Now that there will be “unified” government with a republican Congress and President and without soon to be former President Obama not around to blow the deal, long-sought tax reform might finally come to pass.
Both President-elect Donald Trump and House Republicans have laid out tax reform plans. According to Mary Burke Baker and Stacy J. Ettinger, while the two plans have many synergies, including lower business tax rates and special rates for repatriating offshore earnings, the House Republicans’ “A Better Way,” more frequently referred to as the “Blueprint,” is getting most of the Congressional attention.
As the tax reform debate heats up in Congress, the obscure border adjustment tax (BAT) is causing friction within the GOP.
What is the BAT? Well, Steve Forbes calls it “a nasty political and economic trap for Donald Trump” — a trap he says is being set by Republicans rather than Democrats.
The border adjustment tax basically levies a tax on good retailers import while providing a tax break for American goods that are exported to foreign countries. As further explained by Baker and Ettinger, the BAT is a mechanism intended to encourage business activity and exports in the United States and discourage corporate inversions, certain cross-border manufacturing operations known as maquiladoras, and imports:
It is designed to counter the border adjustments our trading partners apply in their value added tax (VAT) regimes. As described in the Blueprint, it operates by excluding the sales of exports from U.S. taxation and denying U.S. tax deductions for the costs of imports. In practice, it decreases the effective tax rate on exports and increases the effective tax rate on imports, which can be expected to affect their prices and costs, respectively.
Yes it’s complicated, but Forbes describes how the BAT would work in a recent Op-Ed:
Here’s how, in essence, this sneaky, anti-consumer tax works. Importers will no longer be allowed to deduct an item as a business expense. To simplify things, let’s say a store imports a pair of sneakers for $40 and then sells them for $50, making a $10 profit on which it would owe taxes. Under the Republican plan, however, the retailer wouldn’t be able to deduct the $40 it paid for the sneakers. In fact, it would owe taxes on the entire $50! And who, ultimately, pays this tax? You, the consumer, in the form of higher prices or fewer choices of where you can shop. Retailers and their customers will be hit.
[. . .]
But wait, it gets worse. Another feature of this bizarre GOP scheme gives exporters a gargantuan tax break by, in effect, not taxing their export revenues. Let’s say a corporation sells a piece of machinery to Iran for $5 million, which cost only $4 million to produce. That means $1 million in taxable profit. Under the new Republican scheme, however, that $5 million received from the mullahs wouldn’t be taxable. Instead of a $1 million profit, the corporation, for tax purposes, would have a $4 million loss. Loophole doesn’t begin to describe this “tax break.”
Proponents of the tax say it is a manifestation of the America First populism that helped propel Mr. Trump to the White House. But a recent Morning Consult poll conducted for the U.S. Consumer Coalition suggests the measure is not at all popular. For example, the finding show voters are unwilling to pay more for everyday goods produced in other countries as a result of changes in U.S. tax policy. Moreover, voters believe any tax rate reductions for corporations should be paid for through a decrease in government spending, not an increase in taxes or costs on consumers, individuals or families.
Key findings of the poll include:
- Sixty-one percent of voters say reducing federal spending is the best way to offset the cost of any tax reductions versus higher taxes in other areas.
- Nearly 60% of voters believe a border adjustment tax would hurt working families, consumers, retailers and small businesses.
- Fifty percent of voters agree that Congress should look at other ways to offset the cost of a corporate tax rate reduction rather than imposing a border adjustment tax.
- Forty-five percent of voters would not be willing to pay any more at all for consumer products, with only 17% of the electorate unwilling to pay over 5% more, to implement a border adjustment tax.
- Nearly half of voters consider any new tax that raises prices on consumer goods as a broken campaign promise.
The poll was conducted December 18 -20, 2016 and has a margin of error of plus or minus one percent.
The tax reform debate is just getting started, but already Republicans are engaged in friendly fire.