The Corner

Politics & Policy

The Ways and Means Hearing on Tax Reform Is a Missed Opportunity

The House Ways and Means Committee is having a hearing tomorrow on tax reform and U.S. competitiveness. It would be a great thing if the committee wasn’t using this opportunity to continue pushing the misguided border-adjustment tax (BAT).

On the political front, I remain puzzled by the House GOP’s strange fixation with the provision. Tax reform is a difficult endeavor even with active and unified support from free-market groups and the private sector. But the BAT destroys this alliance by dividing the business community and the policy world. Also, many senators have already signaled that no tax reform proposals could go through the Senate with a BAT. In addition, it isn’t even clear that a tax reform plan that includes the BAT could get out of the House, and the White House didn’t even include the BAT in its tax-reform blueprint. In other words, the BAT is an obstacle to tax reform. It will continue to be an obstacle until it is dropped and Congress starts seriously considering alternatives.

But it’s not just bad politics. It’s also bad policy. Contrary to document put out by the W&M Committee for its members in anticipation of the hearing, we can get good tax reform without the BAT and no, the BAT isn’t pro-growth. The document also pays lip service to the ridiculous claim that other countries’ tax codes, not our own Uncle Sam–certified corporate income-tax system, are what are imposing a penalty on U.S. companies. As I and others have noted multiple times, the penalty — the “Made in America Tax” as they like to call it — is a result of our punishing corporate-tax system. Adding a terrible feature like the BAT is not a good way to heal our self-inflicted wound.

On the document’s second page, we get the traditional and misguided talking point that most other countries in the world have border-adjusted tax systems. The document has a color-coded map of the world with an explanation that reads: “Countries with border adjustable tax systems make up more than 70 percent of the global economy.”

This is disappointing because the W&M Committee staff who have put this document together must know by now that this is misleading – because they have been corrected repeatedly on that point. The countries that have “border-adjusted tax systems” have Value Added Taxes (VATs), not BATs. Indeed, no country has ever border-adjusted its corporate tax. None. In other words, the committee is trying to sell a tax system that no one has ever implemented based of the false statement that this would just make us just like everyone else.

Besides, it is not a good idea to follow in the footsteps of big-government nations such as France or failing governments such as Greece. Not every policy implemented abroad is worth emulating — border-adjusted tax systems certainly aren’t. They undermine tax competition and are thus a powerful tool for governments to collect additional revenue from companies and people.

But, obviously, the W&M Committee is comfortable with the idea that companies and people should be stuck with no options to legally avoid bad and burdensome taxes. In fact, the elimination of base erosion (i.e. more revenue for an always tax hungry government) is a central talking point of those who support the BAT, as we can see on the eighth page of the document put out by the committee. It’s quite bothersome to see the Republican leadership make this case. On the corporate-tax side, the reason why companies are trying to escape the corporate-income tax is because it is too burdensome and punishing. As I mentioned earlier, our statutory tax rate is the highest of all OECD countries, and we have a worldwide tax system. Even taking under consideration all the ways that companies try to avoid taxes, our marginal effective tax burden is the third highest of the OECD nations.

The real free-market solution to this issue is to implement a better system with lower tax rates and a territorial system. It is not to trap companies in a tax system that they can’t escape. (When Democrats are in power, they will surely try to jack up the tax rate and/or move to a VAT.) If you think this is ridiculous slippery-slope thinking, check out this and this.

Finally, the committee continues to tell its members that we should not worry about what appears to be a protectionist aspect of the BAT because when 160 countries have implemented “border-adjusted taxes” in the past and those countries’ currencies adjusted “quickly after the proposed changed in those border taxes [were] announced” to offset the penalty imposed on importers by the tax.

First this is yet another instance where the committee fails to note that those border taxes are VATs, not BATs. Why this lack of transparency? I assume that it’s because the committee may not want to stain its proposal by having it be associated with the dreaded VAT that so many conservatives oppose. (A BAT would easily turn into a VAT once the wage deductibility was removed). Let’s not forget that Speaker Ryan’s first “Path to Prosperity” plan years ago included a VAT, but he got so much push back on it that he removed it from the following versions of the plan.

Second, here the Committee engages in a creative reading of the literature. As I have mentioned before, when the Peterson Institute reviewed the literature, it noted that in most cases the adjustment (i.e., the time during which companies will face a high tax burden) is about three years. That’s hardly quick when your company has razor-thin profit margins and the tax is wiping it out three years in a row. How many companies will disappear during that time? We don’t know but it will likely be an important amount. On top of that, because a BAT isn’t a VAT, we can’t take comfort in those findings. It’s likely that the transition will be more than rocky. I summarized the study’s points this way:

The VAT study findings do require some serious caveats if you want to apply it to the House Republican Tax Blueprint. First, border-adjusting the corporate income tax “differs in important ways” from implementing a VAT. This in turn may have important consequences in terms of how and how much adjustments happen. Second, the “United is special” and such an adjustment “might disrupt the global financial system given the dollar’s dominant role in finance.” Third, the dominance may mean a failure to adjust fully and a need for prices to go up. . . . Fourth, and this is a biggie, the House proposal requires a large 25 percent adjustment of our currency to avoid disruption after the introduction of the 20 percent BAT. As the authors, Caroline Freund and Joseph E. Gagnon, note, “Whether adjustment eventually comes through a 25 percent dollar appreciation or a 25 percent increase in US wages and prices or some combination of the two, these adjustments are large, and much larger than the events studied in this paper, and hence more likely to be disruptive.”

To conclude, I am afraid that this hearing is yet another tragic missed opportunity to unify our broad conservative movement behind tax reform — and all for the sake of continuing to support a tax feature that has nothing to do with promoting American industry or economic growth. As a result, divided we stand.

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