Heritage paper: Congress should abandon border tax proposal

The Heritage Foundation is arguing Thursday that Congress should pursue tax reform without a key part of the tax blueprint House Republicans released last year. The conservative think tank urged Republicans in a new paper to drop the border adjustment tax (BAT).

“The tax code is badly in need of an update, and true reform is possible without the border tax distraction,” Heritage policy analyst Adam Michel wrote in the paper. “Congress should move forward on reform without the BAT.”

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The paper comes at a time when the BAT faces growing concerns from GOP lawmakers in the House and Senate, conservative groups, retailers and the White House.

The border-adjustment proposal involves taxing imports while exempting exports. Supporters of the proposal, such as House Speaker Paul Ryan (R-Wis.), argue that it would raise revenue that would help offset cuts to tax rates and would end an advantage that foreign-made products have over American-made products.

But the Heritage paper argues that the BAT “would carry substantial economic risk.”

“The economics of this new tax proposal are poorly understood and the subject of academic disagreement,” Michel wrote. “What is clear from the available evidence is that economists’ models of how border adjustments affect trade flows, currency markets, consumer prices, and internationally held assets are imperfect; and if nothing else, a border adjustment in the context of the House blueprint presents unnecessary economic risks to the U.S. economy.”

The paper also argues that the BAT is not needed to raise revenue, since tax reform could instead be paired with spending cuts to avoid increasing the debt. And it argues that “the BAT lays the groundwork for future governments to expand Washington’s reach,” since it could ultimately result in the U.S. having a value-added tax on top of an income tax, like many European countries do.

While Heritage has issues with the border-tax proposal, the think tank says it otherwise views the House GOP blueprint as a “very good tax plan that would encourage investment, job creation, and economic growth.”

Heritage is encouraging Congress to move forward on tax reform legislation that includes other parts of the blueprint, such as lower rates, full and immediate expensing of businesses’ capital investments and a “territorial” tax system in which the U.S. does not collect taxes on companies’ foreign-earned profits.

The paper is a change in position for Heritage on the BAT. The think tank previously said in a 2015 paper that tax reform should create a border-adjusted system. “The U.S. government should only tax economic activity in the U.S.,” that paper said.  

House Ways and Means Committee Kevin Brady (R-Texas) said in a statement Thursday that while he disagrees with Heritage’s new stance on the BAT, he “will continue to look to Heritage for alternative solutions on how to end the current tax code that favors foreign products over ‘Made in America’ products and how to prevent more American jobs from moving overseas.” 

– updated at 4:03 p.m.