Dylan Matthews · Friday, February 24, 2017, 9:06 am
It seemed like big news — the president of the United States appeared to smile upon House Republicans’ plan to add a “border adjustment” to the corporate income tax in an exclusive interview with Reuters on Thursday. “President Donald Trump spoke favorably about an export-boosting border adjustment tax proposal being pushed by Republicans in the U.S. Congress,” the article’s lead reads, “but did not specifically endorse it.”
That was enough to get Paul Ryan spokesperson Brendan Buck to declare victory on Twitter:
Reuters: "Trump on Thursday spoke favorably about an export-boosting border adjustment tax proposal” https://t.co/dcTKvQdeVb
— Brendan Buck (@BrendanBuck) February 23, 2017
But if you look at the actual quotes Reuters got, you get a rather different impression of Trump’s views:
"It could lead to a lot more jobs in the United States," Trump told Reuters in an interview, using his most positive language to date on the proposal.
Trump sent conflicting signals about his position on the border adjustability tax in separate media interviews in January, saying in one interview that it was "too complicated" and in another that it was still on the table.
"I certainly support a form of tax on the border," he told Reuters. "What is going to happen is companies are going to come back here, they're going to build their factories and they're going to create a lot of jobs and there's no tax."
Read that last bit again. It could be that what Trump is endorsing in that passage is the nuanced plan by House Ways and Means Chair Kevin Brady and Speaker Paul Ryan to convert the corporate income tax into a cash flow tax that targets consumption that’s funded by capital income rather than wages. Or it could be that he’s endorsing what he endorsed throughout the 2016 campaign, during the transition, and in multiple books: outright tariffs on foreign goods.
Those two policies might sound like the same thing, but they really aren’t. The House Republican plan is essentially to replace the corporate income tax with a form of sales tax; it works very similarly to a European-style value-added tax, with the key difference being that it allows companies to deduct wages they pay. So, in effect, spending done using money from wages isn’t taxed, but spending from other corporate income — capital income — is.
The “border adjustment,” a feature shared with European VATs, is designed so that the tax only hits domestic sales and not sales abroad. Exports aren’t taxed, because that’s not spending done domestically; imports are taxed, because they’re a form of domestic spending.
But the exact same tax rate applies to imports sold in the US and to US-manufactured goods sold in the US. What’s more, most economists believe the value of the US dollar will increase after a border adjustment takes effect, reversing any promotion of exports or penalization of imports the policy caused — and making the whole policy trade-neutral. It’s not supposed to help exporters or hurt importers; it’s supposed to raise revenue and make it harder for corporations to evade taxes.
Tariffs, by contrast, are a sales tax that only applies to imported goods. Usually tariffs are limited to a specific product or category of products, and to imports from specific countries, but you can also apply across-the-board tariffs to all imports from all countries. Trump has alternately called for a 20 percent tariff on everything from every country, a 10 percent tariff on everything from everywhere, a 45 percent tariff on all imports from China, and a 35 percent tariff on products from companies that have moved jobs oversees.
Trump’s precise tariff plan has been impossible to nail down, but he’s been remarkably consistent in saying he actually wants tariffs, and he wants them specifically because he wants them to boost exports and penalize imports. That’s what he means when he says, “Companies are going to come back here, they're going to build their factories and they're going to create a lot of jobs.”
Companies will only come back here if it becomes a better deal to export from the US than import to it — and tariffs would have that effect, because they only apply to imports rather than to all goods sold in the US, and because there’d only be a partial currency adjustment in response to the change.
The border adjustment that House Republicans have proposed is intended to do none of that. Because it both taxes imports and subsidizes exports, it is designed to cause a full currency adjustment, rather than the partial one caused by only taxing imports. It may superficially resemble a tariff, but it doesn’t accomplish any of the actual goals that Trump wants to use a tariff to accomplish.
The unspoken assumption behind the current tax debate is that Paul Ryan and his allies are trying to trick the president into endorsing a radically different policy than the ones he’s embraced on the campaign trail by emphasizing superficial similarities between them. That’s certainly a bold strategy, not least because it depends on the president not realizing that Ryan’s favored policy doesn’t serve any of his stated objectives of boosting exports, bringing manufacturing back to the US, and sticking it to China.
The core problem is that Ryan thinks those are bad objectives; he’s a free trader, and Trump is a protectionist. They have a real, deep difference of opinion on international trade, and if Ryan thinks he can paper over that by simply confusing Trump, he’s likely to be very disappointed.