Speaker of the House Paul Ryan has an ambitious plan to dramatically remake the American tax system—and in doing so, give out massive tax breaks to powerful corporations and the wealthy.
Ryan’s plan is unadulterated trickle-down economics, sending 99.6 percent of the tax cut savings to the top 1 percent of American taxpayers. At the same time, it slashes the corporate tax rate from 35 percent to 20 percent.
To pay for those mammoth corporate tax cuts, Ryan and the GOP’s top tax writer, House Ways and Means Chairman Kevin Brady, are hawking a “border adjustment” tax (BAT) that would levy what is essentially a tariff on imports and a rebate on exports. One analysis finds that the proposal would raise about $1.2 trillion in revenue over 10 years, though that’s likely still not enough to cover the cost of the business tax cuts.
What is clear is that the policy would result in dramatically higher prices for American consumers. House GOP leaders want trickle-down corporate tax cuts so badly that they’d gladly pass the costs on to average Americans.
A January report by a group of economists, including Jason Furman, a former chair of the Council of Economic Advisers under President Obama, explored the effects of tariffs that increased by 10 percentage points across the board. Such taxes would be highly regressive, they found, since low-income consumers spend more money on imported products. Households in the bottom quintile lose more than 1.5 percent of their income to inflated prices, compared with 0.3 percent for those in the top 10th percentile, the report found.
The BAT would dramatically increase costs for companies that rely on imports. It has drawn staunch opposition from the Koch Brothers and from retail giants like Target and Best Buy. Some Republican senators have also voiced doubts.
With tax tensions rising in Washington, D.C., Brady has emerged as the proposal’s lead proponent. "If you don't have [the border adjustment tax] in there, tax rates on our local businesses, small and large, will go up. Our tax code will continue to favor foreign products over American-made products and we'll continue to have major incentives to drive jobs and headquarters overseas. That can't continue," Brady said in an interview with CNBC.
Brady sells the BAT by arguing that it will incentivize production for American companies. But the BAT would have the opposite effect. As Marshall Steinbaum and Eric Bernstein rightly point out in a new Roosevelt Institute report, the Brady-Ryan tax plan will not increase investment, stem the rise of outsourcing, or fuel job growth in the United States:
“The Brady-Ryan plan proposes a tax on imports and an exemption for exports under the assumption that this will boost U.S. production and create jobs,” the analysts argue. “While it may be a good idea to promote U.S. competitiveness and job creation through targeted industrial policy, this plan will not return America to the golden age of manufacturing. Instead, it will drastically raise input prices for many businesses and place a significant burden on lower-income Americans.”
Steinbaum and Bernstein add that capital costs are already at historic lows. Businesses have plenty of money to invest in increased production, to pay higher wages, and to create more jobs. The real problem is lies elsewhere: Because of a lack of competition in most sectors, too many American corporations choose stock buybacks over actual investments. “Another tax cut for the rich will only make the problem worse,” they contend, while a BAT will “only succeed in punishing consumers with higher prices on imported goods.”
Trump seems to waver on his support for the BAT, and it will likely remain the most contentious proposal in the tax reform debate. In the meantime, count on Ryan and Brady to double down on rhetoric that a BAT is good for everyone—including the consumers paying more for necessities and the corporations getting a tidy tax break.
For that amazing sleight of hand, Kevin Brady gets the nod as our Trickle Downer of the Week.
Tax Cuts for the rich. De-regulation for the powerful. Wage suppression for everyone else. These are the tenets of trickle-down economics, the conservatives’ age-old strategy for advantaging the interests of the rich and powerful over those of the middle class and poor. The articles in Trickle-Downers are devoted, first, to exposing and refuting these lies, but equally, to reminding Americans that these claims aren’t made because they are true. Rather, they are made because they are the most effective way elites have found to bully, confuse and intimidate middle- and working-class voters. Trickle-down claims are not real economics. They are negotiating strategies. Here at the Prospect, we hope to help you win that negotiation.