660291014 president donald trump speaks during an event 1170x400 - Shocker: Donald Trump Also Sounds Illiterate On Tax Policy

Shocker: Donald Trump Also Sounds Illiterate On Tax Policy

Last week, I wrote about how the centerpiece of Paul Ryan’s tax reform plan—a border-adjusted corporate tax, or BAT—appeared to be all but dead thanks to overwhelming opposition from key senators. On Wednesday during an interview on Fox Business Network, however, President Donald Trump left open the possibility that he would support the idea, and even suggested that a little creative rebranding could revive its prospects.

Unfortunately for Republicans hoping that the president might be able to play a useful role in brokering a tax reform deal, Trump’s comments demonstrated that he is either illiterate on this particular policy issue, or thinks that he’ll be able to skirt by peddling incoherent talking points that anybody with a passing familiarity with the subject will see through.

To quickly recap, the House GOP’s tax reform plan would effectively put a tariff on imports and subsidize exports. It has met furious resistance from retailers like Walmart who sell lots of goods made overseas and are afraid that the proposal would hurt their business by forcing them to pass on higher prices to their customers. Economists have suggested this wouldn’t be the case, because foreign exchange rates should theoretically adjust to cancel out the effect of the new import tax. But that promise hasn’t pacified the idea’s opponents, because what retailer would bet their business on an academic theory about currency markets?

Trump has sent mixed signals on border adjustment. At one point he said it could “lead to a lot more jobs in the United States.” But at another, he called the idea “too complicated.” So given that this is still the single most talked about issue in the tax reform debate, Fox Business host Maria Bartiromo asked the president whether he’d made up his mind on it. Trump sort of evaded the question, but then suggested the concept needed a name change. Instead of “border adjustment” people should call it a “reciprocal tax,” he argued, because really we’d just be doing to other countries what they already do to us.

BARTIROMO:  How are you on the border adjustment tax? Have you decided?

TRUMP: I haven’t really wanted to talk about it. I have my own feelings. I don’t like the word adjustment, because our country gets taken advantage of, to use a nice term, by every other country in the world. So when I hear border adjustment, adjustment means we lose. We lose. So I don’t like the term border adjustment.

BARTIROMO: Any tax at the border?

TRUMP: Weak. Let’s call it an import tax. Let’s call it a reciprocal tax. You know, we have…

BARTIROMO: So it’s in there. You want a…

TRUMP: We have countries, Maria, that charge us — our companies — 100 percent tax if they sell a motorcycle or if they sell — they make it in America, they make it in the United States, they sell it various countries. They sell very low, because the tax is 100 percent in some countries.

The tax is 50 percent, 30 percent, 40 percent. But if they make a motorcycle and they sell it back into the United States, they have no tax. And do you think that’s fair? And do you think that’s smart? So I love the idea of reciprocal.  You can call it a reciprocal or a matching tax or a mirror tax. There are numerous terms.

As always, we need to untoss the president’s word salad to make sense of this. Trump is pointing out that certain countries impose heavy tariffs on goods that the United States exports. India, for instance, really does slap a 100 percent duty on motorcycles with engines larger than 800cc, much to the frustration Harley-Davidson. To Trump, a border adjusted tax would merely be a fair and proportional response to such protectionist measures. So we should call it a “reciprocal tax” instead, since he views it as retaliatory. Also, we’re not losers. And “border adjustment” sounds like something for weakling losers. Like Paul Ryan, presumably.

This is not a politically promising argument. The entire point of border adjustment, according to its advocates, is that it won’t really turn into a tariff, thanks to the magic of shifting exchange rates. Retailers, and the senators who love them, oppose it because they’re worried currencies won’t adjust fully, and so the tax will indeed turn into a tariff. Trump is not going to win over a bunch of tariff opponents by arguing that the BAT is a tariff. He’s rhetorically shoveling dirt onto its grave.

Having given Ryan & Co. ample reason to spend their morning staring despondently into their watery House cafeteria coffee, Trump moved on to suggesting that even our foreign trade partners would have to accept the logic of a “reciprocal tax.”

TRUMP: And you know the funny thing is that nobody gets angry when you say reciprocal tax. When you say we’re going to charge a border tax — we’d be a rich nation if we did it, by the way…

BARTIROMO:  (INAUDIBLE).

TRUMP:  — but, you know…

BARTIROMO:  It sounds easier (INAUDIBLE)…

TRUMP:  — but that — nobody cares about that. But when you say reciprocal, nobody fights you.  When you say I’m going to charge a 10 percent or a 20 percent border tax, everyone goes crazy, because they like free trade. Well, they don’t say that the other countries are charging you much more than that.

But when you say a reciprocal tax — and I’m not saying that’s what I’m doing, but there has to be a certain reciprocal nature to it. But when you say reciprocal tax, nobody can get angry.  Even the other countries, if like — if they’re charging you a 50 percent tax, you say, OK, whatever you charge, we’re charging.

BARTIROMO: Like China and Indiana.

TRUMP: They may not like it, but they can’t get angry because they can’t win that battle.

Where to even start here? First, the premise of the argument is silly. Responding to India’s or Thailand’s or China’s duty on select product like motorcycles with a worldwide, across-the-board tariff on imported goods would not be “reciprocal.” It would be insanely disproportional.1

Not only would China, India and the rest of the world get angry about it—they’d probably try to stop it. Right now, it is unclear whether or not Ryan’s border adjusted tax is actually legal under World Trade Organization rules. But other countries are already preparing to challenge it. Germany’s finance minister says he warned Treasury Secretary Steve Mnuchin to scrap the whole thing, and has promised to “call the WTO” if necessary.

Trump appears to have zero understanding of the economics underlying this issue. He has just as little comprehension of either the domestic or international politics of it. If he were to try and go to bat for the idea, he would almost certainly do more harm than good.

This should deeply worry Republicans. One of the major reasons Obamacare repeal turned into such a debacle was that Trump knew too little about the subject to effectively broker a deal. He reportedly urged Republican lawmakers to “forget about the little shit” and instead focus on the political necessity of just passing something. But health policy is a vastly complicated issue that can hinge on seemingly obscure details. There’s no way to negotiate over it without a firm grasp of the minutia.

Tax reform is in many ways just as complicated and politically unwieldly. And at the moment, the president isn’t demonstrating any kind of firm grasp on the single topic that has defined the debate so far. Even if he decides not to support border adjustment, that bodes poorly for his ability to close any kind of a deal before the GOP’s various factions inevitably start battling among themselves. Trump’s intellectual vacuum could end up swallowing his whole party’s agenda.

1 It’s possible that Trump is conflating high duties on individual products, like India’s tariff on motorcycles, with a slightly separate issue—namely that other countries rely in part on border adjusted value-added taxes, while the U.S. relies on a corporate income tax that exempts imports and hits out exports. This is a source of frustration to some Republicans, and one of the motivating ideas behind the BAT, but, as I’ve written it’s also kind of a red herring.

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