Last week House Speaker Paul Ryan used two reporters’ recorders as props for a misguided defense of the border-adjustment tax being pushed by congressional Republicans. Now, White House Press Secretary Sean Spicer has offered his own confused take on the issue.
Yesterday, while answering a reporter’s question about how the White House would respond to critics who say that a border-adjustment tax would increase the cost of doing business in the U.S. for those importing goods and that the tax would be passed on to consumers (hurting mostly lower- and middle-class Americans), Spicer said that “there is no tax if you’re manufacturing in the United States. So there can be no higher cost.”
It was a very confusing statement to say the least. Now, assuming he was saying that under a border tax, a company could avoid the penalty by moving to the U.S., Spicer shows a lack of understanding of how businesses operate. Does he really believe that under this regime no company will ever again import any goods for the production of their final product? If that’s he what believes, he will be highly disappointed. As I have said before, I certainly think those claiming that the dollar will fully and immediately appreciate to offset higher prices on imports under a border tax are ignoring many reasons to believe that there won’t be a full adjustment, but at least they acknowledge that imports can and will continue to exist. Spicer apparently doesn’t.
The rest of Spicer’s answer borders on incomprehensible, or at least suggests that he doesn’t understand the difference between a tax on outsourcers and the House Republicans’ border-adjustment tax. Contrary to his characterization, the latter isn’t a penalty for moving overseas and selling back into the United States, but rather a tax increase on all imports. In today’s dynamic economy, where supply chains can and often do stretch across the globe, that means not just a tax on consumer goods but on inputs for many manufacturers. Again, even goods made in America require components from overseas, and their higher costs will be passed on to consumers. So suggesting that consumers won’t face higher prices just because a company could manufacture in the U.S. instead of overseas is nonsensical.
Just as outrageous is the suggestion that we should even want everything to be produced domestically. Some things can be made more cheaply elsewhere. Leveraging such competitive advantage through trade to satisfy our needs and wants in the least expensive manner possible is a large part of why we are so wealthy today. Punishing Americans for purchasing those goods that can be made more cheaply elsewhere is not a path to prosperity.
Finally, Spicer repeats a common talking point among supporters of the border-adjustment tax: the idea that there is currently an unfair tax advantage for imports to the U.S. This is the same misguided talking point Speaker Ryan used in his example last week.
First, Spicer conflates our corporate income taxes, which unlike most of our competitors taxes the U.S. companies’ income earned overseas with an exorbitant corporate-income-tax rate, with the value-added taxes common in Europe and elsewhere. VATs are border-adjusted taxes, but no other country border-adjusts their corporate income tax even though most of them have one on top of their VAT.
Second, he implies that companies importing to the U.S. pay no taxes at all for selling their goods here. It’s not true. While a foreign company’s profit earned in the U.S. won’t be taxed from its country of origin because their corporate income taxes are “territorial” — i.e., it only applies to income earned in the country of origin — and the VAT is border-adjusted so it doesn’t apply to exports, it will be taxed in the U.S. through our corporate income tax. More importantly, it will be taxed exactly the same as U.S. goods sold in the U.S. That’s what we call a level playing field.
Finally, that level playing field exists when U.S. exporters sell their goods in a country with both a VAT and a corporate income tax. Both U.S. exports and the foreign countries’ domestic companies’ sales are taxed evenly.
The only difference comes from the fact that if a U.S. multinational company tries to bring its overseas income home it will be taxed again through our insanely high-rate corporate income tax. That’s because our tax is a worldwide tax system. In other words, the disadvantage faced by our multinationals has nothing to do with them having a corporate tax and a VAT. It has nothing to do foreign countries having a border-adjustment tax and a corporate income tax. It has nothing to do with foreign countries having a territorial tax regime. However, it has everything to do with our self-defeating worldwide tax system, that same feature that explains why many companies are inverting and decide to not be American companies anymore.
Worldwide taxation is so bad that a majority of our competitors have moved away from it, including Japan and the U.K. in 2009. The U.S. should do the same and drop this notion that a border tax is the way to fix that self-inflicted disadvantage.