Monday, January 23, 2017

What are the Political Calculations Behind the Border Adjustment Tax???

As the House Republicans prepare for a summit later this week with President Trump to discuss the agenda for the coming weeks and months, I think it is fair to ask how Paul Ryan and the House Republicans view the politics of the Border Adjustment Tax.

We have already debunked the notion that this proposal fixes any purported "tax injustice".  They must know this.

The Brady Plan (including the Border Adjustment Tax) is revenue neutral so they know it's not a tax cut.  It's a tax reallocation.

Given that the Real taxes won't change, because the House Republicans oddly aren't planning to cut spending in what is anticipated to be a fully partisan bill, the layer of fat that is government won't shrink, so this bill won't be stimulative either.  Costs aren't going down, and cash overall will not flow into the public's pockets.  It will flow from some of our pockets into other people's pockets.

And finally, Mr. Trump seems to be against the notion of a Border Adjustment Tax.  As previously noted, Mr. Trump said he didn't "love it" and now today, he apparently clarified that he intends to punish "round tripping", where a company moves production from the U.S. to a low-cost jurisdiction for the purpose of making products more cheaply for the U.S. market.  From the WSJ: "Mr. Trump has described his 'border tax' in the past as a selective 35% tax on companies that outsource production to other countries and then import goods back to the U.S. That is different from the 'border adjustment' that is a key feature of the House Republicans’ tax plan. Mr. Trump has criticized that idea, which would tax all imports and exempt exports from U.S. business taxation."

So why are the House Republicans so anxious to shoot their bullets at this target? What's in it for them?  Mr. Trump is just starting out, with an aggressive agenda which overlaps with theirs.  If Mr. Trump (justifiably) opposes the Border Adjustment Tax (as does his new Treasury Secretary), don't the House Republicans have a lot to lose in pushing on this controversial bill?

We hear rumors that some Republicans in Congress are worried at being asked to vote in favor of this bill only to see it crash and burn in the Senate.  There is institutional memory of the famous BTU Tax fiasco of the Clinton era:

"The politically disastrous 'BTU incident.' Back in 1994, President Clinton and Democratic leaders of the House persuaded rank and file Democrats to to approve a new energy tax, dubbed a 'Btu tax,' for British Thermal Unit, the measure of energy. House Democrats were highly reluctant to support the unpopular tax  increase as part of a budget plan, but the White House twisted their arms. But then Clinton turned around and negotiated a deal with the Democratic Senate to scrap the Btu tax, which left the House Democrats hanging out to dry. The Democrats lost the House in the 1994 elections. Moral: To avoid “getting BTU’d,” weigh the political consequences before you vote."


And this is hardly the only risk.

    -  Raging inflation
    -  Layoffs tied to rising Federal taxes
    -  Disappearing products from shelves
    -  Regressive tax policies, with price inflation making the poor poorer.
    -  Wild currency fluctuations will cause . . . what?  This cannot be predicted, but nirvana is not the only possibility.
    -  Competition to acquire tax losses distorts markets further from natural pricing.
    -  Basic tax equity disappears as highly profitable companies pay NO TAXES, while you and I and Mr. Buffett and his secretary continue to pay taxes.

I think that's a lot of risk to take politically.  Politics are local, guys, and  your home voters may notice some of this.  When they get laid off from their dream jobs because their employers can't fund taxes or have priced themselves out of business, will they be satisfied with the economists' assurance that this is all for the best?  I mean, satisfied when they walk into the voting booth?

I do not believe the House Republicans must include the BAT.  They have other options to fund the other goodies they want.  That may take more coalition building or some elbow grease.  But the Republicans are purportedly the party of smaller government.  This can be done with little political cost.

We'll know more as the week goes on.  Will the House Republicans fall on their BTU Tax sword? Stay tuned!

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