If you thought President Barack Obama leaving office meant families were safe from major tax hikes, think again. Despite promising tax cuts for middle-class families for years, House Republican leaders are now demanding a $1 trillion consumer tax hike as part of a comprehensive tax reform deal this year. This is bad politics, even worse policy, and it must be stopped.
This consumer tax hike is known in Washington as a “border adjustment tax.” Under a border adjustment, American companies could no longer deduct from their taxable incomes the cost of imported goods, effectively imposing a 20 percent tax increase on all goods entering the United States. The scheme is similar to the European-style Value-Added Tax, which taxes consumption rather than income.
This is a highly-complicated taxing regime, but its effects on American families are simple to understand. Unable to absorb the cost of this massive tax hike on their own, businesses will be forced to pass it along to consumers in the form of higher prices on essential goods.
Consider just a few examples. The price of gasoline — much of which comes from imported oil — could rise by as much as 30 cents per gallon under a border adjustment tax, according to a new study. For a family of four with two cars, that amounts to a nearly $400 tax hike every year.
Or take the price of cars, many of which are now produced overseas thanks to decades of onerous federal regulations. A recent report from Baum & Associates estimates the border adjustments tax will increase the average cost of a Ford vehicle by $282, General Motors by $995, Hondas by $1,312, Chryslers by $1,672, Nissans by $2,298 and Toyotas by $2,651.
The impact on retailers could be even worse. Some have estimated the new border adjustment tax could be as high as five times their profits, prompting significant price increases. Combined with other price hikes, a study from the National Retail Federation found the tax could cost the typical family $1,700 in the first year alone. After eight long years under the Obama economy, this would be the final straw for many families already struggling to make ends meet.
This is just a sampling of the harms that would result from a border adjustment tax. House leaders argue that despite these effects, a consumer tax hike is necessary to “pay for” a reduction in overall corporate and personal income tax rates. This is in keeping with the principle that any tax reform should be revenue neutral, or done in a way that does not add to our national deficit, which was $587 billion for fiscal year 2016.
Yet this argument is a red herring at best. There are many other ways to offset lower rates.
One option is to eliminate the myriad tax credits, subsidies, and other handouts that have left the U.S. tax code resembling Swiss cheese. The federal government is estimated to “spend” $17 trillion through these carve-outs between 2016 and 2025. Closing just a fraction of those loopholes would be more than enough to pay for a reduction in top overall rates.
Another option is to restrain government spending. According to an analysis by the Cato Institute, simply limiting spending growth to 1.96 percent per year through 2027 will produce around $3 trillion in savings, more than double the amount necessary to replace the revenue increases from a border adjustment tax.
The end of the Obama era should have been a reprieve for working families across the U.S. But the border adjustment tax would only set many families further back. Lawmakers should drop this consumer tax hike from any tax reform deal, and find one of the many other ways to pay for a reduction in corporate and personal income tax rates.
Akash Chougule (@AkashJC) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is the director of policy at Americans for Prosperity.
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