Op-Ed in Investor’s Business Daily: Let’s Bury The Idea Of A Border Adjustment Tax

http://www.investors.com/politics/commentary/lets-bury-the-idea-of-a-border-adjustment-tax/

Let’s Bury The Idea Of A Border Adjustment Tax
by David McIntosh, President, Club for Growth
January 23, 2017

There are serious problems with the U.S. corporate tax code: The corporate tax rate of 35% is the highest in the industrialized world, and U.S.-based companies are taxed at that rate when they bring overseas profits back into the country. For those reasons and more, there is widespread agreement that our corporate tax code is broken and in need of reform.

House Republicans now have a prime opportunity to undertake corporate tax reform, and they’ve proposed some pro-growth ideas, including rate reductions, incentives for investment, and reform in how purchases are expensed.

Unfortunately, all of that good reform could be wiped out by a separate complicated proposal from the House GOP that amounts to a costly new consumer tax called the Border Adjustment Tax (BAT).

Under the BAT, or border adjustability tax, imports are taxed and exports are exempted. Here’s how that looks: A local retailer pays $40 to import a gadget that it then sells for $50. Under current tax law, that retailer can deduct its cost and only owe tax on the $10 profit. But, with a BAT in place, that retailer would owe corporate taxes on the full $50 sale price.

Consider how four possible scenarios apply to that same sale: Under the current system, the 35% tax eats away $3.50 of the company’s profit. If House Republicans successfully lower the tax rate to 20%, the company would pay $2 to Washington. If President-elect Trump stands firm on his proposed 15% rate, then even more money is kept in the economy and not paid in taxes.

But under the fourth scenario — applying a BAT — the retailer’s entire $10 profit is consumed by a federal corporate tax. That’s a massive increase in their tax burden!

About one-third of the durable goods that Americans buy are imported, and that number trends higher for those in the low- and middle-income brackets. So, whether they’re shopping online or at a local retailer, a BAT will be like a vast hidden sales tax that drives up the cost of purchases and forces retailers to cut costs, including jobs, in order to compete.

The BAT will also kick in for new car purchases, car repairs, and even at the gas pump. Imported crude oil and imported auto parts, even for the many parts that manufacturers use to build cars in the U.S., will all be subject to this new tax.

There’s one more catch to the BAT. It diminishes the buying power of consumers, increases expenses for businesses that import goods, and it gives an enormous break to U.S. businesses that export, allowing them to sell their products for less overseas, but only because of the tax dollars collected from consumers on imports. Essentially, American buyers of imported products would be subsidizing the cost of cheaper products for foreign buyers.

It’s another case of Washington creating winners and losers, instead of doing what’s necessary to reduce taxes across the board: Congress must do the hard job of actually cutting the size of the federal government and its spending, instead of gaming the tax code to create costly offsets.

Proponents of the BAT argue that taxing imports will reduce the demand for them here, sending less U.S. dollars overseas and thus increasing the value of the dollar. Unfortunately, there is no simple formula here, and there are many other factors that influence the value of currency, not the least of which is manipulation by other countries. It is a hope, at best, that exchange rates would fluctuate quickly in the right direction.

But, politicians love the BAT because it is, at its core, a hidden tax that most consumers can’t do much about. They’ll still go shopping, buy gas and fix their cars. In that way, the temptation for politicians to eventually raise these rates is very real, especially as other countries seek to compete with this tax.

We’ve already seen a similar scenario play out in Europe where the Value-Added Tax is hidden to consumers and has fueled enormous growth of the social democratic state.

The truth is many Americans have never heard of the BAT, or they’re not familiar with how it works. But they do know this: They don’t want to pay more just because the goods they buy are produced in other countries. According to a new poll of registered voters, an overwhelming number want to see Congress do tax reform, but they want some way other than a BAT to offset a reduction in the corporate tax rate. In fact, the vast majority said that tax cuts should be paid for by cuts in federal spending.

There’s one other trap awaiting Republicans who want the BAT: Congressional Democrats will likely oppose it, which may seem strange because they love tax hikes. But, the BAT hits low- and middle-income families the hardest. So, opposition to the BAT will be a political winner for Democrats. Republicans will be seen as tax hikers, and worse, they will be seen as taking money from working families and giving it to big corporations through huge tax breaks.

There’s no debate over the fact that Congressional Republicans must do pro-growth tax cuts across the board. The Tax Foundation has projected that Trump’s tax overhaul would produce about 7% in economic growth. The corporate tax rate needs to be lowered, with incentives for investment.

But Congress also needs to dramatically cut federal spending, and not simply substitute a new consumer tax to feed Washington’s endless demand for more revenue.