ONCE AGAIN, tax reform is on the agenda in Washington, and this time there’s a genuinely radical idea under discussion: the House Republicans’ plan for a new “border adjustment” corporate income tax. It would, they say, transform the sluggish United States into a much better place to invest and create jobs. Would it work? The answer depends, in part, on who’s right — economists or lobbyists.
The House GOP plan would sweep aside the corporate tax system with its 35 percent maximum marginal rate, the highest such rate in the industrialized world but one riddled with loopholes. In its place, there would be a new 20 percent flat rate levied only on income earned in the United States. To offset the huge loss of revenue, the plan eliminates the deductibility of imports as a business expense, as well as a few other large deductions. The net effect is a big reduction in the after-tax cost of doing business within the United States — paid for by foreign exporters.
Economists (at least those who like the idea) believe it creates fresh incentives to locate economic activity — and register ownership of intellectual property — within the United States, to export rather than import, and to finance businesses with equity rather than debt. Other things being equal, that could improve tax efficiency and domestic job creation. To those who fear a sudden hit to import-dependent businesses and their customers, advocates respond that the tax plan would trigger an offsetting rise in the dollar exchange rate. Yes, there would be short-term winners (agricultural exporters) and losers (big retailers of Chinese goods). But America as a whole would be better off, long term.
This is where the lobbyists for interests as varied as Koch Industries (major importers of crude oil), Walmart and the people who sell imported fish to grocery stores weigh in, with a hundred real-world arguments about how the economists’ happy scenario might go awry. What if our erstwhile trading partners do not go along with our attempt to get rich at the expense of their export industries, and sue at the World Trade Organization instead? Or what if they respond with retaliatory currency manipulation? Nice as it might be for the United States, a much stronger dollar would hammer developing countries such as Brazil, Chile and Indonesia, which owe hundreds of billions of dollars in U.S.-denominated debt. Yes, yes, we know: America First. But is it really in our national interest to put major emerging markets at sudden risk of bankruptcy?
In truth, neither economists, with their sweeping intellectual constructs, nor lobbyists, with their inherently self-interested takes on the issues, enjoy a reputation for infallible forecasting. Still, this may be one case in which the latter’s stake in the actual operation of the U.S. economy creates an advantage, in terms of practical realism. As it happens, there are already proposals to cut corporate rates and close loopholes less radically but also, quite possibly, less disruptively than the border-adjustment proposal. House Republicans and the Obama administration floated them in 2014 and 2012, respectively. Those plans deserve a second look before lawmakers take this leap.
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