Back in October, congressman Devin Nunes met with a group of executives from major corporations to talk business. “I was trying to sell them on” the House GOP’s tax plan, Nunes says, “explain how it would work and how the economy would grow.” There was only one problem: None of the business executives was interested. According to the California Republican, they wanted to talk about only two things: infrastructure spending and how to pay for it, “just like Clinton wants to do.”
“No company in the U.S. thought, number one, that Trump would ever win, number two, that we would keep the Senate,” Nunes says. That view, of course, was shared by many, including the media and even Republican members of Congress. That’s why Nunes says “our biggest issue now is educating the public.”
The House GOP “blueprint” for tax reform has been sitting on a shelf ignored since it was released last summer, but the ideas behind it have been developed over many years by think tanks and members of the Ways and Means Committee. Nunes, a member of that powerful tax-writing committee, is a true believer when it comes to conservative tax and entitlement reform: He collaborated with Paul Ryan nearly a decade ago on a bill known as the “Roadmap for America’s Future,” many aspects of which are included in the current GOP plan. “If you go to a system like this, you’re going to get massive economic growth,” Nunes declares.
As Lawrence B. Lindsey explains in greater detail elsewhere in this issue (see page 10), these are the highlights of the GOP tax plan: One, it would cut the corporate tax rate from 35 percent (nearly the highest in the world) to 20 percent. Two, it would allow the full and immediate expensing of investments rather than requiring those deductions to be spread out over many years, thus giving new firms critically needed positive cash flow. Three, the 20 percent tax would be “border adjustable,” meaning that it applies to domestically produced goods and imports but not exports. So, for example, Ford Motor Company would calculate its taxes by taking its total domestic sales and subtracting its domestic costs (capital investments, wages, American-made parts, etc.); it could not subtract the costs of imported parts, but it would not pay taxes on its foreign sales.
That last part—border adjustability—has been the most controversial aspect of the reform: Those opposing it include some manufacturers (Koch Industries), major retailers (Walmart), and financiers (former GOP presidential candidate Steve Forbes). Opponents argue that taxing imports but not exports will lead to American consumers paying higher prices. Academics on the left and right argue that these fears are unfounded. Harvard economist Martin Feldstein wrote recently in the Wall Street Journal that a border adjustment tax of 20 percent would “automatically” increase the dollar’s value by 25 percent, leaving importers and exporters no better or worse off than they were before.
“With a 25% rise in the value of the dollar relative to foreign currencies, the $80 net price of U.S. exports would rise in the foreign currency to the equivalent of 1.25 times $80, or $100, and therefore back to the initial price,” writes Feldstein. “Similarly, the 25% rise in the value of the dollar would reduce the real import price to the U.S. retail customer back to $125/1.25, or $100, as it is without the border tax adjustment.” This calculation is “not a theory or a statistical regularity,” Feldstein adds, “but a basic national income accounting identity that holds for every country in every year.”
Feldstein’s view, widely held among academics, is disputed by some Republican businessmen. “Economic models have never predicted the future, much less the past,” Steve Forbes says in a phone interview. “There are a lot of things that go into exchange rates, very complex: monetary policy, international incidents, tax policy, and the like, which is why you have currency trading on the level of $5.3 trillion a day, tens of thousands of the best minds in the world trying to figure out currency trades. The idea that these Washington politicians have gotten this thing cased out or a few academic economists—if they’re so brilliant, they’d be on the Forbes 400 list for currency trading. They don’t know.”
Alan Viard, an economist at the American Enterprise Institute, concedes that the currency adjustment may not happen immediately, but he doesn’t know of any economist who would argue it won’t happen. “It’s not a liberal or conservative thing. This is just what economists believe,” says Viard. “The markets could be confused” initially, he added. “Economists are not always good at timing.”
Asked if he knew of any scholars who agreed that border adjustment would raise prices for consumers, Forbes couldn’t point to anyone in academia, but he named Larry Kudlow and Peter Schiff as two experts who do agree. One adviser to a major U.S. company that opposes border adjustment described the disagreement as one between the “ivory tower or textbook” view and those in business who believe that under border adjustment “currencies can’t and never will adjust completely and perfectly.” The House GOP plan has, however, won the support of a number of large companies—GE, Eli Lilly, Dow Chemical, Oracle, and Pfizer, to name a few.
If the academics are right that border adjustment wouldn’t have a real effect on imports and exports, then why enact it in the first place? Because the United States runs a trade deficit, taxing imports but not exports would raise more than $1 trillion in revenue over the first 10 years. Without that $1 trillion, Congress would likely leave the corporate tax rate much closer to 30 percent than the more competitive 20 percent Republicans want. Congressman Nunes argues that border adjustment isn’t being done simply to finance the rate reduction, but is rather a feature of the new system that moves away from an income tax. “If we’re moving to a consumption tax, you have to basically tax everything that gets consumed in this country,” he says.
Steve Forbes points to the new revenue as proof that American consumers are going to get stuck with the bill. “Where does the hundred-plus billion dollars [per year] come from? Mars?” AEI’s Alan Viard recently wrote that
border adjustment money would really be a disguised form of borrowing—the government would have to pay it back. Because exports and imports must balance in present discounted value, each dollar of current trade deficits means a dollar, plus interest, of future trade surpluses. When the trade surpluses arrived, the border adjustment would lose money, with the export subsidy costing more than the import tax raised. The money that came in during the trade deficit years would flow back out, with interest.
Whether GOP tax reform, including border adjustability, will become law remains unclear. In an interview on January 16, President Trump suggested that border adjustment was “too complicated,” but he quickly walked back that statement, in an interview two days later. Sources say that Trump’s top aides agree with House speaker Paul Ryan about border adjustment. On January 19, Breitbart News, whose former chair Stephen Bannon is Trump’s chief strategist, spun the issue as Ryan moving toward Trump’s position, even though Ryan’s original 2008 “Roadmap” called for a border adjustable consumption tax. “ ’Responsible Nationalism’: Paul Ryan Warming to Donald Trump’s Ideology with ‘Border Adjustment Tax,’ ” blared the Breitbart headline.
Even if Trump and Ryan end up of the same mind, tax reform isn’t guaranteed to pass the Senate. The bill, which hasn’t been introduced yet, will be subject to budget reconciliation rules, which means passage will require only a simple Senate majority. But there are only 52 Republican senators, which means reform advocates won’t have much room for error without Democratic support. A number of Senate Republicans, including John Cornyn, Orrin Hatch, and Mike Lee, have already expressed skepticism about border adjustment.
If the House GOP’s tax reform is going to make it into law largely intact, it will require advocates like Devin Nunes and Martin Feldstein convincing almost all GOP senators—and much of the public—that they’re right and Steve Forbes, Koch Industries, and Walmart are wrong.
John McCormack is a senior writer at The Weekly Standard.
