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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, April 2, 2017

NY Times:  Conservative Split Over Border Tax Imperils Tax Reform

New York Times, Conservative Split Over Import Tax Imperils Trump’s Overhaul:

[T]he political network overseen by Charles D. and David H. Koch, the billionaire conservative businessmen, ... [is] mounting a furious campaign against a new tax on imports proposed by House Republicans, imperiling what is supposed to be a centerpiece of the Republican tax overhaul effort.

Their opposition threatens yet another rupture with President Trump, some of whose advisers see the provision as a critical way to bring about tax reform while protecting American manufacturers.

The battle could not only jeopardize Mr. Trump’s second major legislative initiative, but also redefine the boundaries of conservative economic policy. Much like the failed repeal of the Affordable Care Act, the import tax is dividing conservatives, the business sector and some of the deepest-pocketed groups funding conservative politics. Along the way, it is exposing the broader ideological divide between nationalist policies embraced by Mr. Trump and the traditional small-government movement that his election ejected from the driver’s seat of Republican policy-making.

“Trump ran on a different set of economic issues than traditional conservative Republicans have,” said Stephen Moore, a fellow at the Heritage Foundation who favors the border tax on intellectual grounds, but said he had come to see it as a “poison pill” for broader tax reform. “The baton has been passed on from Reagan to Trump,” Mr. Moore continued, “and there’s no doubt he ran on a much more populist economic message.”

The idea of a border adjustment tax has percolated among academic economists and in think tanks since the 1970s, as the United States has considered ways of harmonizing its tax code with countries that use value-added taxes. Central to the plan is a provision that would tax imports at a rate of 20 percent while exempting exports from taxation. In theory, this would buttress domestic manufacturing, make American products more competitive with foreign goods and encourage American companies to bring home cash they have been parking overseas.

“It is a simple and elegant way to get good tax compliance,” said Douglas Holtz-Eakin, a Republican economist and president of the right-leaning American Action Forum, a nonprofit tied to a “super PAC” that backs House Republicans.

Some conservatives oppose it for the same reason: In their view, such a tax would be too easy to increase, with the potential costs to Americans hidden behind rising prices.

Groups like Americans for Tax Reform — headed by Grover Norquist, perhaps Washington’s most famous anti-tax crusader — have praised the border tax proposal, saying it would put American businesses “on a level playing field” with foreign competitors. Retailers that import many of their goods are lobbying against the idea, while domestic manufacturers like Boeing and Caterpillar — whose interests figure heavily in Mr. Trump’s economic thinking — are supporting it.

The Koch network and groups like the Club for Growth, which for years have targeted what they call “crony capitalism” in Washington, have opposed the border tax as an unnecessary tax increase and a form of favoritism that would hurt the economy. But Mr. Trump and his team have pledged to target what they see as a more insidious kind of cronyism, including unfettered free trade that some Trump advisers say benefits wealthy elites at the expense of American workers. ...

A profusion of strategic and political motives also divides Republicans on the issue. To enact a tax overhaul that does not increase the federal deficit but delivers rate cuts to wealthy taxpayers and corporations, Mr. Trump and Congress need to find some source of new revenue — hence the border tax. For Mr. Ryan, who holds more conventional free-trade views than Mr. Trump, the new tax provides a way to satisfy Mr. Trump’s protectionist impulses without imposing punitive, and potentially even more disruptive, tariffs.

But some conservatives are not so sure. In opposing the tax, Senator Tom Cotton, a Republican from Walmart’s home state, Arkansas, finds himself in the position of defending his local corporate giant and the conservatism that he thought he knew. “Most conservatives I know have long believed that tax reform would look at all of the carve-outs in the tax code,” Mr. Cotton said, “not introduce a whole new concept of taxation.”

(Hat Tip: Ted Seto.)

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