A Bad Way to Pay for Trump's Corporate-Tax Cuts
Republicans in Congress have come up with what they think is a great way to pay for President Trump's corporate-tax cuts: a so-called border tax adjustment, which would provide a rebate for exports while placing an added duty on the country's much larger volume of imports.
Actually, this gift to companies would come straight out of the pockets of American consumers.
Think of it as equivalent to replacing the current corporate tax with a retail sales tax. U.S. producers would gain leverage to pass the corporate tax on to U.S. consumers because competing imports also would have to pay the tax (which explains why the likes of Wal-Mart Stores Inc. and Koch Industries Inc. are fighting the proposal). Domestic producers don’t have that cover under the current system.
We’re talking about big money here. By one estimate, the border adjustment would generate a $1.2 trillion federal revenue gain over 10 years. That’s because as a nation we consume more than we produce, so the added import duty will far outweigh the export rebate. If that money goes to fund the corporate rate cut, the net effect will be a transfer of $1.2 trillion from U.S. consumers to U.S. producers.
Backers of the plan, championed by House Speaker Paul Ryan, are resorting to the old canard that protectionist tax practices abroad are forcing the change at home. Kevin Brady, the chief tax writer in the House of Representatives, argues that it would create a ‘fairer’ system by bringing U.S. treatment of trade flows into line with those in the euro area, where value-added taxes apply to imports but not exports.
Peter Navarro, the head of President Trump’s trade council, went further, saying that the U.S. system “is a grossly unfair subsidy to foreigners exporting to the U.S. and a backdoor tariff on American exports to the world that kills American jobs and drives American factories offshore.”
That’s wrong. Europeans use border adjustment not to seek an unfair trade advantage, but because they want their value-added tax to fall on European consumers rather than on producers. There is absolutely nothing unfair or protectionist about the European practice, which is why it is allowed under World Trade Organization rules. Only a protectionist like Navarro could, as he has done, call WTO rules ‘biased.’
In short, here’s how the Brady argument boils down: The U.S. should turn its corporate tax into a retail sales tax because the Europeans have a national consumption tax. That’s a thin reed indeed for subjecting American consumers to a $1.2 trillion hit.
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