Trump indicated that as president he would respond to these allegedly "unfair trade practices" by imposing retaliatory tariffs on goods and services coming into the U.S. from any country that imposed an import VAT on American businesses exporting goods or services to their country. More than 160 countries have a VAT, and all of them impose an import VAT. Trump is, essentially, promising a global trade war. He vows to set U.S. tariffs at a rate that would force governments and businesses to take notice.
Now according to taxproTODAY Republican lawmakers say they need answers before they can support a plan to overhaul U.S. business taxes, especially in light of arguments from retailers and other companies that the changes would hurt consumers. But a new report suggests solid information may be hard to come by.
There’s been little real-world analysis on how quickly the U.S. dollar would adjust under a so-called border-adjusted tax to prevent consumers from getting stuck with higher prices, according to a paper released Wednesday by the conservative-leaning Tax Foundation. Even so, the Washington policy group supports the proposal from Republican House leaders that would tax U.S. companies’ imports and exempt their exports.
“Surprisingly, there has been little empirical work done on the matter,” Kyle Pomerleau, director of federal projects at the Tax Foundation, said in the report. “The literature suggests that exchange rates would adjust, but it could take time for that to translate through prices. This stickiness could have short-run impacts on consumers and different industries.”
A centerpiece of the House GOP tax plan is a proposed levy on businesses’ domestic income and their imports, while exempting their exports, a feature known as “border adjustment.” The tax would be assessed at a 20 percent rate, replacing the current 35 percent corporate income tax.
Making the tax border-adjusted apply to imports and not exports, is estimated to generate more than $1 trillion in federal revenue over a decade, according to Tax Foundation estimates. That revenue contribution could make it crucial to keeping any tax legislation deficit-neutral, a prerequisite for passing a tax bill through the Senate without Democratic votes.
Republicans in both chambers have said they need more information on how the border-tax measure would work and who it would affect before they can endorse it. Senator Orrin Hatch, chairman of the tax-writing Finance Committee, has said “at least a handful” of senators have serious reservations about the border tax, and he personally still has questions about the proposal.
Many other countries use value-added taxes, which include border adjustments. But there are key differences between VATs and the House GOP measure and that means other countries provide little guidance for U.S. policymakers, according to many trade experts. That’s mainly because the House plan’s border-adjusted tax would include deductions for domestic labor costs and functionally replace the U.S. corporate income tax.
The tax proposal’s supporters, including House Speaker Paul Ryan and House Ways and Means Committee Chairman Kevin Brady, argue that macroeconomic factors would lead to a stronger dollar reducing the cost of imports and increasing the cost of exports evening out any effects on consumers over time.
The border-adjusted tax could also face challenges from the World Trade Organization. A key issue involves WTO rules for border adjustments they’re permitted for consumption-based taxes, like VATs, but not income taxes. Ryan and Brady say their plan, which would be the first of its kind globally, moves U.S. corporate taxes closer to a consumption base.