Almost-Perfect Tax Reform: How The House Worked In A Backdoor Border Adjustment Tax

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Matthew Kandrach President, CASE
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Recent polling confirms what many in Washington have long known: Tax reform is a top priority for Americans, regardless of party. People across the spectrum agree that taxes are too high, too complicated and skewed to favor special interests.

People understand tax reform is essential to modernizing our onerous tax code which has for years bogged down the middle class, consumers and small businesses. While the GOP’s newly-released tax plan is certainly a positive step in the right direction, the text holds a hidden consumer trap: an excise tax that greatly resembles the already jettisoned border adjustment tax (BAT) that was roundly denounced in the months leading up to the release of the GOP plan.

Overall, the GOP’s tax plan simplifies the tax code, lowers corporate and individual rates, and will stimulate wage growth for the middle class. But, buried within the 400-plus pages is a provision that could ultimately increase the costs of a variety of goods that families shop for every day. Section 4303 of the House Republicans’ tax reform bill would apply a 20 percent tax on deductible payments made from a U.S. corporation to related business units that are outside of the country if the corporations don’t agree to submit their foreign subsidiaries to IRS jurisdiction.

Although supporters have argued that this provision is meant to stop foreign inversions (U.S. companies leaving for more favorable tax treatment overseas), this concept goes well beyond that. US companies would face this tax regardless of whether they have any intention of moving overseas. This provision undermines the idea of a “pure” tax reform bill that would be untainted by political or special interest influences, and further threatens to undo the economic gains of the larger package.

Similar to the aforementioned BAT, industries from technology to pharmaceutical to automotive would be negatively impacted by this provision — and consumers would see prices in these areas rise dramatically. For example, if a car part is made in Mexico by a Mexican subsidiary of an American company, then that part would be taxed 20 percent when purchased by the U.S. company. The automotive company would be forced to raise the price of the car to offset these tax increases — passing the cost on to consumers — similar to what would happen under the BAT.

Foreign companies that operate in the U.S. and significantly contribute to the U.S. economy will also be punished by the provision. According to Bloomberg BNA, this provision would “force certain foreign corporations that have no connection to the United States other than selling or licensing or providing services to a U.S. affiliate to become (quasi-) net basis U.S. taxpayers with respect to the income generated from such transactions.” For instance, Samsung and Toyota could both be taxed 20 percent on goods, services, and intellectual property that is imported into the U.S. for sale.

Additionally, according to Reuters, some companies could end up paying the tax twice. Even if the company paid the excise tax in the United States, it would then pay it in the country where the foreign affiliate operates. Again, these companies have no choice but to pass the costs onto consumers, and will no longer be competitive against international businesses.

If we can’t keep the Republican tax reform bill completely pure, this once-in-a-lifetime opportunity will go to the wayside. Regardless of how many pro-growth, pro-consumer provisions are included in the lengthy bill, this inclusion not only has the ability to make American companies inefficient and uncompetitive, but it also will pass drastic cost increases on to consumers. The middle class shouldn’t have to continue waiting on the sidelines for more job creation, lower prices and wage growth while special interest groups continue to receive hidden favors from Congress.

Matthew Kandrach is president of Consumer Action for a Strong Economy (CASE), a free-market oriented consumer advocacy organization.