House Speaker Paul Ryan’s ambitious tax overhaul relies on an import tax concept originally developed by a Berkeley economist who once advised Democratic presidential candidate John Kerry.
Alan J. Auerbach is the director of the Robert D. Burch Center for Tax Policy and Public Finance at the University of California, Berkeley. He served as an economic counselor to Kerry during his 2004 presidential campaign.
He also happens to be known as the godfather of “border adjustability,” the linchpin of the tax reform plan that Ryan, a conservative Wisconsin Republican, is attempting to sell to the White House and push through the GOP Congress.
In a March 6 op-ed in the New York Times that Auerbach co-authored with Michael Devereux, a professor at Oxford University’s Said Business School, he praised Ryan’s tax overhaul and made a direct appeal to liberal critics of the Ryan tax plan.
“Critics, particularly those on the political left, have expressed concern that the tax isn’t progressive enough,” Auerbach and Devereux wrote. “But it promises to be more progressive than the current United States corporate tax system: Its burdens would fall squarely on the owners of corporate capital rather than — as happens to some extent now — on American workers, whose wages suffer from the flight of productive investment capital to lower-tax countries.”
In an email exchange on Friday with the Washington Examiner, Auerbach said he first started writing about the concept of border adjustability in 1997. Ryan was elected to Congress the following year and 10 years later produced a tax reform proposal that included a “border-adjustable business consumption tax.”
Auerbach, a registered independent, said he doesn’t view a border tax as liberal or conservative, despite his belief that it could be more progressive because it would move the tax burden from workers to corporations.
“I view it as good tax policy,” he said. “Given how bad the current corporate tax system is, and the weakness of the other proposed alternatives, I would hope that what I view as a sensible approach could get broad support.”
Auerbach said that did not advise House Republicans on the formulation of the Ryan tax plan.
Congressional Republicans, and President Trump, largely agree on many elements of Ryan’s plan, including lowering individual and corporate rates, and streamlining the tax code. But there is a big fight brewing over border adjustability.
Also known as an import tax, border adjustability would radically shift how the U.S. taxes imports and exports. Income that businesses earn on the sales of domestic goods would not be taxed, but income earned from the sale of imported goods would be taxed.
Republican opponents of the proposal, most prominent in the Senate, are looking for any edge they can find to derail it. And one argument they’ve landed on is that border adjustability is the opposite of what conservative tax reform looks like. Critics could use Auerbach’s association with the proposal to drive that argument.
They also contend that it would jack up the prices of consumer staples that low- and middle-class families depend on.
“The border adjustment tax is regressive, hammers low- and middle-income consumers, and it does not foster growth. What it does do is grow the size of central governments,” Sen. David Perdue, R-Ga., told the Washington Examiner in a statement provided by his office.
House Ways and Means Committee Chairman Kevin Brady chuckled when he was asked to counter claims that border adjustability isn’t conservative policy.
The Texas Republican refers to the current tax system as levying a “made in America tax” on domestically manufactured goods because foreign countries hit American products with a value-added tax, something their exports aren’t subject to by the U.S.
That puts U.S. exports at a competitive disadvantage, both at home and abroad. There’s nothing conservative about that, Brady said.
“No one can defend the current tax code, that favors foreign products over U.S. products. Equal taxation is conservative policy. And, by the way, that’s true competition — that always, in my view, accrues to consumers,” Brady said. “Conservatives have never believed that there should be tax incentives to move American manufacturing jobs, research and headquarters overseas.”
Supporters of the border adjustability import tax dismiss the critics who say it will cause the price of consumer goods to spike. As Brady explained, they believe foreign countries will adjust their currencies to account for the new U.S. tax policy, with prices remaining stagnant.
Major U.S. retailers disagree. They have formed a new trade association, Americans for Affordable Prices, aimed at defeating border adjustability. Many of the Republicans who oppose the provision hail from states where retailers are headquartered.
Republicans are set to take up tax reform after they clear legislation to repeal and replace Obamacare. Ryan has said his plan is for tax reform to be completed by the end of July, when Congress is scheduled to adjourn for its summer recess. Senate Majority Leader Mitch McConnell, R-Ky., said it could take longer to process tax reform in his chamber.
Trump, who has promised to renegotiate U.S. trade deals to encourage more domestic manufacturing, remains noncommittal on the border adjustability import tax.
