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Is the GOP Border Tax Dead? If So, Now What?
From Axios reporter Dan Primack:
Gary Cohn, chief economic advisor to President Trump, told a group of CEOs this morning that the White House does not support the House GOP version of a border adjustment tax, according to an attendee. The comment was made while Cohn was being interviewed by The Carlyle Group CEO David Rubenstein, at a private event hosted by The Business Counsel in Washington, D.C. It also comes less than 24 hours after Trump indicated some support for the House language, in a conversation with Reuters.
Now there was plenty of chatter about this yesterday from TreasSec Mnuchin, WH spox Spicer, and the president himself. And the general interpretation was that it was probably news for the BAT. This from Trump to Reuters was the real market mover, though:
U.S. President Donald Trump on Thursday spoke positively about a border adjustment tax being pushed by Republicans in Congress as a way to boost exports, but he did not specifically endorse the proposal. Trump, who has lashed out at U.S. companies for moving operations and jobs to countries such as Mexico, had previously sent mixed signals on the proposal at the heart of a sweeping Republican plan to overhaul the tax code. “It could lead to a lot more jobs in the United States,” Trump told Reuters in an interview, using his most approving language to date on the proposal. … Trump has also called for a 35-percent border tax on U.S. companies that move jobs abroad and import products back into the U.S. market. It has been unclear in the past if those references referred to the border adjustment proposal. “I certainly support a form of tax on the border,” he told Reuters on Thursday. “What is going to happen is companies are going to come back here, they’re going to build their factories and they’re going to create a lot of jobs and there’s no tax.”
But on CNBC I cautioned against reading too much into the comments — much less trading on them. That, especially since it was unclear to me whether Trump was talking about the BAT as outlined in the House tax plan (he didn’t use the word “adjustment” in the quotes) or a modified BAT — perhaps phased in or with exceptions — or a broad tariff or a targeted retaliatory tariff.
And now just the opposite take from Cohn, probably the maximum econ driver in the Trump White House. Hard to believe, though, that the Axios piece marks the definitive end to the confusion or the back-and-forth among Republicans. But if it is and the BAT is dead, well, time for a Plan B. And here is some scenario imagining from Mike Feroli at JPMorgan:
Published in Domestic Policy, Economics, ImmigrationBecause the US imports more than it exports, the BAT would raise a substantial amount of revenue, thereby facilitating a potentially large, revenue-neutral cut in the corporate tax rate. The Ryan plan reduces the corporate tax rate from 35% to 20%, about two-thirdsof which is financed by the BAT. Without the BAT, the cut in the corporate rate would have to be much less if the fiscal hawks in Congress defend revenue neutrality.
Even with dynamic scoring—discussed in greater detail below—it would be very hard to get the corporate tax rate much below 30%. The simple reason is that the corporate code does not have as many exemptions, deductions, and credits as the personal code. Base broadening to fund rate reductions simply does not go far for corporate taxes. Moreover, eliminating these deductions may allow for a reduction in marginal tax rates, but do little to affect average tax rates. The average corporate tax rate cannot come down much in a world without BATs—unless deficits go up.
In any case, if the border adjustment is abandoned, prospects for tax cuts will hinge on how Republicans weigh their distaste for deficits and debt against their desire for tax cuts. Our baseline forecast assumes that they are willing to accept some increase in the deficit, but stop short of rate cuts as large as either Trump or the House Republicans propose.
Someone is letting tax neutrality kill clear thinking or maybe that’s the purpose. Congress loves complex things they can sell changes to. What we need is new investment financed increasingly by new savings such as cuts to government spending and increases in personal and corporate savings spurred by decreases in regulation. The border should be a separate issue. If we must have more revenue from the corporate sector, then tax corporate profits as income of the holder of record. Or impose a 10% VAT which hits imports and all other consumption so raises lots of revenue and stimulates savings if accompanied by cuts in corporate and top personal brackets. An across the board tariff, uniform with no variation and no exceptions raises revenue from consumption of imports. The border tax was awkward and would lead to unintended consequences because it’s complex and can lead to gaming.
The corporate tax only amounts to 11% of all Federal revenue, which means that we can cut it in half with no dynamic scoring while only increasing the budget deficit a small amount. However, cutting the corporate tax rate is liable to make income tax on capital gains and dividends to grow significantly. I would expect cutting the Corporate tax rate to 20% would only lower total Federal revenue by 1-2%.
The Obama Administration’s record in generating revenue was absolutely dismal. The Obama Administration’s generated significantly less revenue per dollar of GDP growth than any administration in the last sixty years. To make matters worse, GDP growth was also lower than any administration in the last sixty years, even though the Obama Administration/Federal Reserve stimulus efforts in the bank bailout, economic stimulus package and QE exceeded the total dollar amount of growth for those eight years.
There is a strong correlation between revenue generation as a percentage of GDP and economic growth. The present highly progressive US Federal tax system is particularly sensitive to the success of high income individuals and particularly small business entrepreneurs. If those in the higher brackets are not making money, revenue collection will suffer. If those do well, revenue collection will boom. It’s that simple.
The Obama administration with the help of the RINO’s in Congress spent a lot of time and effort trying to destroy small business and their efforts succeeded spectacularly- unfortunately. For the first time in history, there were more small businesses destroyed than created – to the tune of 30-50,000 a year in the late Obama Administration.
The Republicans in Congress should stop dealing in this phony “revenue neutrality” game and kill this stupid Border Tax for good. The way to increase revenue is to cut taxes (Corporate and Income) and to get the government and their ridiculous regulators off the backs of small business.