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Trump Dismisses Border Adjustability, Eyes Interest Deductibility

Posted on May 13, 2017 by Jonathan Curry

President Trump in a recent interview put another nail in the coffin of House Republicans’ proposed border-adjustable tax and suggested that the White House might deviate further from the House GOP tax reform proposal by retaining the business interest deduction.

Trump, in a wide-ranging interview with The Economist conducted May 4 and published May 11, offered a tepid response when asked if he was looking to include the border-adjustable tax in tax reform. “It’s not really what I’m considering,” Trump said of the beleaguered 20 percent tax on imports of goods and services included in House Republicans’ “A Better Way” tax reform blueprint.

The border-adjustable tax was left out of the one-page tax reform plan outline released by the White House last month. The administration’s official position for several weeks has been that it opposes the border-adjustable tax in its current form but that it is open to considering a revised version, a position that Trump’s statement doesn’t necessarily preclude.

Trump also reiterated his interest in a “reciprocal tax” as a tool to reduce U.S. trade deficits with other countries, saying that it “very much has to do with trade.”

The president also drew a comparison between his proposed “border tax” — another moniker for the reciprocal tax — and VATs, and he went on to express his fondness for such a tax system. “The concept of VAT I really like,” he said, noting that he owns properties in countries like the United Kingdom that have implemented VATs.

But he added that he didn’t think switching to a VAT would have support in the United States, largely because taxpayers have grown accustomed to the current income tax system and also because it would be “too much of a shock to this system.”

Tax Preferences

The president reiterated his intention to eliminate most itemized deductions on the individual tax side, but when asked about the business interest deduction, Treasury Secretary Steven Mnuchin chimed in to say the administration would prefer to keep it.

“We’re contemplating keeping it. That’s our preference,” Mnuchin said, before adding, “But we’ll look at everything.”

Trump likewise said that it “hasn’t been determined yet” whether the business interest deduction would be kept or repealed, but he emphasized that the goal is to keep tax reform “as simple as possible.” Discussions over the business interest deduction may be a key sticking point with House Republicans, who advocate eliminating the deduction in their tax reform blueprint.

Earlier in the interview, Trump said that his tax reform plan would keep the deductions for charitable contributions and mortgage interest but get rid of “all this nonsense that they have right now that complicates things.” The Trump tax reform outline proposes eliminating all itemized deductions except for the deductions for charitable contributions and mortgage interest, but the White House has since indicated retirement saving tax incentives would be protected. The outline also proposes eliminating tax breaks for “special interests” without specifying which tax breaks would be axed.

Repatriation Gets a Rate

Trump said that the administration is envisioning a temporary, 10 percent rate on the repatriated profits of U.S. companies. The White House tax reform outline called for a one-time tax on the profits of U.S. companies being kept overseas as part of a transition from a worldwide to a territorial tax system, but it left unsaid at what rate those profits would be taxed.

The president argued that the reason why U.S. companies are deterred from repatriating trillions of dollars in profits stashed overseas is twofold: First, U.S. corporate tax rates are too high, and second, the administrative process for repatriating those profits is too complex. Trump and Mnuchin said they would simplify the process for repatriation.

“I have a friend who said [that] even if you wanted to bring it back in, you can’t because you have to go through so many papers, so many documents,” Trump said. “You pay millions of dollars in legal fees and they almost don’t allow you to bring it back in.”

H. David Rosenbloom of Caplin & Drysdale Chtd. told Tax Analysts he didn’t have “the slightest idea” what Trump and Mnuchin were referring to when they described the repatriation process as overly burdensome. Between 2004 and 2005, “companies had the chance to bring back funds taxable at a 5.25 percent rate. . . . They figured out how to do that to the tune of about $300 billion,” he noted.

Jeffrey H. Paravano of Baker & Hostetler LLP suggested the repatriation complexity Trump and Mnuchin were referring to could revolve around foreign tax credit disputes. “There is significant complexity in the current tax code, and many complicated planning strategies that may allow companies to reduce or eliminate taxation on repatriation of foreign earnings. The IRS routinely issues guidance to target what they view as aggressive foreign tax credit strategies,” he said in an email. “Under the current tax code, even routine repatriation of offshore earnings by taxpayers often involves complex tax credit calculations and disputes with the IRS regarding how much tax is due in connection with those earnings repatriations.”

Some questions about the administration’s repatriation policy are still unanswered, Paravano noted. It’s unclear, for example, if there would be a window of time for companies to repatriate previously earned profits, or if those earnings would be “deemed” repatriated and subject to taxation.

Priming the Pump

Trump made clear in the interview that he supports a short-term, deficit-increasing tax cut, repeatedly using the expression “prime the pump” to describe his approach to tax reform and economic growth.

Asked if it was acceptable for the tax plan to increase the deficit, Trump responded, “It is OK, because it won’t increase it for long. You may have two years where you’ll . . . prime the pump.”

Mnuchin elaborated on Trump’s point, saying that the administration predicts that the resulting economic growth from a tax cut could yield an additional $2 trillion in revenue over a decade. “So priming the pump in the short term leads to growth,” Mnuchin said.

Trump later came back to that point at the end of the interview, saying, “We’re going to prime the pump with the taxes because we’re going to take in perhaps a little bit less, but we’re going to have a lot more business, we’re going to have companies coming back into the country.”

Even with economic growth included, the cost of the proposed tax cuts would be difficult to offset if the tax reform package does not include base broadeners like the border-adjustable tax and does not eliminate the business interest deduction, as the White House seems to prefer. In an analysis of the House GOP’s tax reform plan, the Tax Foundation estimated that the border-adjustable tax would yield about $1.1 trillion in revenue over 10 years, and eliminating the interest deduction would raise an additional $1.2 trillion.

Democrats on Board?

Trump indicated that he still wants to get some Democratic support for his tax reform plan, and he once again held open the possibility of offering to pair tax reform with infrastructure investment as a bargaining chip.

The president said he needed at least a “little bit” of Democratic support for his tax plan and that including infrastructure spending would be one way to do that. Mnuchin also said that he has held discussions with Democratic senators, some of whom he said “actually believe we’re on the right tax plan to bring business back to America.” And White House Director of Strategic Communications Hope Hicks, who also sat in on the interview, said the administration’s proposed child care tax credit had generated interest from Democratic lawmakers.

The White House has offered conflicting statements on infrastructure, at times suggesting it could be paired with healthcare reform, tax reform, or neither. Speaking at a conference May 1, Mnuchin said that infrastructure would be kept separate from tax reform.

The president, however, notably refused to consider at least one tax reform bargaining chip: releasing his tax returns.

Luca Gattoni-Celli contributed to this article.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.