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White House's Reciprocal Tax Ties to Border Tax Are Unclear

Posted on February 28, 2017 by Jonathan Curry

Both the White House and the Treasury are supporting the idea of a "reciprocal tax" at the border, but have not disclosed what relationship this proposal has to House Republicans' vision of a border-adjustable tax.

In a February 26 interview on Fox News, Treasury Secretary Steven Mnuchin said that President Trump's frequent threats to impose a punitive tax or tariff on U.S. companies that move production overseas is "not a retaliatory tax, it's an idea that he's looking at calling a 'reciprocal tax,' which [is] basically saying, we want to create a level playing field so that others treat us the way we're treating them." Mnuchin did not say how closely this aligns with the House's proposal outlined in the "A Better Way" plan, but he did say that Trump likes parts of it, although there are "certain aspects that he's very concerned about."

The next day, Trump alluded to the reciprocal tax during remarks given at a meeting of the National Governors Association. Other countries are able to export their products into the U.S. without paying taxes, while they tax products imported from the U.S., Trump explained. His administration would "make taxes between countries much more fair," he said, adding, "If we're going to be taxed, they should be taxed at the same amount, the other countries."

House Ways and Means Committee Chair Kevin Brady, R-Texas, spoke favorably of Mnuchin's reciprocal tax idea during a February 27 press briefing, but similarly declined to characterize its relationship to the House plan.

"When I hear him talk about leveling the playing field with some sort of reciprocal approach that gives our businesses and workers a fair chance to succeed, I think we're all on the same page and headed in the right direction," Brady said.

The border-adjustable tax proposed by House Republicans would replace the current corporate tax code with a destination-based cash flow tax that implements a system of border tax adjustments so that imports into the U.S. are taxed at 20 percent while U.S. exports are exempt. The tax is based on a hybrid version of a VAT.

Mnuchin said that he wasn't concerned about other countries retaliating with higher taxes on U.S. exports or starting trade wars in response to the reciprocal tax proposal, but he indicated that the U.S. would renegotiate treaties with other countries so that they better benefit U.S. workers and companies.

As for reforming business taxation, Mnuchin emphasized that the plan the administration will come out with "is something that will be simple that companies will know how to incorporate."

The administration is also working to tamp down allegations that National Economic Council Director Gary Cohn on February 24 told a meeting of business executives that the White House did not support the House version of a border-adjustable tax. 

But the White House pushed back against that characterization, saying that Cohn's comment was taken out of context. "At no point during this conversation did Gary make a statement of support or opposition to the House border adjustability plan," the White House told Axios February 24.

Another Blueprint

The Trump administration will release an initial "blueprint" of its annual budget proposal March 16, with a more comprehensive budget to be released in early May, according to Office of Management and Budget Director Mick Mulvaney.

In the meantime, a draft version of the budget blueprint was sent to federal agencies February 27, Mulvaney said at a White House press briefing. The early version of the budget was sent to federal agency heads and consists of "the president's priorities as reflected in top-line discretionary spending."

Most notably, the draft budget increases discretionary defense spending by $54 billion while cutting non-defense discretionary spending by an equal amount -- though Mulvaney did not specify if Treasury or the IRS would be included among the agencies whose budgets are cut. Mulvaney said the draft budget does not include tax policies, revenue projections, entitlement reforms, or other specifics. Those details will be included in the comprehensive budget to be released in May, he said.

Agency heads will still have the opportunity to respond to the administration's suggested budget cuts and make the case for why a particular program or office should "stay in existence" before the White House finalizes its budget, Mulvaney added.