How a Clever GOP Tax Plan Managed to Baffle Everyone

Ramesh Ponnuru:

House Republicans, led by Paul Ryan, have been trying to give President Donald Trump an outlet for his protectionist impulses while avoiding any increase in tariffs. They hit on a clever plan — but on Thursday a series of remarks by Trump spokesman Sean Spicer and reports by journalists showed that it might have been too clever.

The House Republican idea is to cut the corporate-income tax to 20 percent and modify it. Crucially, the new corporate tax would have a feature in common with most of the value-added taxes (VATs) that other countries use: It would apply to imports but not exports. The idea is to tax all domestically consumed goods, whether those goods are produced here or abroad.

This “border adjusted” tax wouldn’t be a tariff, because it wouldn’t discriminate between imports and goods produced in America for Americans. It therefore wouldn’t bias a consumer’s choice between a domestically produced good and a competing import.

Some Republicans think that other countries’ VATs help to reduce their trade deficits and that we could reduce ours by adopting a border-adjusted tax. They are probably wrong about that: Most economists believe that when countries adopt such taxes, their currencies appreciate and their total imports and exports end up roughly unchanged. (How fast this happens is an open question.)

But since we import more than we export, applying taxes to imports but not to exports also raises money for the federal government. The economist Martin Feldstein estimates that border adjustment could raise $120 billion a year. That’s another reason House Republicans like it: They could use the revenue to offset some of the tax cuts they want to enact.

The best argument for border adjustment is that it is a way for free traders to tell Trump that they are going to discourage imports and encourage exports, while at the same time they avoid outright protectionism. That rationale depends on Trump’s not quite grasping what’s going on.

Problem number one with this plan is that Trump’s understanding of it is a little too poor. He recently said that border adjustment was “too complicated” and sounded as if it could be a “bad deal” — sounding as if he thought it had something to do with international trade negotiations, when it is actually something Congress could simply legislate. But later he said it would be an option.

On Thursday, Trump spokesman Sean Spicer introduced more confusion. He told reporters that it was possible to make Mexico pay for the border wall by “using comprehensive tax reform as a means to tax imports from countries that we have a trade deficit from, like Mexico.” He said, “That’s really going to provide the funding.”

Spicer didn’t describe the plan correctly. The reform in question would tax all imports, not just imports from countries with which we have a trade deficit. And reporters garbled things further. The New York Times, for example, erred early on in reporting that the tax would apply to all countries but that “initially” it would apply just to Mexico. Spicer had mentioned Mexico because he was making a point about the border wall, not because it would be singled out by the tax.

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