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Trump and House Republicans still seeking agreement on border adjustability proposal

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Tax Hot Topics: Trump and House Republicans still seeking agreement on border adjustability proposalThe Trump administration expressed wariness last week over the border adjustability proposal at the heart of the House GOP tax blueprint.

House Republicans want to make business taxes “border adjustable,” meaning that gross receipts from exports would be excluded from income, while the cost of any imported goods or parts could not be deducted. The Ways and Means Committee is hurrying to convert its blueprint into a full legislative draft, but is facing skepticism from Trump on border adjustability.

The administration waffled a bit last week on the issue, but its discomfort is clear. Trump told the Wall Street Journal in an interview that he didn’t “love it” and that it was too complex. Administration officials walked back some of the definitiveness of that statement in the following days, but are still not embracing the proposals. House Speaker Paul Ryan, R-Wis., acknowledged that Trump is still focused on his proposed trade tariffs as a potential separate initiative.

Border adjustability is proving to be the most controversial aspect of the House tax reform plan. Many influential business sectors and party members are rising in opposition, and criticism from Democrats will undoubtedly grow. For now, House tax writers remain fiercely committed to the idea. The provision is expected to be the primary revenue raiser in the bill and will pay for much of the aggressive rate cuts and business expensing.

The Treasury Department’s Office of Tax Analysis released a working paper earlier this month on what a cash flow tax would look like for U.S. companies, concluding that such a tax, like the border adjustability mechanism of the GOP blueprint, would closely resemble a consumption tax. The paper also suggests that a cash flow tax, which may be “incapable of being sufficiently progressive” paired with a progressive individual income tax on wages and capital, “might prove to be the path forward.”

Meanwhile, Ways and Means committee Chair Kevin Brady, R-Texas, promoted the GOP blueprint in a speech before the U.S. Chamber of Commerce, calling it “stunningly simple” – a contrast to President Trump’s belief that such a tax was too complicated. Brady said the tax is economically equivalent to a value-added tax, but should not be considered one. Brady also defended the proposal as being compliant with the World Trade Organization (WTO). Detractors of the tax, and even advocates, have worried that the border adjustable mechanism of the GOP blueprint could fall outside the bounds of WTO rules.

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Dustin Stamper
Director, Washington National Tax Office
+1 202 861 4144
 
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