The US will “leapfrog” the rest of the world in the race for investment if it embraces contentious plans to implement tax reforms designed to strip away advantages held by other countries, the Republican congressman leading the reforms predicted.
Kevin Brady, who is shaping a tax overhaul that has yet to be endorsed by President Donald Trump, told the Financial Times his controversial proposal for an import tax was essential to putting the US on an equal footing — or ahead of — its peers.
“Our goal is to leapfrog America back into the lead pack as one of the most attractive countries in the world for that new job and new business investment by levelling the playing field,” he said.
The Republicans who control Washington have promised the biggest overhaul of the tax code in 30 years and Mr Brady’s blueprint has the potential to upend corporate supply chains, global trading patterns and the currency markets.
The reforms pose a far-reaching threat to European countries such as Ireland that have been seeking to lure US companies with aggressive corporate tax cuts.
But Mr Brady said foreign countries had no basis to complain because the US would be mirroring their own tax regimes — and he predicted the new American system would become even more attractive than some by allowing companies to write off investments on day one.
At home he faces a battle convincing Mr Trump to support the reforms given forecasts they would increase prices for consumers and lead to a stronger dollar at a time when the president and his advisers are trying to weaken the currency.
“By focusing . . . simply on consumption within the United States, we do clearly eliminate all tax incentives to move jobs, research or intellectual property overseas. And we help to bring them back,” Mr Brady said.
By focusing . . . simply on consumption within the United States, we do clearly eliminate all tax incentives to move jobs, research or intellectual property overseas. And we help to bring them back
He wants to replicate how trade flows are treated elsewhere by taxing imports and exempting exports, but his plans have been roiled by an outcry from importers and a fumbled White House attempt to tie them to funding a US-Mexico border wall.
President Trump has said overhauling the byzantine US tax code — a perennial cause of heartburn in corporate America — is one of his top priorities, citing the “inversion” deals US companies have used to secure foreign tax domiciles as proof of its flaws.
But it is Mr Brady, the baldheaded Texan chairman of the powerful Ways and Means committee, who must originate tax legislation in the House of Representatives — and has been urged to think big by his ally Paul Ryan, the speaker.
Although he unveiled a first draft of his plans last June, when most people expected them to be quietly forgotten during a Hillary Clinton presidency, his ideas chime with President Trump’s “America first” economic mantra.
They would work by not letting US companies deduct the cost of imported goods from their taxable profits, while giving exporters a rebate by allowing them to exclude foreign sales from taxation.
In the face of cries from retailers, oil refiners and other importers about how they would suffer, Mr Brady said: “Clearly an America that doesn’t favour foreign products over American products is a very different America.”
Although some economists disagree with him, Mr Brady said his proposal for an import tax — known as a border adjustment tax — was economically equivalent to the value-added taxes, or VATs, prevalent elsewhere in the world.
“I don’t know what other countries can claim. ‘Stop copying us?’ Is that their argument? ‘We do this but America you shouldn’t’,” he said.
VAT is a consumption tax paid in the country where a product or service is bought and Mr Brady, similarly, wants to tax consumption only in the US and exempt exports. But the radical difference is that his is a business tax levied on cash flow.
He insisted that it would be compliant with World Trade Organisation rules.
His proposals have created a rift in corporate America between exporters such as GE and Boeing, which would benefit, and big retail chains such as Walmart and Home Depot, which say they would have to pass higher costs on to consumers.
But Mr Brady said the most dramatic forecasts of dislocation would be proved wrong because currency rates would adjust, with a stronger dollar boosting the buying power of importers and making US exports more expensive overseas.
He cited the UK’s experience of prime minister Margaret Thatcher’s move in 1979 to pay for a cut in income tax by raising VAT. “Their [pound] adjusted 13 per cent — almost exactly what it was projected to — within a month,” he said.
But he also offered an olive branch to concerned importers by expressing a readiness to help them by creating a transition period to smooth the adaptation to border adjustments.
“[We can] phase this in a way that allows the market currencies and supply chains to adjust. I haven’t seen yet any valid concern that has been raised that cannot be addressed significantly in the design and the transition,” he said.
In addition to border adjustments, Mr Brady wants to make other big changes such as slashing the corporate tax rate from 35 per cent to 20 per cent and letting companies deduct the cost of investments from their taxable profits in the year they were made.
“We won’t be able to match the lowest rates in the world, but putting those provisions together in that redesign, creating competitive rates . . . plus the market power of the US, will clearly vault us back into that lead pack,” he said.