Feb 21, 2017

Fed Chairwoman Casts Doubt On ‘Border Adjustment’ Tax Wishful Thinking

Post by Freedom Partners

Pro-growth tax reform is on the way, GOP leaders maintain. But according to Senate Majority Whip John Cornyn (R-TX), the current House Republican proposal “is on life support.” Sen. Lindsey Graham (R-SC) even boldly declared that the plan “won’t get 10 votes in the Senate.”

So what’s in the plan?

A 20 percent tax on imported goods – leading to a $1.2 trillion tax hike shouldered by consumers – is causing Republicans and Democrats in both chambers to shudder.

Under this proposal, known as a “border adjustment” tax, experts warn that Americans will see higher costs on everyday goods, more pain at the pump, fewer jobs and less economic opportunity. In fact, some estimate that gas prices could increase by up to 40 cents per gallon.

But GOP leaders like Ways and Means Chairman Kevin Brady (R-TX) say that these concerns are mistaken, and this isn’t going to happen.

“Brady alluded to arguments by some economists that those concerns are overblown because the plan would strengthen the U.S. dollar. That would increase companies’ buying power overseas, which the economists say would offset their increased tax bills,” reported POLITICO.

“We know that will occur,” Brady said.

Many, however, are not convinced. Federal Reserve Chairwoman Janet Yellen last week cast doubt on GOP leaders’ promise that the “border adjustment” tax would create a stronger dollar. In her testimony to Congress, Yellen said that this key argument of GOP leaders could be all but wishful thinking.

“The problem is there’s great uncertainty about how in reality markets would really respond to these changes … A strong set of assumptions is needed to believe that markets would fully offset those changes,” Yellen said. “It’s very difficult to know just what would happen.”

Senator Tom Cotton (R-AR) was more pointed in his remarks on the Senate Floor.

“This logic reminds me of Orwell again: some ideas are so stupid only an intellectual could believe them.  This is a theory wrapped in speculation inside a guess. Nobody knows for sure what will happen—no one can know for sure because currency markets fluctuate daily based on millions of decisions and events. Just because an economist slaps an equation on a blackboard doesn’t make it real. So I’m more than a little concerned that these predictions won’t pan out—as the old joke goes, economists have predicted nine of the last five recessions.  But if that happens, it won’t be economists, intellectuals, and politicians in Washington and New York left holding the bag—working Americans will get stiffed again.”

There are many positive, pro-growth aspects to the House effort on tax reform, but this new trillion-dollar tax on hardworking Americans would be devastating. Lawmakers should keep their focus on implementing reforms that promote economic growth, job creation and opportunity for all by lowering both corporate and personal tax rates and eliminating corporate welfare, subsidies, loopholes and wasteful spending.