House Republicans defend border adjustment tax

Republicans in the US House of Representatives said they are pushing forward with their plan to overhaul the tax treatment of imports and exports, including crude and refined products, despite tactical disagreements with president-elect Donald Trump.

The border tax is part of a package designed to eliminate tax incentives for corporate inversions, in which companies move their headquarters overseas while keeping the bulk of their operations in the US. Under the House blueprint, the corporate tax rate would be reduced to 20pc, down from 35pc today. The House Republican plan would establish a territorial tax system, so that oil companies and other multinationals do not pay US corporate taxes on their foreign operations. And while imports would be subject to a tax, exports would not.

Trump and House leaders broadly are in agreement on the need for a tax reform, but not its details. Trump wants the corporate tax slashed to 15pc. He spoke in favor of a "border tax" but his statements indicate a preference for more straightforward measures — such as tariffs or other direct levies on imports. The purpose of a Trump border tax would be to pressure US-based automakers and other manufacturers to scrap plans to move production overseas. "There will be a major border tax on these companies that are leaving and getting away with murder," Trump said.

Trump's transition team said today he is committed to getting a tax reform done. "We are having some serious discussions back and forth with key members of Congress," the transition team said. "There is always a back and forth between the executive and Congress as to how to get this right."

The lead tax writer in the US House of Representatives, House Ways and Means Committee chairman Kevin Brady (R-Texas), in turn defended the need for the border adjustment tax reform, saying it was necessary for taxing imports and exports equally. The US tax code "favors Chinese steel over American steel, Mexican beef and autos over American beef and autos, and foreign oil over American oil," Brady said.

The proposal has sparked concern among US businesses, particularly importers and retailers that rely heavily on imports. Industry trade group the American Petroleum Institute has been voicing its concerns on Capitol Hill. US refinery trade group the American Fuels and Petrochemical Manufacturers and US energy company Koch Industries have come out against the border tax proposal. Brady said he would welcome comments from the refining industry on the proposal.

Some analysts estimated that the provision would push up US crude prices and hit consumers at the pump. UK bank Barclays estimated US gasoline and diesel prices could jump by 30¢/USG, based on the House plan. Another analysis, conducted by oil consultant Phil Verleger and consultancy the Brattle Group and funded by Koch Industries, likewise estimated US retail gasoline prices could rise by 30¢/USG if Brent were trading at $50/bl.

But such analyses does not fully account for the possible appreciation of the dollar as a result of border tax changes or the subsequent adjustments in international trade flows. Mexico already said it would retaliate against any US border tax or levy.

A border tax could have "some positive features in terms of simplification of business taxes and reducing the opportunities for profit shifting," IMF research chief Maurice Obstfeld said yesterday. But he declined to evaluate the US House proposal, noting that "academic economists" do not fully understand macroeconomic effects of border taxes. "There has not been much empirical or modeling research on that."

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