Trump’s tariff proposal needs a makeover: A border-adjusted tax

Opinion

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By Stuart Leblang and Amy S. Elliot, Opinion Contributors 

President-elect Donald Trump’s historic victory may indicate that most Americans support the economic promises he made during his campaign.  A major feature of those economic promises was his tariff policy.  Trump purportedly plans to levy 10 percent or 20 percent across-the-board tariffs on all foreign imports (with more punitive rates on goods from China and foreign cars).  His aim is to increase investment in the United States, restore manufacturing jobs, reduce the trade deficit and raise revenue.

The U.S. trade representative during Trump’s first administration and a reported contender for Treasury secretary in Trump’s second term, Robert Lighthizer, is also a fan of tariffs.  Lighthizer has long voiced his concerns over the fundamental imbalances in the global trading system.  He has said that such imbalances are caused, in part, by the fact that all of our major trading partners border adjust their taxes and the United States does not.

But many economists are concerned that the broad-based tariffs reportedly under consideration by Trump are more likely to reignite inflation and reduce household incomes (with lower-income households hit the hardest) while inviting a possible trade war.

There may be a way to achieve Trump’s goals while avoiding some of the risks presented by across-the-board tariffs.  At the beginning of Trump’s first term, certain economists and politicians were touting a plan that had features of a tariff but was designed to bring America in line with its trading partners.

The so-called destination-based cash flow tax or DBCFT — which was initially floated in the “A Better Way” Blueprint, introduced by then-House Speaker Paul Ryan (R-Wis.) and House Ways and Means Committee Chairman Kevin Brady (R-Texas) — would tax cash associated with U.S. consumption while exempting cash associated with foreign sales (effectively taxing imports and exempting exports to significantly improve the competitiveness of U.S. products abroad).  Domestic expenses would be deductible (other than debt financing) and full expensing would help boost U.S. investment.

While the DBCFT died politically when industries heavily reliant on imports, including retailers, voiced their strenuous opposition, the threat of broad-based tariffs might change the calculus.  The DBCFT would likely be a better alternative to and might avoid many of the harmful effects of broad-based tariffs.  The more serious Trump is about imposing across-the-board tariffs, the more sense it makes to revisit the DBCFT, because economists and policymakers acknowledge that:

1. The DBCFT could raise significant revenues;
2. The DBCFT will incentivize domestic manufacturing in a way that is less likely to lead to retaliation;
3. The effects of the DBCFT are likely to be less inflationary (given expected currency adjustments);
4. The DBCFT will bolster economic growth rather than threaten to stall it; and
5. The DBCFT would be a significant simplification of the tax code, increasing administrability and reducing inequities (while also “[bringing] an end to the profit-shifting shenanigans eroding our tax base,” as we explained in a 2017 Bloomberg column making the case for why such radical reform of the business tax system was warranted).

Many businesses (and their supply chains) would prefer the certainty of a legislatively enacted tax over a tariff policy that can be changed at the whims of one executive.  The DBCFT — which incorporates an import tax that offers a better shot of achieving Trump’s economic goals — could become politically more palatable in the face of sweeping tariffs.  At a minimum, the threat of such tariffs should spur a reconsideration of the DBCFT.

Stuart Leblang is an Akin partner and co-head of the firm’s tax practice.  He was previously associate international tax counsel for the Treasury Department.  Amy Elliott is an Akin senior practice attorney and a former legal journalist for Tax Notes.

Tags A Better Way Blueprint destination-based cash flow tax Kevin Brady Paul Ryan President-elect Donald Trump Robert Lighthizer Robert Lighthizer Tariffs trade war

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https://thehill.com/opinion/4985126-trump-tariff-policy-dbcf/