Politico

Why the GOP should abandon the border adjustment tax

Written by Lisa

Investors, employers and workers are getting nervous. What’s holding up the promised Trump tax cuts?

The White House and GOP congressional leaders are hinting that tax cuts may not come until after Obamacare is repealed — meaning late summer at the earliest. But delay is the enemy of what these politicians need most: an early signature legislative victory that delivers on a key promise to voters and ramps up growth quickly.

One distraction stalling the tax plan is the thorny issue of border adjustability. The Border Tax Adjustment, proposed by the House Ways and Means Chairman Kevin Brady, would in effect impose a tax on American imports while exempting American made exports from income tax calculations. That’s a giant change to how America taxes its businesses, and respected economists are divided as to whether this makes economic sense. Meanwhile, the business community is split down the middle. This is no way to build consensus for a tax plan.

If the border adjustment tax lacks the necessary support to pass Congress, Brady and his colleagues should consider abandoning it—at least for now. Otherwise, it risks further delaying tax reform.

Yes, jettisoning the tax will increase the cost of the plan by about $1 trillion over 10 years. But Congress should not limit itself to revenue neutrality, rejecting pro-growth tax policy because of a misguided concern that it will increase the deficit in the near-term. Instead, they should push forward with a simple tax rate reduction — to 20 percent — for small and large businesses (which face tax rates as high as 35 percent today). The tax bill should also repeal Obamacare’s 3.8 percent surtaxes on capital gains and dividends, which have slowed investment. A repatriation tax of 10 percent on foreign earnings held abroad will raise revenue and spur a surge of domestic investment.

Here’s the key point: What’s needed is a net tax cut for business — which this is. Lawmakers shouldn’t get bogged down on the issue of how to “pay for” it. Revenue neutrality is a trap. It requires that one man’s tax cut be offset dollar-for-dollar by another’s tax increase. That’s hardly a way to stimulate jobs, because the overall tax burden is not lessened by a penny.

The U.S. charges the highest business tax rates in the world — in many cases double our competitors. No one can deny that reducing these rates will increase jobs and make America more competitive in global markets. Higher growth and more jobs will make up for much of the revenue loss.

We also believe that Congress should not confine itself to the restrictive reconciliation process. By preemptively choosing the reconciliation route, Congress is essentially setting its initial efforts to reform the tax code on the basis of threats of obstruction and demands for economically damaging tax increases on some industries.

Congress should first try to pass tax reform the old-fashioned way: via the regular legislative process in the House and Senate. The House should pass a strong tax bill in a matter of weeks, and the Senate should get on with the debate immediately after. Trump should weigh in, urging that a tax-cutting bill hit his desk in 100 days. This strategy has the advantage of not being bound by reconciliation rules that require any fast-tracked legislation not to add to the deficit.

While it is true that Democrats could filibuster any legislation in the Senate, a filibuster is not a given. Our reading is that many Democrats understand the imperative of business tax cuts. If the entire business community is unified behind this measure, this would be a very tough no vote for Senate Democrats, especially in Trump-carried states.

A robust debate over tax reform on the Senate floor would be a good thing, forcing members to deliberate, offer alternatives, and vote. Doubtless some on the left will demagogue business tax reductions as “tax cuts for the rich,” but such claims can be countered effectively. For example, American Enterprise Institute economist Kevin Hassett has assembled solid evidence showing that business rate reductions primarily benefit the working class through higher wages.

Conflict is an ingrained characteristic of the contemporary political environment — particularly when it comes to tax policy. So bring on this debate and the sooner the better.
If this approach ultimately fails, then the Republican leadership can revert to the reconciliation process, and pass the tax cut with 51 votes in the Senate. But it’s worth trying first to build a broader bipartisan consensus to juice the economy with the biggest tax cut since Ronald Reagan.

A Distinguished Visiting Fellow at The Heritage Foundation, Stephen Moore directs the think tank’s Project for Economic Growth. James Wallner is Heritage’s Group Vice President for Research.

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Lisa

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