Loopholes in the tax code like carve-outs, phase-ins, special rules, and exemptions have been the lifeblood of special-interest lobbyists. They also helped create the burdensome, expensive, and downright confusing tax code that American individuals, families, and businesses must comply with.
House Ways and Means Committee Chairman Kevin BradyKevin Patrick BradyEconomic growth rate slows to 2 percent as delta derails recovery Democratic retirements could make a tough midterm year even worse Yellen confident of minimum global corporate tax passage in Congress MORE (R-Texas) knows this. Last month, when discussing possible modifications to his increasingly unpopular trillion-dollar border adjustment tax (BAT), Brady told reporters, “I always worry about that with exemptions, that that will be the new ‘Lifetime Lobbyist Employment Act’ going forward, so I’d strongly prefer not to go that route.”
Brady no longer seems to be worried, however. At a conference on Tuesday, he rolled out modifications to the BAT that include a five-year phase-in and special exemptions for industries like financial services and communications. His revised plan would also allow only certain companies to continue use of the net-interest deduction.
It is truly mystifying to see these recommended “fixes” coming from the chairman who has made clear that his plan for comprehensive tax reform is to “go bold” and to eliminate the numerous exemptions and special-interest handouts that have plagued our tax code since the last major overhaul in 1986.
In fact, the House tax reform blueprint says that “[w]hen carve-outs and loopholes are built into the tax code, they increase complexity, undermine the principle of fairness, and create economic distortions that draw resources away from more productive uses and therefore reduce economic growth.” Perpetuating these same broken policies that gave us to our current code will not result in comprehensive, pro-growth reforms — but rather, just more of the same from Washington.
Beyond the generally noxious and distortive nature of such tax complexities, modifications to the BAT will have very particular negative impacts on an already troubling policy. For example, Brady asserts that these modifications are necessary to alleviate many of the concerns that have surrounded his BAT. The biggest concern has been that the U.S. dollar will not adjust fully to offset the increased cost of imports for businesses and, ultimately, higher prices for consumers — a concern echoed by many scholars and economists.
Chairman Brady’s proposed modifications make the possibility of a perfect currency adjustment even less likely. The theory that U.S. currency appreciation will perfectly offset the cost of the tax relies on a complete and unexpected implementation of the border adjustment tax. Exempting particular industries or implementing the BAT over a longer period of time make it much more likely that any currency adjustment will be imperfect, which is a threat not only to importers but to exporters as well.
Phasing in a bad policy over five years or with special exemptions doesn’t make it any better. It just delays the political consequences for lawmakers that support it. The only real way to eliminate the risks that the border adjustment tax poses to the American economy is to eliminate it altogether from consideration.
The House leadership and the rest of the Ways and Means Committee have a once in a generation opportunity to follow through on their promises to enact a bold and ambitious plan that will make it easier for Americans to do their taxes and will grow the economy. But the longer lawmakers cling to any form of this trillion-dollar tax on consumers, the dimmer the chances become for delivering on the type of tax reform the American people deserve.
Mary Kate Hopkins is deputy director of federal affairs at Americans for Prosperity, a nonprofit organization that advocates for policies promoting free markets and economic freedom.
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