As if trade relations with the States under a new president weren’t uncertain enough for Canadians, the tax reform plan the Republicans introduced suddenly shows up with a nasty, anti-import provision in it.
Suddenly, because in all the discussions over the last couple of years regarding big tax reform proposal — long before anyone knew Trump would be president — no one mentioned a border adjustment tax (BAT). We had heard House Speaker Rep. Paul Ryan (R-WI), who developed much of the plan when he was chairman of the Ways and Means and Budget Committees, discuss proposals several times. No mention of a BAT, however. We’d also heard Rep. Kevin Brady, present chairman of the Ways and Means Committee discuss the tax proposal. But no mention of a BAT.
So what is a BAT? In the present proposal, it would be a 20 per cent tax, the same thing as a tariff, on all goods imported into the U.S. That would mean parts, sub-assemblies, finished goods or raw material for further manufacture would face a 20 per cent tax at the border. And companies would not be allowed to deduct the cost of such goods from their taxes as expenses, as opposed to such goods or raw materials sourced domestically. A double whammy.
By contrast, goods exported would not be taxed.
As one can imagine, companies from retailers to manufacturers to food retailers and processors down here are livid.
Where did this come from?
The main elements of the tax reform proposal are cuts in the corporate tax rate from 35 per cent to 20 per cent, cuts in personal income tax rates and capital gains, expensing of capital investment in the year spent and a 10 per cent repatriation tax on money held overseas.
In American politics, the left (Democrats) rarely brings up the cost of any program they favour. It is something that “needs to be done.” But if it is something the right is proposing (Republicans), suddenly, cost is a big issue. How are we going to pay for this program?
For the left, cutting tax rates always induces panic that the government will run out of money. Never mind that every time major tax rate cuts have been tried, the result has been increased revenues to the government and an economic boom. The administrations and Congresses of Presidents Harding and Coolidge first proved it in the early 1920s; Presidents Kennedy and Johnson demonstrated it again in the 1960s and President Reagan proved it again in the 1980s, with that boom extending well into the 1990s. It takes a year or two but suddenly the government starts receiving revenue well above projections.
Of course, to those favouring free markets, adding this anti-trade clause to tax reform is a slap in the face, on top of protectionist trade proposals that already threaten to derail major contributions to the American economy.
So what is the likelihood of a BAT surviving in the final tax reform bill?
There are some folks suggesting the BAT was added as a political chip to be sacrificed later or to point to as a “we tried but it didn’t survive” show of bipartisanship.
Interestingly enough, President Trump has not committed himself on a BAT one way or another. One thing has been plain about Trump’s governing style right away. He likes to bring CEOs and company reps into the White House to hear what they have to say. It is probable that more company, union and trade association people have been to the White House in Trump’s first 100 days than in all eight years of President Obama’s administration.
Many of those guests have filled Trump’s ears with complaints about projected protectionist trade policies and the damage that wrecking NAFTA would do to our economy. That’s not to say the labour unions haven’t been getting their licks in, too. But let’s face it, roughly 30 per cent of America’s GDP derives from trade. Some 41 million jobs derive from trade (Business Roundtable). If Trump is listening, he would be daft to ignore all the input he is getting from people in the real business world versus ivory tower academics.
The White House battle over trade has been characterized as a civil war, with advisers lined up on both sides. Agricultural groups have defended trade.
Private with their criticism until recently, Republican members of Congress have begun speaking out against Trump’s protectionism, as they realized the threats to their state economies.
Trump has used executive power to begin eliminating regulations that have severely hampered profits and jobs in manufacturing, mining, agriculture and energy. Tax reform, before BAT came up, had been promised to make profitability easier in the U.S.
A BAT and inserting tariffs in trade agreements seem to run extremely counter to creating jobs and profits.
Hopefully, President Trump will come around.