I spent most of last week working with John Mauldin to explore the “border adjustment” tax reform idea. He wrote about it in Thoughts from the Frontline (subscribe here for free).
We had a conference call with experts from the House Ways and Means Committee, including the committee’s chairman, Rep. Kevin Brady (R-Texas). They were very kind and tried to help us understand their proposal.
Here’s the problem, as the House describes it in a fact sheet: “Under our current broken tax code, U.S. companies pay a tax when exporting products, but not when they import products. To avoid paying that tax on exports, U.S. companies move jobs, research, and headquarters overseas.”
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This sounds terrible. Taxing exports makes no sense at all. We should stop it at once.
Just one problem: That tax does not exist. The United States does not tax exports and never has.
Here’s What the Constitution Says about Taxing Exports
Although we have had to amend the US Constitution a few times, for the most part, it has withstood the test of time. The Framers left us a document of remarkable clarity.
Article 1 defines how the legislative branch works—and Section 9 is a list of things Congress can’t do. It includes this: “No Tax or Duty shall be laid on Articles exported from any State.”
The Constitution prohibits the federal government from taxing exports. They can’t do it. Period. Court rulings over the years make this very clear.
Since that’s the case, what is this “tax on exports” that Rep. Brady’s committee wants to kill?
The fact sheet I quoted isn’t the only place they use that language. The “Better Way” policy paper says: “Our high corporate rate, our outdated worldwide tax system, and our origin-basis system that taxes exports have created a perfect storm that has encouraged so many businesses to move their headquarters overseas.”
Rep. Brady himself used it in a January 24 speech to the US Chamber of Commerce: “[F]or the first time in our nation’s history, we will finally end the ‘Made in America’ tax on US exports.”
So if such a tax on exports actually existed, someone who had to pay it would have sued, and the federal courts would have tossed it out. Taxing exports is clearly unconstitutional.
So what’s going on here?
Who Benefits from Border Adjustment Tax Reform
Last week, I asked the House Ways and Means Committee staff if they could clarify these statements. I was told they would get back to me. They didn’t. So I can only speculate.
Large multinational corporations are very eager to see this tax reform pass. They must see some advantage in it for them. But if they aren’t paying taxes on their exports, what’s the advantage?
Here’s my guess.
When Rep. Brady and others talk about a “tax on exports,” what they really mean is the practice of taxing US companies on all of their income, wherever in the world they earn it.
I admit that’s a problematic policy, and Congress should change it… but it’s not a tax on exports.
The main beneficiaries of such a change would be large US companies that own factories in other countries. It would do little for small businesses that build their products in the US and ship them to foreign buyers.
The Real Purpose of Disinformation
By falsely claiming that the US has a “tax on exports,” border adjustment proponents make the problem sound broader than it is. It’s a way to get support from people who aren’t tuned in to the details, aka most Americans.
This kind of doubletalk is what Donald Trump meant when he spoke of “draining the swamp.” It clearly isn’t drained yet.
Possibly, that’s why the president seems skeptical of the border adjustment plan. He once described it as “too complicated.” He knows complexity is a good way to hide things.
But maybe I am reading this wrong.
There’s a lot to like in the “Better Way” tax reform plan. It’s more than just the border adjustment.
But if it’s really so great, why stretch the truth to describe it?
Seeing this, I have to wonder what else is in there, and whom the plan’s designers really want to help.
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