Term Paper: GOP s 2016 Tax Reform Proposal

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[. . .] Trump tried to impose a border tax. They would file cases against the United States at the World Trade Organization, which has the power to authorize retaliatory tariffs on American products, potentially hurting exporters like Boeing, General Electric and farmers in the Midwest."[footnoteRef:22] China is already objecting to Trump's intention to investigate steel imports,[footnoteRef:23] indicating that a border tax would be seen as a further attempt to suppress foreign competition. By all accounts, the border tax would thus benefit American exporters while hurting importers -- but as the Peterson Institute for International Economics has pointed out, "if the reform is found to violate WTO rules by restricting US imports, trading partners could be authorized to retaliate by an estimated $220 billion annually."[footnoteRef:24] Moreover, should the tax be viewed as a means "to implicitly subsidize exports, partners could be authorized to retaliate by an additional $165 billion annually."[footnoteRef:25] How the WTO would react to the GOP border adjustment tax proposal depends ultimately on how the plan is judged by the Dispute Settlement Body should members dispute the tax's legality. [19: Pomerleau, supra note 1.] [20: Tim Worstall, GOP And Trump Beware - EU Planning WTO Case Against Border Adjustment Tax, Forbes (2017), https://www.forbes.com/sites/timworstall/2017/02/14/gop-and-trump-beware-eu-planning-wto-case-against-border-adjustment-tax/#4713ae041c37 (last visited Apr 24, 2017).] [21: Worstall, supra note 20.] [22: The Editorial Board, Opinion | Opening Salvos in President Trump's Trade War, The New York Times (2017), https://www.nytimes.com/2017/01/23/opinion/opening-salvos-in-president-trumps-trade-war.html?_r=0 (last visited Apr 24, 2017).] [23: Trump resorting to unilateralism with steel probe: China Daily, Reuters (2017), http://www.reuters.com/article/us-usa-trump-steel-china-idUSKBN17Q0AY (last visited Apr 24, 2017).] [24: Chad Brown, Policy Brief: Will the Proposed US Border Tax Provoke WTO Retaliation from Trading Partners? Peterson Institute for International Economics (2017), https://piie.com/system/files/documents/pb17-11.pdf (last visited Apr 24, 2017).] [25: Brown, supra note 24.]

B. On American Workers

It follows that the effect of the border adjustment tax on American workers would be beneficial to the extent that it leads to job creation and to more companies choosing to build in America -- which is a phenomenon that Trump has touted at every opportunity as part of his "America First" theme.[footnoteRef:26] As Colvin notes, the expected outcome of the tax is particularly shaped by economists' forecasts -- which means that the American worker may not be as effected as the Trump Administration has let on -- namely because "while border adjustment would change effective tax rates . . . it would also change exchange rates."[footnoteRef:27] Should the border tax cause the dollar to appreciate against foreign currencies, importers would likely be paying no more than they already are. However, a strong dollar would hurt U.S. exporters[footnoteRef:28] -- and so finding the right balance to keep American companies productive and profitable could be more difficult than simply adopting a border adjustment tax. [26: Bill Vlasic, Trump, in Meeting, Urges Automakers to Build in United States, The New York Times (2017), https://www.nytimes.com/2017/01/24/business/trump-us-automakers-meeting.html (last visited Apr 24, 2017).] [27: Geoff Colvin, Donald Trump's Border Tax May Not Hit American Importers at All Donald Trump's Border Tax May Not Hit American Importers at All, Fortune.com (2017), http://fortune.com/2017/02/10/the-border-adjustment-tax-may-have-zero-effect-on-american-companies/ (last visited Apr 24, 2017).] [28: Adam Samson, US Exports Take the Strain of a Strong Dollar, Financial Times, https://www.ft.com/content/16c337d0-8d2c-34e4-be3d-23aceace7c4f (last visited Apr 24, 2017).]

The direct impact on American workers is considerably hypothetical -- but there are likely a number of variables that could impact their situation, with the border adjustment tax being merely one of them. Isolated as a mechanism to create job growth in the U.S., theoretically it offers a conduit to that goal; however, as Colvin has stated, there is no real precedent for the tax proposal that the GOP has put forward.[footnoteRef:29] Value-added-taxes have been used in Europe to positive effect, but the outcome of border adjustment tax in America could in fact hurt American workers employed by American exporters as it could "destroy manufacturing jobs, not create them," as Williams reports.[footnoteRef:30] This argument is made by the Motor Equipment Manufacturers Association, which holds that the border adjustment tax "could raise vehicle prices by as much as $2,500"[footnoteRef:31] -- and in an industry that is already over-saturated and in need of deep incentives to move product,[footnoteRef:32] any cuts in margins could lead to cuts in jobs, as "the global automotive supply chain is complex and integrated into almost every vehicle manufactured, including those made in the U.S."[footnoteRef:33] Small businesses that rely on imported parts could equally be hurt by the tax -- unless manufacturing in the U.S. were to suddenly grow exponentially and to such an extent that reliance upon foreign-labor produced parts would dissipate quickly. It is this latter prospect that the Trump Administration appears to be resting its assumptions on. [29: Colvin, supra note 27.] [30: David Williams, GOP's border tax will kill blue-collar jobs and harm consumers, TheHill (2017), http://thehill.com/blogs/pundits-blog/economy-budget/322962-gops-border-tax-will-kill-blue-collar-jobs-and-harm (last visited Apr 24, 2017).] [31: Williams, supra note 28.] [32: Bill Vlasic, Record 2016 for U.S. Auto Industry; Long Road Back May Be at End, The New York Times (2017), https://www.nytimes.com/2017/01/04/business/2016-record-united-states-auto-sales.html (last visited Apr 24, 2017).] [33: Williams, supra note 30.]

C. Intellectual Origins: The True Intention of the Border Tax

Yet, if the actual outcome of the border adjustment tax on the American worker is unclear at best, perhaps the tax is being proposed for an ulterior motive. To understand the GOP's proposal, it is helpful to obtain context -- to identify the Intellectual origins of the border tax. The man described as the tax proposal's "principal intellectual champion in the United States" is an economist at the University of California, Berkeley, named Alan Auerbach -- and his goal in promoting the tax is to ensure that "incentives will align with the national interest."[footnoteRef:34] The destination-based tax is one that Auerbach believes "is an adaptation to the modern economy of open borders and advancing technology" -- a system in which multinational corporations are able to shift assets such as intellectual property like patents and software to countries that are tax-friendly as a way to protect profit margins: the border adjustment tax would theoretically, according to Auerbach, eliminate "incentives to game the system."[footnoteRef:35] [34: Steve Lohr, New Approach to Corporate Tax Law Has House G.O.P. Support, The New York Times (2016), https://www.nytimes.com/2016/12/12/business/economy/new-approach-to-corporate-tax-reform.html (last visited Apr 24, 2017).] [35: Lohr, supra note 34.]

Auerbach's ideas found political support in the Texas Republican and chairman of the House Ways and Means Committee Rep. Brady, who is at the center of the GOP's border adjustment tax proposal. Brady's stated aim has been to "level the playing field for made-in-America products."[footnoteRef:36] In effect, the tax proposal is a challenge to the World Trade Organization, to free trade agreements such as NAFTA, and to globalism in general. The ideological nexus of the tax is one that promotes the "America First" theme of the Trump Administration -- but in actuality the effect of the tax will not be felt in a vacuum or, in fact, in a world that is wholly controlled or controllable by Brady, Auerbach or the Trump Administration. The tax proposal is more akin, in this light, to a paring thrust in an economic match of wits in a much larger game consisting of social, political and other economic factors and nuances. Auerbach himself has admitted as much, stating, "Economists don't rule the world; I understand that . . . .You never know when or if your policy ideas will have an impact."[footnoteRef:37] The intellectual origins of the border tax adjustment proposal are thus situated less in perfectly calculated plan to promote the interests of the American worker than in a nationalistic approach to tax code reformation -- one that would challenge decades of trade policies that have promoted offshoring. Whether the tax proposal would in the end actually benefit the American worker or simply lead to more economic devastation domestically as multinationals look for leverage to wield against such a proposal is something that remains in the realm of the speculative for now. [36: Lohr, supra note 34.] [37: Lohr, supra note 34.]

III. Alternatives to the Border Adjustment Tax

Alternatives to the border adjustment tax that could be better be suited for achieving Trump's stated objective of creating American jobs, particularly in the manufacturing sector include: 1) the application of ethical consumption laws, 2) the strengthening of International Labor Organization (ILO) so that labor conditions violations could be referred to the WTO, and 3) reduction of U.S. trade deficits through negotiation with trade partners.

A. Applying Ethical Consumption Laws

As Nicholls states, a "leading form of ethical consumption is Fair Trade."[footnoteRef:38] But as far as the Trump Administration is concerned, fair trade is not what the U.S. is engaged in -- not with the kinds of trade deficits it carries. There is, however, another way to look at ethical consumption within the framework of taxation law: the Trump Administration could pursue legislation that subsidizes the "America First" approach for the domestic consumer who is ethically oriented towards… [END OF PREVIEW]

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