House Ways and Means Committee Chair Kevin Brady, R-Texas, expressed confidence February 3 that Republicans' proposed border-adjustable tax would fit within WTO guidelines and cited increasing agreement with the White House on the overall tax reform plan.
While speculation continues about whether the key feature of the House GOP tax reform blueprint would comply with WTO obligations, Brady told tax policy scholars and stakeholders at an international tax policy conference at Georgetown University Law Center in Washington that committee staff have been focused on the issue.
"I think talk of a trade war is silly," Brady said. "Frankly, what will they do? [Say] 'stop copying us?' 'Stop border-adjusting your taxes as we do?'"
The destination-based cash flow tax in the "Better Way" tax reform proposal is "economically equivalent" to the VATs implemented in European countries, Brady said. "We chose not to use a value added tax for a number of reasons and [instead] go to the simpler cash flow system based on consumption in the United States," he said. "We think it's far more pro-growth and simpler to comply with."
Brady said he was not worried about complying with WTO guidelines and meeting other countries' challenges to the tax because the United States is "no longer merely adjusting an income tax; we're transforming ourselves to this cash flow tax, based on consumption here. We believe it meets the standards and the critique of the WTO."
Brady said his staff and Trump administration officials have "had discussions on every provision in the blueprint. I only see our common ground growing more and more each day."
Brady suggested that Senate Republicans "develop their ideas for tax reform," but noted that several bills in the blueprint are from the upper chamber. "Not only do we share some of the goals of fairness and competitiveness, we actually share the solutions to those as well," Brady said.
The blueprint's separate small business income tax rate for passthroughs would apply to all non-C corporations, regardless of size, Brady explained. "We want to make sure, from a pro-growth standpoint, that we are becoming competitive not just on a part of the ledger, but on the entire job creation network of the United States," he said.
Brady said the decision to separate small business income from wage income resulted from difficulties in trying to lower the individual rate if the two are combined, which he said was an issue during the reform efforts of former Ways and Means chairs Dave Camp and Paul D. Ryan, R-Wis.
Asked about the concerns raised from retailers and oil refiners about the effects of the border-adjusted tax, Brady said "true competition" is the main driver of better prices and quality and that the tax reform proposal would put U.S. businesses "on an equal playing field" with the rest of the world.
"Imports are as equally important to our economy as exports, but no one deserves special or favorite treatment in our tax code, especially compared with our competitors worldwide," Brady said.
Brady said staff is looking at many "ideas on both the design and the transition of this provision to accommodate some of the valid concerns."
No WTO Violation, Roskam Says
A senior Ways and Means committee member also made the case that the border adjustment provision in the GOP blueprint complies with international trade regulations and is similar to other forms of global taxation.
Ways and Means Tax Policy Subcommittee Chair Peter J. Roskam, R-Ill., speaking at a Heritage Foundation event in Washington on February 6, suggested that the proposal would pass the WTO's "three-part test."
According to Roskam, "One is, is it a financial contribution to a business? No, it's not. Second, is it a national preference? No, it's not. Third is, is it an export subsidy? Well, if taking the VAT off is not an export subsidy, how is taking our tax off an export subsidy?"
Roskam said there is a "threshold fairness issue" that plays a role, and because "we are moving toward a consumption tax, we are mirroring essentially what the rest of the world is doing, and we are asserting a right to be treated in the same fashion as the rest of the world is. We think when it all comes down to it, we'll be exonerated on that."
VATs were initially seen as "de minimis, but over a period of time, the VAT has grown, and so then the adjustment, which is a disadvantage to us, has grown as well," Roskam said.
Brady, speaking to reporters February 6, would not commit to a completion date regarding the committee's tax reform work. Asked whether he planned to bypass committee hearings and instead hold a markup of the eventual border-adjusted tax legislation, he said he anticipates some hearings on tax reform this year, but that the committee hasn't set a timetable because it's "really focused on the elements, the education, the design, the input."
Since the border tax proposal was unveiled last year, lawmakers have met with stakeholders from different industries that might be affected by it, and groups representing exporters and importers have launched lobbying efforts to educate Ways and Means members. Meanwhile, Senate Finance Committee Chair Orrin G. Hatch, R-Utah, said his committee would likely make changes to the proposal after raising concerns about who would bear the tax and whether it would be consistent with international trade obligations.
Although some business groups have concerns about the border-adjusted tax, which would provide a tax exemption to U.S. exporters, Roskam suggested that companies would conclude that the House Republican plan is the best option. "The more people look at different alternatives, I think they'll come down and say the elements and the architecture and the structure of the blueprint is the best way to go," he said.
When asked about the uncertainty surrounding the border-adjusted tax, Roskam said the currencies would adjust to accommodate the substantial tax change and that committee members and staff would work with concerned stakeholders to better direct transition rules.
Roskam did not speculate on when tax reform legislation would be sent to the Joint Committee on Taxation for revenue estimates, marked up by the committee, or receive a vote on the House floor. But he did suggest that House Speaker Ryan would provide "as much legislative space as possible" for their tax reform effort this year.
Roskam said he would reintroduce IRS civil asset forfeiture legislation this session, but that the issue, which he worked on with bipartisan support during the 114th Congress, would not be part of the "Better Way" tax reform bill.
Considering All Options
A key White House economic adviser declined to reveal which way the Trump administration is leaning when it comes to the border-adjusted tax.
Gary Cohn, director of the National Economic Council, was asked February 3 in an interview on CNBC whether the administration supported the border-adjusted tax backed by House Republicans.
Cohn responded that the White House is exploring "all options to get our U.S. corporate tax rate down to the lowest possible level we can get it." A border-adjusted tax is one of those options, according to Cohn, but he added, "You should not take it from me that that's the option we're going with."
Cohn Under Fire
Two Democratic senators sent Cohn a letter February 3 asking him to recuse himself from decisions that might directly or indirectly affect Goldman Sachs, where he was president and chief operating officer before joining the administration. They also requested that Cohn pay full taxes on the $284 million payout he received when he left the company.
In the letter, Sens. Elizabeth Warren, D-Mass., and Tammy Baldwin, D-Wis., complained that Cohn would be able to defer taxes on the payout as long as he invests it "in certain mutual funds or government securities."
The senators asked that Cohn recuse himself from Goldman Sachs decisions for his entire term as National Economic Council director, considering that his $284 million payment was "orders of magnitude higher than the 'extraordinary payment' threshold" of $10,000 from a former employer, which they said typically requires a recusal period of one to two years.
Jonathan Curry contributed to this article.