism. That’s the wrong approach. Good policy should not be a concession to bad politics. Conservatives should stand up and say what needs to be said: tariffs are bad, and so is the BAT.
There are real tax reforms worth fighting for. Renewing full expensing, for example, is the best possible way to encourage American production in America. Other reforms could be permanently lowering corporate tax rates. Moving toward a consumption-based tax system that is neutral, not border-adjusted. Reforming the taxation of savings and capital. But these are reforms built on principle, not reactive policy swaps. Michel and I have recently made the case that this agenda is the ultimate abundance agenda if paired with deregulation and reduction of the size of government.
If the goal is – as it ought to be – to eliminate tariffs, then eliminate them. Don’t replace them with something equally distortionary just because it sounds better at a press conference. With all due respect to Glenn Hubbard, this is not how we advance pro-growth policy. It’s how we legitimize a retreat from it.