Brady Says Border Adjustment 'Key' to Tax Reform; Senate Democrats Concerned
Amid grievances raised by importing industries and Senate Democrats, House Ways and Means Chairman Kevin Brady, R-Texas, on Dec. 18 vowed to keep border adjustability tax provisions for imports and exports in the House GOP’s plan for tax reform. Speaking during C-SPAN’s Newsmakers (here), Brady said foreign competitors don’t tax exports to the U.S., but the U.S. taxes its exports. “Today, we lose both here in America, and we lose around the world,” Brady said. “That can’t stand. This is a key part of our ‘Built for Growth’ tax [initiative]. It’s going to stay.” The border adjustability aspects of the House GOP’s tax reform proposal would exempt exports from taxes while taxing imports. Importers raised concerns about the plan in meetings with lawmakers and in a letter to Brady’s committee (see 1612140046).
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Such provisions are commonplace elsewhere around the world, Brady said. “What we know is that border adjustability has been established and has occurred more than 100 times around the world,” Brady said during Newsmakers. “And more than 100 times, currencies adjusted, because others want to compete in these markets. So we know that will occur, but if our local industries are concerned about that transition, bring us your solutions. We’re listening.” But to be sure, Brady added that it’s important for industry to realize that the U.S. “cannot” continue tax policies that encourage companies to move abroad. “Those won’t stay,” he said.
Meanwhile, a Dec. 8 memo circulated among Senate Democrats and obtained by International Trade Today describes the House GOP’s proposal for a destination-based cash flow corporate income tax with border adjustments as “confusing, untested, leads to bizarre results, and is possibly illegal under WTO rules.” The memo expresses concern that the border adjustability provisions could incur a successful challenge at the World Trade Organization, resulting in punitive tariffs and other measures on U.S. exports. The memo makes that case that the House blueprint doesn’t propose an indirect tax “like a sales tax, excise tax, or VAT that burdens domestic and foreign producers alike,” but instead proposes “an income tax (a ‘direct tax’) with a ‘border adjustment’ that probably violates WTO rules.”
The memo also says "the border adjustment excludes foreign sales from the US tax base and disallows deductions for imported goods. At minimum, these aspects of the system could violate WTO rules on measures affecting trade in goods as well as rules prohibiting export subsidies.” Some tax analysts have said the GOP proposal reflects an income tax, but others have referred to the plan as a consumption tax with potential caveats (see 1612160039). The House proposal is “short on details,” so there is some legal uncertainty surrounding the plan, but consequences of a WTO challenge would be “harsh,” as other countries could level “billions of dollars or more” in retaliatory tariffs, the memo said.
The memo also challenged economist studies showing that border adjustability would have no effect on the U.S. trade balance, largely because the dollar would strengthen relative to foreign currencies, making U.S. exports less attractive and foreign imports more attractive. But the memo also mentioned the concerns of other economists about the speed of currency adjustments, whether they would occur uniformly worldwide, and how the dollar would interact with currencies more closely managed by government authorities.
Incoming White House chief of staff Reince Priebus recently expressed support for the House GOP’s border adjustability proposals on The Hugh Hewitt Show (here). “Our goal should be to try to make everything we can in the United States so that the money gets put in the pockets of Americans,” Priebus said. “The other piece is border-adjustability, meaning right now, paying a percentage on imports and having no percentage coming in on exports is an imbalance. And we want to see the potential for a change in that border adjustability so that American jobs are protected. That’s the point.”