That is the focus of my latest Bloomberg column, here is one bit from it:
Under one somewhat-neglected feature of [one version of] the tax, companies could no longer deduct advertising, interest, rent and employee benefit costs from their bills for tax due. This is a recipe for major tax dodges and the further politicization of government-business relations.
To think through these problems, note that under circulating versions of the tax reform a company still can deduct its asset acquisition and inventory costs. So, to cite one potential problem, if a company acquires a building it can deduct that expense, but not if it rents a similar building. The result is that the rental market would suffer badly. Some companies would put up their own structures, but others might engage in temporary “repurchase” agreements so they are owning their space (“asset acquisition”) rather than renting it. That’s just one example of the big loopholes the new tax code could create.
There is no single canonical account of how a border adjustment tax would work, so maybe that loophole won’t apply to your preferred version. (Here is a 2016 outline, but expect further changes and details; this KPMG document is useful on options.) But the general point is this: By creating such a sharp distinction between deductible and nondeductible business expenses, the opportunities for tax arbitrage and tax-code lobbying are huge. The suspicion is that most business expenditures could, one way or another, be converted into forms that allow for full and immediate expensing.
How about a version of the tax that allows for deductibility of newly constructed but not purchased buildings? Well, that would encourage overinvestment in new construction. You can also imagine building purchases accompanied by overbilled site modifications (with some of that money being returned in another associated transaction), so the refitted structure could count as new construction.
As I say in the piece, please do note that many people have their particular favored versions of the tax, sometimes designed to avoid various specific problems that are raised. But I don’t think any version of the tax will avoid these problems in general. Full and immediate expensing is a potent lure, and it will attract a great of gamesmanship.