Republican lawmakers say they need answers before they cansupport a plan to overhaul U.S. business taxes — especially inlight of arguments from retailers and other companies that thechanges would hurt consumers. But a new report suggests solidinformation may be hard to come by.

There's been little real world analysis on how quickly the U.S.dollar would adjust under a so-called border-adjusted tax toprevent consumers from getting stuck with higher prices, accordingto a paper released Wednesday by the conservative-leaning TaxFoundation. Even so, the Washington policy group supports theproposal from Republican House leaders that would tax U.S.companies' imports and exempt their exports.

“Surprisingly, there has been little empirical work done on thematter,” Kyle Pomerleau, director of federal projects at the TaxFoundation, said in the report. “The literature suggests thatexchange rates would adjust, but it could take time for that totranslate through prices. This stickiness could have short-runimpacts on consumers and different industries.”

A centerpiece of the House GOP tax plan is a proposed levy onbusinesses' domestic income and their imports, while exemptingtheir exports — a feature known as “border adjustment.” The taxwould be assessed at a 20% rate, replacing the current 35%corporate income tax.

Making the tax border-adjusted — applying it to imports and notexports — is estimated to generate more than $1 trillion in federalrevenue over a decade, according to Tax Foundation estimates. Thatrevenue contribution could make it crucial to keeping any taxlegislation deficit-neutral, a prerequisite for passing a tax billthrough the Senate without Democratic votes.

'Real Questions'

Republicans in both chambers have said they need moreinformation on how the border-tax measure would work and who itwould affect before they can endorse it. Sen. Orrin Hatch, chairmanof the tax-writing Finance Committee, has said “at least a handful”of senators have serious reservations about the border tax, and hepersonally still has questions about the proposal.

“I have some real questions about it right now,” Hatch, aUtah Republican, said during a Bloomberg Television interviewMonday. “I'm going to be looking at it very carefully becausethat's going to be a very important part of what the House is goingto do.”

Many other countries use value-added taxes, which include borderadjustments. But there are key differences between VATs and theHouse GOP measure — and that means other countries provide littleguidance for U.S. policymakers, according to many trade experts.That's mainly because the House plan's border-adjusted tax wouldinclude deductions for domestic labor costs and functionallyreplace the U.S. corporate income tax.

The tax proposal's supporters, including House Speaker Paul Ryanand House Ways and Means Committee Chairman Kevin Brady, argue thatmacroeconomic factors would lead to a stronger dollar — reducingthe cost of imports and increasing the cost of exports — eveningout any effects on consumers over time.

Proponents say the dollar would strengthen because taxingimports would reduce U.S. demand for them, which means fewerdollars would end up overseas. That relative scarcity would pushthe dollar's value up compared to other currencies.

At the same time, exempting companies' exports from taxationwould allow U.S. producers to lower their prices overseas. Lowerprices would attract more foreign buyers, who'd need more U.S.dollars to make purchases. Their increased demand for the dollarwould also push its value up.

'Hammers Consumers'

Pomerleau said in the report it's too early to assess anyshort-term impact of border adjustments because it's unclearwhether lawmakers would include a phase-in period for them. Still,a border tax is trade-neutral and wouldn't put the U.S. at adisadvantage or give it an advantage, according to Pomerleau.

Brady has been trying to sell the border-adjustment plan tocolleagues over the past month. He met with House conservativeslast week. Following the meeting, House Freedom Caucus membersstill doesn't have an official position, according to Rep. MarkMeadows of North Carolina.

Brady, a Texas Republican, told the group that without theborder-adjustment levy, meaningful tax reform couldn't happen,according to Meadows.

Some GOP senators have already said they're against the bordertax or leaning toward opposing it. Sen. David Perdue, a GeorgiaRepublican, called it “regressive” and said it “hammers consumersand shuts down economic growth” in a Feb. 8 letter tocolleagues.

WTO Rules

Sen. Pat Roberts, a Kansas Republican, also said he has concernswith the proposal.

“I got a lot of questions about that. And I think — to bedetermined,” Roberts said in an interview. “My main concern isagriculture and the possibility of a trade war.”

The border-adjusted tax could also face challenges from theWorld Trade Organization. A key issue involves WTO rules for borderadjustments — they're permitted for consumption-based taxes, likeVATs, but not income taxes. Ryan and Brady say their plan, whichwould be the first of its kind globally, moves U.S. corporate taxescloser to a consumption base.

It's also unclear where President Donald Trump, who has saidhe's going to be releasing a tax plan within weeks, stands on theissue. He initially called the border tax “too complicated,” beforeaides said he was warming to it. He met with retailers Wednesday todiscuss their opposition to a border tax.

Bloomberg News

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