At the Tax Council Policy Institute Symposium in Washington, D.C. Wednesday, Brady said the “Better Way for Tax Reform” can be best understood with one question: Is your product or service consumed in the US? If yes, it will be taxed at a 20 percent tax rate.
Perhaps the most controversial provision of the plan is a “border adjustability” tax which favors US exports over imports. Many industries have raised concerns about the impact, including retailers, since a large percentage of the products they sell are imported.
“The context here is pretty simple. This is the most dramatic proposed change to business taxation in the US ever. There are lots of people who are nervous and uncertain about how it will impact their business models, said panelist Douglas Holtz-Eakin, President, American Action Forum. “And that’s one hundred percent legitimate. This is a move from a tax system that favors foreign production to one that would be neutral. You’ve got the classic tax reform winners/losers things lining up right away.”
But Brady’s message to those industries is that a border adjusted tax will “level the playing field” by becoming more like America's major trading partners.
According to Brady, there are several key benefits to taking this approach.
First, it levels the playing field between foreign products and American-made products. Brady said competition will be based on price, quality and service, not on another country’s tax code. It would also enhance the competitiveness of made-in America products worldwide by no longer double taxing made-in-America products overseas.
Secondly, Brady argues that border adjustability dramatically simplifies US tax code. He said that foreign competitors use border adjustability as part of their value-added tax, but the rest of their taxes come from complicated, prone to the base-erosion and profit-shifting problems Brady claims this approach is different.
“We are transforming our entire international tax system and moving to a much simpler and smarter cash flow tax, based on consumption in the US. Under our new system, businesses will simply add up their export receipts each year and disregard them. At the end of the year, they’ll line up their import costs and disregard them.”
Brady added that border adjustability this will eliminate the need for complex transfer pricing rules and anti-base erosion measures that increase complexity and inhibit investment.
On the Ways and Means timetable, Brady stressed that the priority for lawmakers is repealing and replacing the Affordable Care Act, adding “You’ll see action on that over coming weeks.” The budget will have to be approved following ACA action, making reconciliation available later this summer.
Brady reminded the audience that the GOP agenda for tax reform will remain aggressive for the foreseeable future. “We were not merely going to tweak a few things and call it a day, nor were we going to shoot to be the middle of the pack worldwide for a competitive tax system.”