Trump right to question GOP tax plan
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Corporate tax reform should ideally, among other things, serve to significantly lower the 35 percent top statutory corporate tax rate, address the “lockout effect” of having trillions of dollars of offshore earnings by U.S. multinationals, prevent further erosion of good jobs and earnings from migrating offshore, encourage inbound investment, and limit the number and cost to the “losers” created by tax law changes.

Tax reform should not serve to add to the deficit nor further add complexity to our tax laws. It should also be compliant with World Trade Organization (WTO) rules prohibiting illegal trade subsidies. Whether a border adjustment feature would be consistent with all of the foregoing is, at the very least, questionable.

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A few days before being inaugurated, President Donald TrumpDonald TrumpOversight Dem calls on WH to suspend Kushner's security clearance Civilian deaths a 'fact of life' in 'accelerating' war on Islamic State, Pentagon head says The Paris climate agreement: Stay in, renegotiate MORE told the Wall Street Journal that the border adjustment provision, which was a major feature of a House Republican corporate tax reform blueprint unveiled in June, was “too complicated.”  He observed that “anytime I hear border adjustment, I don't love it.” He went on to state, “You don't need [the border adjustment benefit] plus lower taxes and everything else. And it's too complicated. They get credit on some parts and not on other parts. Where was the part made? I don't want that. I just want it nice and simple.” In a later interview with Axios, Trump slightly backed away from his earlier comments, saying in effect the decision was not final.

 

CNBC pundit Larry Kudlow, an economic advisor to President Trump, made similar comments to those Trump told the Wall Street Journal a few days earlier. Kudlow called the border adjustable plan on CNBC “an exercise in government planning and complexity that I believe is doomed to fail.” Trump and Kudlow are right to be skeptical.

The Journal article also indicated that “retailers and oil refiners have lined up against the measure, warning it would drive up their tax bills and force them to raise prices.” It also reported that Koch Industries “last month said the border-adjustment measure could have ‘devastating’ long-term consequences for the economy and the American consumer.” In an opinion piece, Donald Luskin wrote that “the costs [of taxing imports] would be passed on to Americans in some form: either to consumers through higher prices or to stockholders through lower profits.”

House Ways and Means Committee Chairman Kevin BradyKevin BradyBorder-adjustment tax proposal at death’s door Mnuchin asks Congress for clean debt hike before August Overnight Finance: Inside Trump's first budget | 66 programs on the chopping block | Hearing highlights border tax divide | Labor to implement investment adviser rule MORE (R-Texas), a major proponent of the border adjustment provision, has described it, saying “At the end of the year, a business adds up its export sales and doesn't count it as income. At the end of the year, it adds up its import costs and doesn't count them as expenses.”

There are admittedly many economists enamored with moving our corporate income tax system to a destination-based cash flow tax, like that proposed in the House Republican blueprint. A recently published report by the Treasury Department’s Office of Tax Analysis found that a cash flow tax “is promising” although there “is [a] daunting list of issues that remain to be resolved.” Economist Martin Sullivan, has reported, however, that “probably a majority of commentators have argued [the House Republican border adjustment plan]… violates WTO rules.” We've had experience in the past with tax reform measures that needed to be repealed because of their non-compliance with WTO rules.

I'm not in a position to assert this provision is deserving of a red light, but at least a long yellow light seems warranted. Congress should be very careful before enacting radical changes to the corporate tax system and instead focus on matters like corporate rate reductions that are widely embraced.

Philip G. Cohen is associate professor of taxation at the Lubin School of Business at Pace University. He is a retired vice president and general tax counsel for Unilever. His views don't necessarily reflect those of any organization he is or has been associated with.


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