Tax plan is still bad, even if smaller.

Tax plan is still bad, even if smaller.

The Republican Tax reform plan is being negotiated over again. After months of criticism, Rep. Brady gave an inch, but only an inch. The House GOP leadership wants the Border Adjusted Tax too much to give it up. Even though Sales Factor Apportionment could bring the revenue they need to pay for their desired tax cuts. And even though both plans are destination-based. But so far they’d rather weaken their bad idea by reducing the tax rate on importers and call it a win. They should use sales factor apportionment in their tax plan.

Where did this come from

So back in June of 2016 , the GOP House Ways and Means proposed a Blueprint on Tax Reform. This plan was little noticed because before Nov. 8th, it was expected that the U.S. would continue to have a divided government. However, since the election, affected parties took greater notice of the GOP tax plan.

Retailers noticed the plan would drastically multiply the tax cost of any products imported into the U.S.  Many tax avoiders noticed that they would get to continue to avoid taxes, but now they could do it without loopholes. Well retailers and consumers have been screaming louder and more effectively. So as President Trump starts to weigh in on the process, House Republicans have given a cosmetic lift to the tax plan.

Cosmetic only

The House Republicans mentioned reducing the tax on importers down to a quarter of the original tax. So they didn’t change the bad structure, they just reduced the effect. This is because retailers have made a point that this tax could triple or quadruple retailers tax costs when importing.  While it cosmetically resolves the issue, it does not in fact resolve the larger point. The Border Adjusted Tax (BAT) is distortive. It relies on an untested and unproven theory of currency adjustment to  argue that it fixes the tax system. While some point to the European VATs that it is based on, the BAT is a different animal and will have different consequences.

Why use a bad tax plan when a better one exists?

What is most confusing is the insistence on using the BAT? Right now, the Republican negotiators are talking about only reducing the corporate tax rate to 28% to account for the lost revenue in not taxing importers as heavily. But if they looked at sales factor apportionment as proposed by Bill Parks, they could likely get much lower rate. Sales Factor effectively gives the GOP everything it needs and wants in tax reform. So why aren’t they using it? Maybe they don’t know? Other economists advocate France beats the U.S. using Sales Factor Apportionment if the U.S. adopts border adjusted tax. We should adopt this better tax reform system first.

The GOP needs a win and it needs a win that effectively shows they can govern. The worst mistake is insisting on the BAT. They need to adopt Sales Factor Apportionment.

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