(Bloomberg) Republican lawmakers say they need answers before they can support a plan to overhaul U.S. business taxes—especially in light of arguments from retailers and other companies that the changes would hurt consumers. But a new report suggests solid information may be hard to come by.
There’s been little real-world analysis on how quickly the U.S. dollar would adjust under a so-called border-adjusted tax to prevent consumers from getting stuck with higher prices, according to a paper released Wednesday by the conservative-leaning Tax Foundation. Even so, the Washington policy group supports the proposal from Republican House leaders that would tax U.S. companies’ imports and exempt their exports.
“Surprisingly, there has been little empirical work done on the matter,” Kyle Pomerleau, director of federal projects at the Tax Foundation, said in the
report. “The literature suggests that exchange rates would adjust, but it could take time for that to translate through prices. This stickiness could have short-run impacts on consumers and different industries.”
Border fence between U.S. and Mexico
A centerpiece of the House GOP tax plan is a proposed levy on businesses’ domestic income and their imports, while exempting their exports—a feature known as “border adjustment.” The tax would be assessed at a 20 percent rate, replacing the current 35 percent corporate income tax.
Making the tax border-adjusted—that is, applying it to imports and not exports—is estimated to generate more than $1 trillion in federal revenue over a decade, according to Tax Foundation estimates. That revenue contribution could make it crucial to keeping any tax legislation deficit-neutral, a prerequisite for passing a tax bill through the Senate without Democratic votes.
Republicans in both chambers have said they need more information on how the border-tax measure would work and who it would affect before they can endorse it. Senator Orrin Hatch, chairman of the tax-writing Finance Committee, has said “at least a handful” of senators have serious reservations about the border tax, and he personally still has questions about the proposal.
“I have some real questions about it right now,” Hatch, a Utah Republican, said during a Bloomberg Television interview Monday. “I’m going to be looking at it very carefully because that’s going to be a very important part of what the House is going to do.”
Many other countries use value-added taxes, which include border adjustments. But there are key differences between VATs and the House GOP measure—and that means other countries provide little guidance for U.S. policymakers, according to many trade experts. That’s mainly because the House plan’s border-adjusted tax would include deductions for domestic labor costs and functionally replace the U.S. corporate income tax.
The tax proposal’s supporters, including House Speaker Paul Ryan and House Ways and Means Committee Chairman Kevin Brady, argue that macroeconomic factors would lead to a stronger dollar—reducing the cost of imports and increasing the cost of exports—evening out any effects on consumers over time.
Proponents say the dollar would strengthen because taxing imports would reduce U.S. demand for them, which means fewer dollars would end up overseas. That relative scarcity would push the dollar’s value up compared to other currencies.
At the same time, exempting companies’ exports from taxation would allow U.S. producers to lower their prices overseas. Lower prices would attract more foreign buyers, who’d need more U.S. dollars to make purchases. Their increased demand for the dollar would also push its value up.
Pomerleau said in the report it’s too early to assess any short-term impact of border adjustments because it’s unclear whether lawmakers would include a phase-in period for them. Still, a border tax is trade neutral and wouldn’t put the U.S. at a disadvantage, or give it an advantage, according to Pomerleau.
Brady has been trying to sell the border-adjustment plan to colleagues over the past month. He met with House conservatives last week. Following the meeting, House Freedom Caucus members still doesn’t have an official position, according to Representative Mark Meadows of North Carolina.
Brady, a Texas Republican, told the group that without the border-adjustment levy, meaningful tax reform couldn’t happen, according to Meadows.
Some GOP senators have already said they’re against the border tax or leaning toward opposing it. Senator David Perdue, a Georgia Republican, called it “regressive” and said it “hammers consumers and shuts down economic growth” in a Feb. 8 letter to colleagues.
Senator Pat Roberts, a Kansas Republican, also said he has concerns with the proposal.
“I got a lot of questions about that. And I think—to be determined,” Roberts said in an interview. “My main concern is agriculture and the possibility of a trade war.”
The border-adjusted tax could also face challenges from the World Trade Organization. A key issue involves WTO rules for border adjustments—they’re permitted for consumption-based taxes, like VATs, but not income taxes. Ryan and Brady say their plan, which would be the first of its kind globally, moves U.S. corporate taxes closer to a consumption base.
It’s also unclear where President Donald Trump, who has said he’s going to be releasing a tax plan within weeks, stands on the issue. He initially called the border tax “too complicated,” before aides said he was warming to it. He’s scheduled to meet with retailers Wednesday to discuss their opposition to a border tax.
- Lynnley Browning