With no current Plan B, is tax reform possible in this Congress?

House Republicans desperately want to reform taxes, but so far the only plan they have developed has gained no leverage. That’s because border adjustment makes up a majority of the plan, which few, including top retailers, want anything to do with.

The border adjustment is a tariff. It adds a tax on imports, which will inevitably raise prices on consumers. Common sense economics: A business must make a profit in order to supply goods and services. It cannot do that without money. In order to make money when a tax is added or raised, the business must raise the price on its goods in order to make that profit.

This is why retailers have lashed out against the proposal. It’s also a reason why Speaker Paul Ryan (R-WI) and Rep. Kevin Brady (R-TX), the architects of the proposal, cannot bring in other congressional GOP members.

Ryan tried to do just this at a weekly lunch gathering with Senate Republicans. He begged them to “[K]eep your powder dry.” From Politico:

The next day, Sen. Tom Cotton took to the Senate floor to slam Ryan’s so-called border adjustment tax, saying “some ideas are so stupid only an intellectual could believe them.” “Many other senators share these concerns and we most certainly will not ‘keep our powder dry,’” Cotton went on, without naming the speaker in his speech.

Politico said many have argued against the proposal privately, but here are a few, besides Cotton, who have expressed doubts:

Senate Finance Chairman Orrin Hatch (R-Utah), sources said, has warned Trump and Ryan that border adjustment won’t likely have the support needed to clear the Senate. Hatch, in an interview after Ryan’s presentation, said the speaker “didn’t cover [the border adjustment proposal] as specifically as I would have liked.” And Sen. Roy Blunt of Missouri, the fifth-ranking GOP senator, said the Finance Committee will likely go a “different way.” Others were more unequivocal. “It’s beyond a complication. It’s a bad economic proposition,” said Sen. David Perdue (R-Ga.).

Greg Valliere, the chief global strategist with Horizon Investment, told CNBC that the proposal is “on life support” especially since President Donald Trump met with those retailers who do not want it:

“[Trump’s] been all over the lot on this issue,” said Valliere. “They [retailers] may have persuaded him to oppose this tax. That’s speculation. If they do, I think Ryan’s got to come up with a trillion dollars. I don’t see a trillion dollars.” Valliere said the remaining options would be to scale back the size of the tax cut or move ahead without the requirement that it be revenue neutral.

Even a senator used those same words:

Senate Majority Whip John Cornyn, R-Texas, joined the list of doubters this week, saying he does not see the votes lining up. In an interview with Bloomberg, he used the same language as Valliere in describing the tax. “The hard reality is the border tax is on life support, and given the imperative of 51 senators and 218 House members and one president, I think we need to look for other options,” he said.

The proposal sounds fine and dandy, but includes too many what ifs. I wrote about those scenarios in my last piece about this subject. Ryan and others brush aside fears by saying those burdens placed on the consumer “would be offset by an increase in the dollar’s value due to the policy, thus negating the need for the importers to hike prices for consumers.”

Nope. That offset is not even close to a guarantee and is unlikely to happen. Steve Forbes explained that politicians forget that the country belongs to “elaborate global supply chains.” No one knows the consequences if those chains come undone.

From The Wall Street Journal:

Tax experts are puzzling over how to describe who wins and loses from border adjustment. One thing is clear, economists say: If the dollar goes up 25%, U.S. holders of foreign assets—including pension funds and endowments—would suffer a one-time loss in wealth of more than $2 trillion. There is also global uncertainty: Other countries may retaliate, either by border-adjusting their corporate taxes or by challenging the U.S. plan at the World Trade Organization as too tilted toward American producers.

From The Financial Times:

Prices tend to be sticky, particularly when 93 per cent of US imports and more than 40 per cent of global trade is invoiced in US dollars. These prices would have to be renegotiated over time. Furthermore, the Federal Reserve and the People’s Bank of China would do their best to lean against such a currency move.

So on to their backup, right? Well, that’s another problem because that does not exist. As The Wall Street Journal points out, they don’t have a Plan B.

Republicans in Congress may think the time has become ripe for tax reform, but if they refuse to stray from this tariff, it will not get done.

The easiest way to solve the tax problem is to cut the budget and stop spending. Revamp the tax code. Repeal the 16th amendment. Mainly stop spending.

But we all know that will not happen.



