Last week, President Trump announced his outline for changes to the tax code. Fortunately, the plan he laid out did not include the border adjustment tax, the linchpin of the plan proposed by Republican leadership in the House of Representatives. In the way of Trump's announcement, some House Republicans have continued to argue in favor of a border adjustment tax.
Let me be clear about why a BAT is even being considered: The only reason that Republicans are willing to endure this risky scheme is because they are being held hostage to the faulty logic that their tax cuts must be revenue-neutral in a static analysis. This demand that tax cuts be "paid for" will act as a brake on economic growth and force us down rabbit holes like the BAT proposal. These silly "pay for" rules aren't actual laws, but politicians view them as necessary for responsible fiscal policymaking.
But, the truth is that this economy needs growth. Marginal income tax rate cuts bring growth, not new protectionist taxes that subsidize exporters at the expense of anyone who imports goods. Let me tell you that if our nation's historic major tax reforms of the 1920s, 1960s and 1980s had required marginal rate cuts to be "paid for," we never would have had the Roaring Twenties, Go-Go Sixties or the Reagan Eighties.
The economy needs a jolt, and pro-growth tax reform must be a key part of the mix. The legacy of the Obama presidency is and will be the weakest economic recovery in American history. For nearly the last decade, the economy has crept along at an anemic average growth rate of less than 2 percent because of Presidents Bush and Obama's massive stimulus spending programs, and Obama's increased regulatory and tax burdens on businesses and families.
Voters elected Trump and a Republican Congress last November to roll back these economic growth impediments, leading to more jobs and stronger growth. There is a lot on the line for Republicans and the country as the debate over tax reform moves forward in Washington. With workforce participation at a near 40-year low and wage growth stagnating, we need a bold breakthrough on tax reform to unleash the animal spirits of the economy.
If Republicans squander this opportunity, they will lose the moral high ground on economic policy and set themselves up for a very difficult midterm election in 2018. Voters want and need economic growth, and if they don't get it, they will blame Republicans. Every Republican officeholder in Washington needs to be aware that the voters want growth, and they want it now!
Unfortunately, some House Republicans are playing a loser's game with their insistence that tax reform include a BAT.
The BAT is essentially a national sales tax on imports that is designed to raise $1.2 trillion over the next 10 years. It would discriminate against businesses that rely on imports and drive up prices for consumers. It could also set off a trade war, as foreign countries respond by slapping higher tariffs or similar border-style taxes on American exports. One need look no farther than our neighbor to the north, as Canadian Prime Minister Justin Trudeau has been outspoken in his opposition to this misguided policy.
The political risks associated with the BAT are exceptionally high. It will be very easy for Democrats, who are already hell-bent to oppose anything associated with Trump, to paint the BAT as a price-raising, job-destroying tax hike that benefits multinational corporations to the detriment of middle-income families.
Politicians should focus their attention on reducing tax rates sharply, while eliminating the loopholes and deductions that create inefficiencies in the economy and reward special interests at the expense of a more rational, growth-oriented tax code. If Republicans are courageous and willing to cut tax rates dramatically while wringing the complexity out of the code, the economy will take off and generate more tax revenue that will put the country in a stronger position to deal with the long-term consequences of entitlement spending and debt. But their first priority must be growth, and the BAT is counterproductive to that national imperative.
Tax reform is in its beginning stages — it's nowhere near too late to recalibrate and get reform moving in the right direction.
Arthur Laffer is the founder and chairman of Laffer Associates. He has served in various senior and distinguished capacities both outside of government but also within it, most notably as a member of President Ronald Reagan's Economic Policy Advisory Board throughout his two terms.
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