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BOHANON & STYRING: Border adjustment may be only path to tax cut

March 18, 2017

Economic AnalysisWashington tax lobbyists are earning their fees these days pushing their clients’ views on “border adjustment.” 

BA is the House GOP tax-reform centerpiece. In exchange for a corporate-rate tax cut from 35 percent to 20 percent, imports will no longer be deductible as business costs, but exports will not be counted as taxable revenue. Advocates of BA claim exchange rates would adjust so that the U.S. trade deficit would remain the same and the U.S Treasury would get a windfall of about $100 billion a year. Critics question these assertions. Bohanon and Styring are not yet convinced one way or the other.

For right now, the question is, “Why are these guys bothering with such a controversial proposal?” All we heard about in the campaign was a “big, big tax cut.” Where did this “border adjustment” thing come from? Why not just cut the tax rate, knock out some loopholes in the tax base, and be done with it? That was our question, too. The answer lies in the arcana of how things work on Capitol Hill and ordinary retail politics.

The House is trying to craft a bill that can pass the Senate. There, the GOP has 52 votes. It takes 60 to end a filibuster and have a bill come to a vote. Chances of eight Democrats voting to consider a GOP signature tax bill are slim and none, and Slim is on sabbatical.

The one way to pass a bill with merely 51 votes is “reconciliation.” A recon resolution must deal with only revenue and budgets (OK so far), but it also must not raise the deficit over a 10-year period. A straight corporate-tax-rate cut bill would surely be scored by the Congressional Budget Office as deficit-increasing. It couldn’t be considered under reconciliation. But a corporate tax cut with a revenue-enhancing BA could be passed under reconciliation rules.

Advocates of BA claim its burden falls on foreigners. We are not totally convinced of this, either, but several prominent economists make the claim credible. A revenue-neutral corporate-tax-rate cut could be financed by eliminating tax loopholes or raising other taxes. But these tax offsets fall on Americans. It doesn’t take a crystal ball to predict that your average House or Senate member will be much warmer to a BA compared to raising taxes on voting constituents.

So it might be BA or nothing.•

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Bohanon is a professor of economics at Ball State University. Styring is an economist and independent researcher. Both also blog at INforefront.com. Send comments to ibjedit@ibj.com.

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