To cut the corporate tax rate, as President Trump and virtually all Republicans want to do, legislators have a big choice to make: offset the lost federal revenue with another kind of tax, or add to the deficit and hope a faster-growing economy produces more tax revenue in the future.
Budget hawks are a powerful part of the GOP, and they insist tax reform be “revenue-neutral,” which means it won’t add to budget deficits or the national debt. If you’re cutting one type of tax, that means you have to increase other types of taxes or come up with some new ones, to keep the net cost to the government at 0.
That’s why the leading Republican tax plan in Congress — backed by House Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady — includes a “border adjustment tax,” or BAT, that basically amounts to an across-the-board tariff on imports. If enacted, new revenue from this tax would allow Congress to cut the corporate tax rate from 35% now to something closer to 20%, putting US rates in line with those in other developed countries.
But the BAT faces major opposition, even among Republicans. “This is a tax grab,” Republican Sen. David Perdue of Georgia said at the recent Yahoo Finance All-Markets Summit. “It’s a regressive tax, it hammers low-income and middle-income consumers, [and] it doesn’t foster growth.”
A tax on imports would basically push the prices of those goods up. Supporters of the BAT argue that, if imposed, it would boost the value of the dollar by roughly the same proportion as the hike in import prices, strengthening Americans’ purchasing power. In theory, there would be no net cost to consumers.
But Perdue and others point out that the dollar wouldn’t appreciate all at once, leaving consumers stuck with higher prices until it did. And that’s the best-case scenario. A gloomy scenario would be spiraling inflation combined with new tariffs on American exports to other counties, as payback for a US tax on imports. Such trade wars could easily cause a recession.
Consumer groups, retailers and other types of businesses are already lobbying hard against a BAT. The National Retail Federation argues it would cost the typical family $1,700 per year in higher prices on many everyday goods. President Trump himself has said the idea is “too complicated,” although the White House has also signaled it might sign on to some version of a BAT.
But if Republicans such as Perdue — an early Trump supporter and key Senate ally – aren’t willing to support a BAT, the idea may be doomed. The question is, what would be a better way to raise needed revenue? Tax legislators could close loopholes and limit deductions, but that would be controversial too, with hundreds of lobbyists fighting hard for their industry’s preferred tax break. Another possibility is that tax reform is simply more modest than Trump or other Republicans would like, with the corporate rate falling by less.
Congress could also cut taxes without making up the lost revenue, on the principle of “dynamic scoring,” which assumes tax cuts will boost growth and produce more tax revenue through more taxable economic activity. But the budget hawks aren’t big fans of imagined future revenue, either. Tax reform is a great idea, until you have to figure out how to pay for it.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.