By Holman W. Jenkins, Jr.
When it comes to the politics of tax reform, a vital principle is always to inject a big disruptive element into the mix. That way members of the House and Senate tax-writing committees can be assured a fundraising bonanza from threatened business and taxpayer groups.
When it comes to the policy merits of tax reform, however, the opposite principle applies. Don’t go out of your way to create big winners and losers. Don’t inject elements that unduly disrupt the business models taxpayers have adopted in keeping with the current tax code.
Tax reform should be win-win: Everybody benefits from a flatter rate structure, even if they lose their favorite carve-outs, gimmes and deductions. Everybody benefits from a more efficient, dynamic, faster-growing economy.
In a good tax reform, there should be one large net loser: tax lawyers.
Which brings us to 2017’s big disruptive idea from the House GOP, the border-adjustable corporate tax. For the first time in 30 years, the tax-reform opportunity is upon us here in the U.S. But first House Ways and Means members must be allowed a good, long shake of the money tree. And border adjustability is tailor-made for this purpose.
Big exporters like Boeing and GE are guaranteed to speak up in its favor—and speaking up usually means writing a check. That’s because, under border adjustability, profits on sales to foreigners are tax-free.
Even more deep-pocketed and numerous are the idea’s opponents, since imports would no longer be deductible under the new corporate tax rate. Essentially imports would be taxed at 20%. Wal-Mart and most of the retail industry is opposed; the petroleum-refining industry is opposed; most of the clothing and apparel industry; much of the tourism and higher-education industries. Plus a variety of conservative groups, including some affiliated with the Koch brothers, plan to attack the idea as anticonsumer.
OK, with enemies like these, border adjustability was perhaps never a real threat to make it through the congressional sausage factory. But, oh, the fundraising gusher in the meantime from those who have something big to lose.
What of the merits? In essence, border adjustability functions as a consumption tax; to many pro-growth types, a consumption tax is the ideal tax system. Income would be taxed only once, when it’s consumed. Savings go untaxed until spent on consumption.
Unfortunately, because it operates at the corporate level, this form of consumption tax falls short of the ideal. Like a European value-added tax, its cost would be deeply hidden in the price of goods, thus easily jacked up over time. Also, compared with the current tax structure, businesses would see less incentive to move abroad in search of lower taxes, eroding a useful pressure on politicians to be fiscally sane.
And because the tax would alter the terms of trade, it would be expected to lead to a sharp increase in the dollar. U.S. holders of foreign assets would suffer large paper losses. Since many foreigners borrow in dollars too, a global debt crisis might follow.
The tax might also violate World Trade Organization rules, inviting other countries to impose punitive taxes on U.S. exports. In any case, U.S. tax reforms are often copied abroad. A general trade war might be in the offing if other countries adopt their own import-taxing reforms.
Still, border adjustability certainly qualifies as a “big idea,” and House Ways and Means Chairman Kevin Brady and Speaker Paul Ryan like big ideas. But big ideas are also ripe to be traded away in pursuit of tax-reform consensus. Key players can feel they dodged a bullet. Border adjustment may turn out to be a bit of roughage that helps the body politic digest the once-in-a-generation tax-reform opportunity.
But where can revenue scorers get the $1 trillion over 10 years the border tax was supposed to raise? Well, ahem, a carbon tax is also a consumption tax. To make it acceptable to free marketers, it would have to come with a full stop to all climate-related mandates and subsidies including fuel-mileage rules. It would also have to be clear that all carbon-tax proceeds are being used to cut payroll or income taxes.
Otherwise conservatives who’ve spent their lives fighting the climate wars will see only a spontaneous surrender to the global warming alarmists, whom they’ve been defeating for 30 years. Lost from view will be a carbon tax’s comparative virtues—it amounts to a broad-based consumption tax that also would be highly visible to the consumer and won’t become an easily jacked-up growth hormone for big government.
How much would be needed if the goal were to offset a 20% import tax? The equivalent of 13 cents per gallon of gasoline.
As a bonus, such a proposal would be a test of sincerity for those liberals who say they care about the climate but perhaps only care about green pork barrel for their heavily subsidized alternative-energy cronies.