“What can be more fair?”

BAT author acknowledges some (re: retailers) will be losers under new tax proposal

By: Eric Kulisch
Photo: Oksana.Perkins / Shutterstock
   House Ways and Means Committee Chairman Kevin Brady on Tuesday forcefully defended a key plank of the House Republican tax reform plan that would tax imports under a punitive formula and exempt exports in an effort to encourage more domestic manufacturing, calling it a “game changer” for the economy.
   Critics say the so-called “border adjustment tax” would actually raise prices for consumers and severely harm companies that rely on imports for sales or as inputs for American-made finished goods. Retailers are among the industry sectors that would be hit hard by such a change in the tax code.
   The proposal essentially would tax imports at the corporate tax rate based on their final sales value, without the ability to deduct wholesale, transportation and other expenses, as is currently the case with today’s income-based taxation system. The aim is to tax goods at the point of consumption rather the point at which profits are taken. Domestic manufacturers, conversely, would not get taxed on profits from their exports.
   In a speech Tuesday at the U.S. Chamber of Commerce, Rep. Brady said U.S. tax policy has put U.S. exporters at a severe competitive disadvantage since many other countries with value-added tax systems remove the tax for their exports and apply them to imports from the United States and elsewhere.
   “The House GOP tax reform blueprint finally ends the ‘Made in America’ tax,” Brady said, according to a copy of his prepared remarks. “By border adjusting our taxes like our foreign competitors do, we level the playing field. For the first time in U.S. history, foreign imports and American-made products and services will be taxed at exactly the same rate here in America. No more tax advantages for foreign products or services. No more incentives for U.S. companies to move overseas. Everything taxed at exactly the same rate in the U.S. —what can be more fair?”
   Brady is the principle author of tax policy changes in the “Better Way” plan, the House Republicans’ agenda from the summer for addressing economic, security and social needs. House Republicans are also pushing to lower the corporate tax rate to 20 percent from 35 percent and give companies the ability to immediately write off the full cost of capital investments instead of having to account for depreciation over the asset’s lifespan as part of their tax overhaul.
   In his remarks, the congressman did not mention that the border adjustment tax is considered one of the principle vehicles for offsetting the government’s lost revenue from other tax cuts. It is estimated to raise more than $1 trillion over 10 years, according to some analysts.
   The Texas Republican said the border adjustment tax (BAT) will level the playing field for American companies, and give them an incentive to invest in domestic production rather than going offshore.
   “While it’s new to America, border-adjustability is used throughout the world to give our foreign competitors a big advantage over the U.S. We match them, not with a hidden VAT, but with a simpler, smarter cash-flow tax based on where a product is consumed rather than today’s business income tax based on where products are produced or profits booked."
   On an episode of NPR’s 1A program Wednesday, Georgetown University public policy professor and economist Harry Holzer noted that the BAT is more analogous to a sales tax than a VAT.
   “This border-adjusted tax is stunningly simple and based on a pro-growth principle: if your product or service is consumed in the United States it is taxed equally,” Brady said. “It will bear the same rate of U.S. tax regardless of where it is produced, regardless of whether you’re a foreign company or a domestic one,” he said.
   Brady acknowledged the BAT creates winners and losers, but is necessary to make America more competitive.
   “Make no mistake, there are severe consequences for America if special interests succeed in blocking this provision," he said. "Foreign products would continue their tax advantage over ‘Made in America’ products—undercutting President Trump’s focus on American jobs and growth. Tax rates on businesses would have to increase significantly from the proposed 15 percent and 20 percent rates, undercutting our ability to make America competitive again.  
   “But perhaps most importantly, Congress and the White House would have voluntarily left in place the damaging incentives for U.S. companies to move their jobs, research, and headquarters overseas. We cannot let that happen.”
   Brady said the long-term goal is “not simply to eliminate all tax incentives to move overseas, our goal is to establish America as a magnet for 21st century investment and job creation. Understandably, some companies that import a lot of foreign products have concerns. Taxing both foreign and ‘Made in America’ products at the same rate is a big change. We are listening to their concerns and we welcome their feedback. We continue to invite CEOs to engage constructively on the design and transition of this critically important provision so that imports and exports continue to contribute to our local economies.” 
   Retailers and other business interests have expressed alarm at the proposed tax change, saying it could put some companies out of business. Opponents argue that border adjusted taxes will raise prices on domestic sales as well as manufacturers will expect the equivalent benefit they could receive from tax-free exports.
   A study by the Brattle Group says domestic gasoline and diesel prices could rise nearly 30 cents per gallon at current crude oil prices, or up to 55 cents a gallon if crude prices rise, if the destination-based tax scheme is implemented. Goldman Sachs analysts said in a client note Tuesday that BAT would quickly trigger a 25 percent hike in domestic crude oil prices, which would translate into a 30 cent per gallon hike at the pump.
   The investment bank handicapped the chances of the BAT making its way into law at 20 percent “given the disruption that such an abrupt change in corporate tax policy likely entails.”
   Beyond that, the BAT, if implemented, would force U.S. retailers to make drastic changes to sourcing patterns and supply chain networks. Recent analysis, highlighted in earlier this month by the Adam Smith Project, found that the BAT costs would supercede operating profits for many retailers.
   That’s important, because manufacturing jobs currently account for around 8 percent of total U.S. jobs. According to Burea of Labor statistics, at the end of 2016 the retail industry provided jobs to 15.9 million Americans, compared to 12.3 million manufacturing jobs. As Brady noted, supporting the U.S. manufacturing sector through a BAT would necessarily transform the import-based retail industry.
   Retailers have argued that transformation cannot happen overnight without significant consequences.