The Corner

Setting the Record Straight on the Republican Tax Plan and Economic Growth

An e-mail from the special-interest coalition called “The American Made Coalition” is circulating through Congress right now and is illustrating the incredible dishonesty of those who are pushing for the Border-Adjustment Tax (BAT) included in the House Republican plan.

First, the e-mail denounces my suggestion that Congress could pay for the tax cuts with spending restraints instead of a very risky tax increase on importers and American consumers. Then it explains how I am wrong by pointing to the growth we would get with the overall plan. What they are really doing, however, is trying to pass off the growth-enhancing qualities of other features in the plan, such as the lower rate, the move to a territorial tax system, and the full expensing as being the result of the BAT. Yeah, it’s not. As you will see below, the BAT doesn’t grow the economy. Without the BAT, the Republican plan remains pretty much as pro-growth as it was with it.

The e-mail starts like this:

Veronique de Rugy, an economist at the Mercatus Center, writes in a recent blog post on National Review Online that tax reform could be paid for by cuts to government spending and that border adjustment is not needed. Her argument fails to acknowledge the benefits of this proposal within the broader context of tax reform as a way to level the playing field for American workers and keep good paying jobs here in the U.S. Meanwhile, policy makers, business leaders, and economists agree this provision is an important part of a broader plan to update today’s antiquated and broken tax code that subsidizes cheap foreign imports at the expense of American workers.

It then proceeds to make more of the same misguided claims about how other countries’ tax codes create a disadvantage for our companies. I have already debunked these claims here and here.

I have said it before and I will say it again: To the extent that we have, as Chairman Kevin Brady likes to say, “A Made in America Tax,” it is because of our own government designed a corporate income tax with the highest tax rate of all OECD countries, and a worldwide system (meaning that Uncle Sam will tax you no matter where you earn money in the world if you bring it back home). Other countries also have corporate income taxes (which is lost in the debate that only talk about other countries’ VATs), but our main competitors tax corporate income on a territorial basis, meaning only when it is earned within the country’s borders, and their rates are lower than ours. Worldwide tax systems and high rates are known to be so anti-competitive that the U.K. and Japan joined the ranks of all the other territorial-tax and lower-rate countries in 2009.

Now here is the best part. The e-mail ends with this quote from the Tax Foundation:

“The plan would significantly reduce marginal tax rates and the cost of capital, which would lead to 9.1 percent higher GDP over the long term, 7.7 percent higher wages, and an additional 1.7 million full-time equivalent jobs.”

This is actually quite funny. Indeed, the whole tax plan would be very pro-growth. But according to that Tax Foundation’s score, the growth doesn’t actually come from the Border-Adjustment Tax. It comes from the other features of the plan. Did you get that? You don’t need the border tax to get all the good growth and job creation produced by the rest of the plan. All the BAT does is raise revenue, which is a very questionable thing for Republicans to push for.

So back to my original point: You could pay for the pro-growth side of the tax-reform plan by cutting spending.

By the way, Arthur Laffer argues that you get you pay for with the tax cut itself a few years down the road. And so does Steve Forbes. They both say to the Republicans in Congress: Don’t do the border tax, please.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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