As conservative political reporter Robert Novak once declared, “God put the Republican Party on earth to cut taxes. If they don’t do that, they have no useful function.” Now imagine a new Republican president and Republican Congress — both of whom ran on cutting taxes — not being able to pass a tax cut. It might seem unimaginable. If so, stretch your imagination. Border adjustment is a key element of the GOP tax reform plan. It serves several purposes: raises a trillion bucks, makes it harder for companies to escape US taxes by shifting operations overseas, and gives a protectionist president a perceived win on trade that may help avoid harsher trade measures.
But border adjustment is in deep trouble. Which means tax reform may also be in trouble. Imagine that.
From the WSJ’s Richard Rubin: “Big retailers are lobbying aggressively against the concept, which would tax imports and exempt exports. Senate Republicans have expressed views ranging from skepticism to hostility. Even some House Ways and Means Republicans are wary. With Democrats sidelined, just three GOP senators could kill the House tax plan; already, more than that oppose border adjustment.”
And from Politico:
Trump’s chief strategist Steve Bannon likes it, but the president’s chief economic adviser, Gary Cohn, is opposed, according to people who have talked with them. Trump himself has acknowledged he doesn’t think much of the proposal, though he has said he will keep an open mind. Many Republican senators say privately they detest the concept, fretting that it will hurt their in-state retailers like Walmart, which is headquartered in Cotton’s state of Arkansas. Senate Finance Chairman Orrin Hatch (R-Utah), sources said, has warned Trump and Ryan that border adjustment won’t likely have the support needed to clear the Senate. … A source familiar with the White House’s thinking said it’s unlikely Trump would try to push through the border-adjustment tax if key administration officials and senators are still divided over it. Senior House Republican sources who back him say the House has been working on tax reform for years and has already considered numerous financing mechanisms. But all of them have set off firestorms within various industries. A border adjustment tax, they say, is the best option on a limited menu. Without it, they contend, tax reform will die. Ryan has made the same pitch to his colleagues privately, according to one source close with the speaker who heard it.
Indeed, the lack of a Plan B right now might be the best thing tax reform has going for it. As Rubin notes: “Republicans haven’t developed palatable alternatives that avoid huge budget deficits or prevent the corporate tax base from fleeing abroad.”
But is coming up with a Plan B really so hard? In a summer analysis of the House Plan, the Tax Foundation found it would slash federal revenue by $2.4 trillion over the first decade on a static basis, or by $191 billion over the first decade if dynamically scored. Without border adjustment, that’s a $3.5 trillion loss, $1.2 trillion dynamic. So maybe … don’t cut taxes as deeply and don’t depend so much on tax reform to boost long-term economic growth. Maybe cut the corporate rate to 25% rather than 20%. Maybe leave personal income tax rates alone (saving $2 trillion) and use some of that savings to expand the child and earned income tax credits. Maybe leave estate and gift taxes as is. There are other ideas, I am sure. Like this:
The new proposal retains a 15 percent corporate income tax, gives taxable shareholders a credit for corporate taxes paid, imposes a 15 percent tax on interest income of non-profits and retirement plans, and addresses stock price volatility and shifts between private and publicly-traded status. The reform encourages domestic investment and sharply reduces incentives for corporate inversions. It is approximately revenue neutral and makes the tax system more progressive.
Really seems to tick all the boxes. Doesn’t bust the budget. Doesn’t include a new border adjustment mechanism. Substantially relieves incentives to shift reported income and investments overseas and incentives for companies to establish residence outside of the United States. Makes the tax code growthier and more competitive. So maybe combine this with more targeted middle-class relief.