The GOP’s Corporate Tax Reform Would Raise Taxes on Poor People

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Paul Ryan. Photo: Cheriss May/NurPhoto via Getty Images

When they sat down to hatch a plan for reforming the corporate tax code, congressional Republicans were faced with two great puzzles:

1. How to slash the top corporate tax rate from 39 to 20 percent, while keeping the overall tax plan “revenue neutral.”

2. How to throw president Trump a bone on trade protection without starting a trade war via heavy tariffs.

Paul Ryan’s caucus found a magic bullet to slay both these quandaries: the border-adjustment tax (or BAT).

Currently, the U.S. taxes corporations based on their net profits — regardless of where those profits are earned. With the BAT, we would stop taxing the profits that American firms make from overseas sales, and raise taxes on corporations that import a lot of goods, like retailers. In other words, it would shift the corporate tax system away from taxing production and toward taxing consumption. And since America consumes more than it produces, the proposal increases total revenue.

This policy isn’t without its virtues. For one thing, America is the only G7 country that taxes the overseas profits of its domestic firms, which puts our exporters at a competitive disadvantage. For another, since we can’t actually collect on those foreign profits until American companies bring them back home, our current system creates an incentive for U.S. firms to hoard their profits abroad — or else relocate to a tax haven.

The BAT would, ostensibly, eliminate both these problems. And, according to the policy’s partisans, the tax wouldn’t actually raise the cost of imports for consumers, since cutting taxes on American exporters would spur a stronger dollar.

Or, at least, that’s how it would work in a world of perfectly functioning, frictionless markets. In our world, the picture is less rosy.

As UC Davis economist Kaddie Russ notes, even if a stronger dollar fully offset the tax on imports, it would take a while for that equilibrium to be reached — specifically, at least two years, according to the latest economic literature.

So, who would bear the burden of the BAT in that time period (and, forever after, if the theoretical model proves faulty)?

According to Russ’s analysis: the poorest among us.

It’s possible that the BAT would provide the working poor — especially those who work for exporters — with wage gains big enough to offset the rise in consumer prices. But for the unemployed, including retirees (a.k.a. the GOP base), border-adjustment looks like bad news.

This is a big problem for the GOP. The BAT already has powerful opponents. Walmart does not trust the abstract economic models. They think retailers and other importers are going to get hit hard by the BAT — and when they do, it will be the end of “always low prices.”

And so, the two senators from Walmart’s home state of Arkansas are already being pushed hard to oppose border-adjustment, according to Axios. Other GOP senators with big retailers in their states have already come out against the measure.

With Republican lawmakers and Walton family money behind them, it shouldn’t be hard for Democrats to make the idea of cutting taxes on corporations — and raising them on the poor and working class — an unpopular one.

But without the BAT, the GOP’s tax plan will add to the deficit. And if their plan adds to the deficit, then they can’t pass it through the reconciliation process without putting a ten-year expiration date on it (which is what killed the Bush tax cuts).

Redistributing wealth upward — against the wishes of nearly every voter in America — ain’t easy.

The GOP’s Corporate Tax Plan Would Raise Taxes on the Poor