Federal Reserve Chairwoman Janet Yellen on Wednesday cast doubt on a key idea undergirding the House Republican tax reform plan: that the border adjusted tax in the plan would create a stronger dollar.
“The problem is there’s great uncertainty about how in reality markets would really respond to these changes,” Yellen told lawmakers at a House hearing.
House Republicans, including Speaker Paul Ryan, have argued that the border-adjusted corporate tax, which would effectively raise taxes on imports, would not hurt domestic industries or consumers because the dollar would strengthen as a result. In that scenario, the purchasing power of importers would be the same, even with higher taxes.
But Yellen, the world’s top monetary policymaker, appeared to be less than fully convinced of the GOP line of argument in a discussion with Rep. Warren Davidson, R-Ohio.
“A strong set of assumptions is needed to believe that markets would fully offset those changes,” she said. “It’s very difficult to know just what would happen.”
Investor expectations would matter greatly in influencing the dollar, she noted. Also, she said, if the dollar appreciated significantly, “there would be shifts in wealth — the value of U.S. assets held in foreign currencies would be greatly diminished.”
The House Republican plan would tax imports as part of a broader corporate rate-cutting reform that would tax goods based on where they are sold. Under the plan, companies would no longer be allowed to deduct the cost of imported goods and services, but would no longer pay any taxes on revenues from exports. In today’s system, U.S. companies are taxed on all profits, whether they are earned in the U.S. or abroad. Republicans say that the change would encourage more manufacturing within the U.S., and discourage companies from moving production overseas.
Critics, however, including retailers and oil refiners, have warned that their businesses could be harmed, especially if the dollar doesn’t fully adjust.
Earlier in the hearing, Yellen had also called the border adjustment proposal “complicated policy.” House Republicans have argued that it is simple: Goods and services are taxed at a 20 percent rate if they’re sold in the U.S., and not taxed if sold elsewhere.
