For weeks now, House Speaker Paul Ryan (R-Wis.) has struggled to convince his colleagues of the benefits of the border adjustment tax. If his reasons seem unsound and unconservative (Why should the government dictate which suppliers you use?), it’s because he is not being honest about the motivation behind the plan to tax imports. The one and only reason behind the push centers on the massive deficit the rest of the GOP tax plan would create. (Take a fiscally irresponsible tax plan and add in a counterproductive border tax adjustment!) In short, his tax plan needs the infusion of cash that a tax passed on to U.S. consumers would raise.
Libertarian economist Veronique de Rugy blasts Ryan for intellectual dishonesty in claiming that the “United States was at a disadvantage because other countries’ exports are exempted from taxes while U.S. goods aren’t.” This is wrong:
For instance, he claims that Japanese exports are exempt from taxes. No, Japanese products exported to the U.S. are exempt from the Japanese VAT but the Japanese company is still paying U.S. corporate tax on its U.S. profits. And you know what? In that sense, the Japanese export is treated exactly like the U.S. goods sold in the U.S. In other words, the playing field is even! I repeat: Japanese goods in the U.S. are taxed like U.S. goods in the U.S. How about U.S. exports in Japan? Well, it gets hit by the Japanese VAT in Japan and by the Japanese corporate tax but so are Japanese goods sold in Japan. Again, the only disadvantage faced by U.S. companies selling tape recorders abroad comes from the U.S. tax system, which requires that income earned in Japan be taxed by Uncle Sam at 35 percent after benefiting from a tax credit for tax paid in Japan. If the U.S. company decides to keep its Japanese income outside the U.S., the U.S. rate won’t apply.
The plan will raise the cost of consumer goods. (Not even Fed Chairman Janet Yellen buys into the notion that the U.S. dollar will instantly and sufficiently rise in value to offset higher prices.) And it will hurt a whole bunch of businesses that rely on imports, whether they are sold directly to U.S. consumers or, in many cases, incorporated into U.S.-manufactured goods.
De Rugy concludes: “The way to fix the U.S. disadvantage is not to create a new expansive tax that would penalize imports in the U.S. — including imports for the benefit of U.S. domestic companies — and would penalize U.S. consumers. The solution is to reform our corporate-tax rate by lowering the rate and moving to an origin-based territorial-tax regime.” The problem is that such an approach won’t raise sufficient revenue to offset revenue losses from Ryan’s underlying tax plan, raising the question as to whether the tax plan is the real culprit here. (Maybe a smaller tax cut, or one that does not reward upper-income taxpayers at all, would be wiser? Nah, that would rain on the parade of the right wing, which for years has been pining for a huge Ronald Reagan-style tax cut, although our current debt, tax code and economic situation bear no resemblance to the factors Reagan faced in the 1980s.)
This is no small or esoteric policy debate. Without the border adjustment tax, the GOP tax plan will be (rightly) excoriated for blasting an enormous hole in the budget. However, with the border adjustment tax, the Senate and a great many House Republicans will not vote for it.
Retailers have organized against the border adjustment tax. In particular, small businesses — the darling of Democrats and Republicans alike — foresee disaster. The Wall Street Journal recently reported that small businesses “typically have less ability to negotiate better deals with suppliers or push through price increases to customers or spend time and money modeling tax changes. More than 95% of U.S. importers have fewer than 250 employees, according to 2014 U.S. Census data.”
Richard Woldenberg, chief executive of Learning Resources, is marshaling some interesting data to defeat the plan. He told the Journal that “a border-adjusted tax would increase Learning Resources’s tax bill by four- to fivefold, even with a lower corporate rate. That would force his company to raise prices by as much as 15%, which he fears could cause sales to drop by 20% or more.” He pointed out that it is not as though there are domestic suppliers readily available. (“Learning Resources tried in 2013 to find a U.S. molder to produce simple plastic counting toys it could sell at mass-market retailers with a ‘Made in the U.S.A.’ label. Just one firm bid on the job. ‘They gave us a terrible quote,’ Mr. Woldenberg said.”) For this very reason, many of President Trump’s products are made outside the country and imported.
Woldenberg is also amassing some politically potent data. On his website, he writes:
Rep. Kevin Brady [R-Tex.] is a big cheerleader for the BAT as Ryan’s designee and Chair of Ways and Means. He has said publicly on numerous occasions that he will go forward with this provision at all costs. Thus far, despite lots of bad press and organized opposition that will endanger his Republican majority in the House, he has refused to relent.
Notably, Brady’s own district is full of importers. . . . According to my research in a public database, there have been 24,402 import entries associated with zip codes either wholly or partially within Brady’s district over 2015-16. The total importer count is 2430 in this two-year period, including many individuals (let’s call them “voters”). They will all have to pay up in Brady’s BAT …
Brady may be in a GOP safe seat, but he is not immune to a primary challenge.
Trump and arrogant lawmakers can swear up and down that protesters in their districts are paid phonies. What they cannot ignore are the legions of small businesses, importers, retailers and consumers who will surely conclude that they’ll be worse off than they are now with the border adjustment tax. It is the sort of issue (tax cuts for the rich! price hikes at Walmart!) that can set off a wave election.
Ryan might persist with the border tax adjustment gimmick, but it likely will mean the end of his tax reform effort. That would be some economic karma if a non-conservative, distortional tax grab knocked the legs out from under a GOP that has decided to discard its fiscally responsible free-market positions.