As chairman of the U.S. House Ways and Means Committee, Houston-area Republican U.S. Rep. Kevin Brady is leading efforts in Congress to make our nation’s outdated and overly complex tax code competitive in the global economy.
Brady’s “Better Way” tax reform plan lives up to its name in many ways. It would eliminate most special-interest tax breaks that benefit only a few industries and use the savings to reduce tax rates for virtually all businesses. The corporate tax rate of 35 percent, the highest in the industrialized world, would be reduced to 20 percent. Most unincorporated businesses would receive the same rate; individuals would also see significant reductions.
Those concepts have been sought for years by the retail industry, which benefits from few of the credits and deductions that reduce effective tax rates for other industries and pays at or close to the full 35 percent.
But there is a fatal flaw in the “Better Way” plan, a devastating one for the U.S. economy that is drawing unprecedented opposition from consumers, retailers and many other industries: The plan calls for making U.S. exports tax-free, a well-meant but misguided move intended to increase demand and create new jobs. Unfortunately, the plan proposes paying for this $1 trillion tax windfall for giant corporate exporters by creating a new 20 percent “border adjustment” tax, or “BAT,” on all imports.
Making imports more expensive, supporters of the BAT claim, would boost U.S.-made products at home in addition to the new tax advantage for exports. The problem is that this new tax ultimately would be paid by U.S. consumers because it would make almost everything they buy more expensive long before it would create any jobs.
The most obvious impact would be in retail, which relies heavily on a global supply chain to provide American families with the products they need at prices they can afford. Whether it’s clothing, shoes, furniture, TV sets, housewares, computers or smartphones, imports have dramatically reduced the cost of living and improved our quality of life.
Retailers could not easily switch to domestic sources for these products because most have not been made on a large scale in the United States in decades. And even if new factories were built, to be economically competitive they would have to be highly automated and employ only a handful of workers, defeating the job creation goal.
The impact would go far beyond retail. The very food we eat would be affected – chocolate and coffee, for example, come from beans not grown in the United States. Year-round fresh fruits and vegetables could become a memory. Many prescription medicines are also imported. Gasoline could go up 35 cents a gallon. And those who live in Texas and Houston specifically know, when oil goes up, so do the energy costs of lighting and cooling our homes and running our businesses.
While the tax is aimed at imports, it fails to recognize that many “made in America” goods are assembled from imported parts. This is particularly true with automobiles; with a BAT, the average car – Chevy or Toyota, alike – could go up $2,500.
Overall, the National Retail Federation estimates the BAT would cost the average family up to $1,700 in the first year. It would be regressive on its face, hitting the poorest the hardest.
Backers of the BAT want to dismiss these concerns. They claim currency exchange rates would fluctuate to compensate for the tax. But experts say it would take an unprecedented 25 percent increase in the value of the U.S. dollar to fully offset the BAT, – and could take five years, if the experiment works at all. Given the current turmoil in retail, many merchants would not survive that long, going out of business and taking millions of jobs with them. Many middle-class families might find it tough to weather the transition as well.
The currency adjustment argument ignores that most international contracts are priced in U.S. dollars expressly to avoid the uncertainty of currency fluctuations. And the BAT could be declared illegal under World Trade Organization rules, exposing farmers and exporters to a ruinous trade war.
Overall, Brady’s goal of reforming the tax code is valid, and is a goal we share. But the plan for achieving this shared goal needs be one with less risk and uncertainty that works for everyone. As long as it includes the BAT, the plan is yet another congressional tax reform proposal likely doomed to failure. Our nation’s tax system is too badly in need of reform to allow that to happen. It’s time to set the BAT aside and focus on tax reform that will work for everyone.
Shay is president and CEO of the National Retail Federation in Washington, D.C. Kelemen is president and CEO of the Texas Retail Association in Austin.