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Go Big and Go Home

After a crushing defeat trying to repeal and replace Obamacare, President Donald Trump could be in for more of the same on tax reform.

You might think that with Republicans controlling the White House, Senate and House of Representatives, tax reform would be easy. All Republicans want lower taxes – particularly when it comes to lowering the marginal tax rates for corporations and wealthy people. But as happened with health care, different Republicans want different and incompatible things from the tax system:

The corporatist group wants to cut the nominal 39 percent tax rate on profits of U.S. corporations. Of course, very few corporations pay anything close to that rate; the average rate paid by corporations is about 19 percent. Likewise, the top 1 percent want to see the marginal rate on income cut from its current top level of nearly 40 percent.

Trump is ready to comply: At various times in his campaign he has proposed cutting the corporate rate all the way to 15 percent and the individual rate on earnings to 25 percent.

 

Unfortunately for Trump, another group of Republicans are self-proclaimed deficit hawks: They don't want to see taxes past the point where loss of tax revenue makes the deficit go up. It's not that the hawks don't want tax cuts; they do. But hawks like Kentucky Sen. Rand Paul and House Speaker Paul Ryan insist that government spending be cut in proportion. And, since most government spending goes to safety net programs like Social Security and Medicare, the deficit hawks want to reduce the net to pay for the big tax cuts that the corporatists want.

However, Trump has promised his base of working- and middle-class, mostly white voters that he would protect Social Security and Medicare. Unless he reneges on this promise, he can't cut government spending enough to get his huge, beautiful, phenomenal tax cuts past the deficit hawks. Even if he were personally willing to make these cuts, many House and Senate Republicans won't risk angering the voters who elected them.

So Trump is caught. He can't push through a big tax cut without a big spending cut. And he can't push through a big spending cut without infuriating his base. (Although he could cut military spending, but he won't do that for other reasons.) Sound familiar?

Is there a solution? Perhaps.

If the president could find another source of tax income or spending cuts, it could finance a deep reduction in tax rates. Killing Obamacare could (arguably) have reduced Medicaid costs – but Obamacare survived. This brings us to the latest voodoo-economics idea, the so-called border adjustment tax. The tax is described as an "adjustment," but really it is nothing less than a complete restructuring of corporate taxes, turning our system into something vaguely like a value-added tax, which is standard everywhere in the developed world but here. The border adjustment tax basically says "we don't care where your corporation is nominally headquartered, or what games your accountants play to shift profits to offshore tax havens. We are going to tax you based on what your company sells in the U.S. and what it imports into the U.S. And we are NOT going to tax your company on what it makes in the U.S. and exports to other countries."

Proponents of the border adjustment tax say it will eliminate much of the loophole that let big multinational corporations get away with paying a much lower tax rate than the nominal 39 percent. In that regard, it can theoretically generate revenue that can offset the cuts that Trump wants to make.

A border adjustment tax has never been tried on anything close to this scale, so no one knows how it would really work, or if we could even maintain it in the face of retaliation from other nations. It is little more than a fanciful construct at this point. Like so-called supply-side economics, the border adjustment tax encourages the magical thinking that tax cuts will pay for themselves. But supply-side economics never worked in practice. (Just ask the citizens of Kansas, who have been living in a nightmarish experiment with this idea for the past five years.)

In any case, the border adjustment tax is politically dead. It pits one set of corporations (exporters like Boeing, Caterpillar, GE and Pfizer) against another (importers like Wal-mart, Best Buy, Gap and Nike). And many legislators fear that it will lead to deeply unpopular price hikes in imported goods ranging from T-shirts made in China to Ford cars made in Mexico.

At this rate, it's hard to see how Trump can do anything bold with taxes. Caught between the corporatists, the deficit hawks and his working-class base, he'll probably end up eking out some small cuts on marginal tax rates. The score so far: Swamp, 2; Trump, 0.

David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report April 4, 2017.