Conservatives Split Over Trillion-Dollar Border Tax

Proponents see key measure to restoring U.S. trade balance, critics see costs for consumers

A wonky debate over a proposal to dramatically change the way the federal government raises revenue could shape President Donald Trump’s promised tax relief — or even determine whether it happens at all.

At issue is a proposal called a border adjustment tax, which would impose taxes based on where goods are sold rather than where they are produced. It is part of a broader tax reform plan under development by House Ways and Means Committee Chairman Kevin Brady (R-Texas) and supported by Speaker Paul Ryan (R-Wis.).

“A border tax or something like it is absolutely critical for Trump to keep his promise to restore American manufacturing.”

The White House has been noncommittal, but Trump reportedly has been warming to the idea. It has provoked a diverse array of supporters and opponents, splitting conservatives. Kevin Kearns, president of the U.S. Business and Industry Council, said it is key to rebalancing U.S. trade.

“A border tax or something like it is absolutely critical for Trump to keep his promise to restore American manufacturing,” he said. “This is an equalizer. We have been trying to do this, basically, since the 1960s.”

The plan calls for reducing the 35 percent top corporate income tax rate to 20 percent and applying it to profits earned on goods sold in the United States — but not to profits earned abroad by U.S. companies. It would apply to imports but exempt exports, theoretically making U.S.-made products more competitive in other countries and encouraging more domestic production.

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Currently, the United States is one of the only countries that taxes profits regardless of where they are earned. So U.S. companies generally pay taxes on money earned in foreign countries and then get hit with another tax when they bring profits home.

Experts contend that the system has led a number of companies to opt for so-called “corporate inversions,” in which they agree to be bought by foreign companies and then relocate corporate headquarters abroad.

But opponents argue that the tax plan would amount to a large tax hike on consumers, to which companies would pass the increased costs, and would disadvantage smaller companies.

“The border adjustment tax will impose a 20 percent rebate to businesses who export which clearly proves these supposed free-market Republicans are intent on distorting the market in favor of multi-national corporations who line congressional campaign coffers,” wrote Paul Nehlen, who unsuccessfully challenged Ryan in the GOP primary last year.

Some Republican senators also have criticized the idea. Sen. David Perdue (R-Ga.), in a letter to his colleagues lass month, warned a border adjustment tax would hurt consumers and the retirement savings of seniors by reducing the value of foreign investments held by U.S. investors.

“This 20 percent tax on all imports is regressive, hammers consumers, and shuts down economic growth,” he said.

Group Claims $1,700 Burden
Oil companies and large corporations that use a lot of foreign-made parts have come out against the tax. Americans for Affordable Products, a coalition of retailers and other companies that oppose the idea, argue that a border adjustment tax would increase costs for American households by an average of $1,700.

John Gentzel, a spokesman for the American Made Coalition, called that nonsense.

“Proponents of our broken status quo tax policies are ignoring the overwhelming number of Americans who want a tax code that incentivizes domestic manufacturing, investment in U.S. businesses and, above all, unwavering support for American workers,” he wrote in an email to LifeZette.

Kearns, of the U.S. Business and Industry Council, said America is like an airplane at 10,000 feet heading toward a 14,000-foot mountain peak.

“Either we pull up on the stick and get over the mountain, or we’re going to slam into it,” he said.

Economist Stephen Moore, a visiting fellow at The Heritage Foundation who advised the Trump campaign, said it does not make sense to tax American-made goods sold abroad but not foreign-made goods coming in.

“It’s a very stupid, anti-American system we have right now,” he said.

Grover Norquist, president of Americans for Tax Reform, said he would oppose making the corporate income tax border adjustable if it were a stand-alone proposal. But he said he supports it as part of a broader reform package that slashes taxes overall.

House leaders want the $1 trillion the tax would be expected to raise over a decade to help offset deeper cuts. Norquist said the plan would produce net $2 trillion savings over a decade. And crucially, he said, it would project to be deficit-neutral after 10 years — a prerequisite to being able to pass it with a simple majority in the Senate.

The plan also would lock in the tax relief on a permanent basis, allowing members of Congress to avoid the high-stakes fights to preserve tax cuts in the George W. Bush-era that had expiration dates.

“If they know it’s permanent, they’re much happier,” Norquist said, referring to business owners.

‘Tremendous Pro-Growth, Job-Creating Package’
Norquist called the overall plan a “tremendous pro-growth, job-creating package.”

Most foreign countries have value added taxes, which operate similar to sales taxes, on U.S. goods entering their markets. But most of those same countries rebate the VAT on products they ship to the United States, which does not have VAT.

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“That makes us non-competitive with the rest of the world,” Norquist said.

The nonpartisan Tax Foundation concluded that switching to a border adjustable tax would limit tax avoidance and simplify the tax code. But it also argued that the plan ultimately would not affect trade because taxing imports would reduce exports. That is because the reduced revenue caused by the tax would reduce the ability of foreigners to buy American products.

Caroline Freund, senior fellow at the Peterson Institute for International Economics, agreed that any boost to domestic manufacturers could not be sustained.

“It will do that [stimulate the domestic economy] in the short run,” she said. “Over time, we expect the real exchange rate would adjust.”

That means that either the dollar would increase in value — making imports cheaper — or prices would rise. She said trade levels are determined by the amount of money that is saved and invested.

“Tariffs don’t really affect trade balance unless they are so extreme that they affect savings and investment,” she said.

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