Tax Analysts Blog

If Trump Cares About Tax Reform, He’d Better Get Busy

Posted on Feb 3, 2017

Many of the same people who underestimated Donald Trump’s political skills on the campaign trail are now overestimating his policy sophistication in the White House. Or at least the specificity of his policy agenda.

This tendency was on full display last week around the subject of “border taxes.” The root of the problem seems to be this “border” word. Since it’s associated with more than one policy proposal, it’s made for a lot of (possibly deliberate) confusion.

The problem began on Capitol Hill, where House Republicans have been trying for months to build support for their plan to replace the corporate income tax. According to the GOP “blueprint,” the United States should adopt a destination-based cash flow tax, often described in D.C. shorthand as a “border adjustable” tax after its signature characteristic.

Meanwhile, President Trump and his advisers have been talking for a long time about “border taxes.” But they’ve never been entirely clear about what a border tax might actually be. A general tariff on all imported goods? A punitive, country-specific tax on items imported from problematic trading partners? A sin tax on the Chevrolet Cruze? (Howard Gleckman of the Tax Policy Center has mulled these and other possibilities in a great blog post.)

One thing it probably isn’t, however, is a border adjustable tax on the House model. The Tax Foundation made this point in an excellent FAQ on border adjustability:

Sometimes, the administration seems to be talking about a tariff on foreign imports, while other times, they use “border tax” to refer to a targeted tax on companies that outsource U.S. jobs. Both of these proposals are different than a border adjustment.

Not everyone, however, has been so clear about this distinction. Last week, when Trump restated his intention to make Mexico pay for his long-promised border wall, reporters were quick to make a connection with the House plan. Their reading was buttressed by Trump’s press secretary, Sean Spicer, who made such a connection more or less explicit.

Spicer’s comments were newsworthy because Trump had previously complained, just a few days earlier, that the House plan was “too complicated.”  “Anytime I hear border adjustment, I don’t love it,” he told The Wall Street Journal, “because usually it means we’re going to get adjusted into a bad deal. That’s what happens.”

Trump’s comments to the Journal were some of his most substantive on tax policy of any sort. For a guy who often talks in bland generalities about complicated issues, the president was remarkably specific about his objections to the House plan.

To my mind, that means we should take Trump’s comments seriously. But many other observers seemed to disagree. When Spicer drew a connection between Trump’s “border tax” and the House plan, many reporters were quick to marginalize Trump’s previous complaints. These same reporters stuck to their guns even after Spicer began backpedaling furiously (which happened almost immediately; within hours the White House was calling border adjustability just “one option” among “a buffet” of alternatives).

Maybe Spicer’s initial  comments really did represent some serious rethinking by the president. Maybe Trump has seen the light on the virtues of border adjustability.

More likely, however, Spicer’s comments were a halfhearted trial balloon. In my view, they revealed not a shift in White House tax preferences but a lack of any real preferences in the first place. Trump doesn’t seem to care very much about the details of tax reform, and I suspect he would sign off on pretty much anything congressional Republicans bring to his desk.

But that’s the problem: It’s not clear  GOP leaders will be able to pass anything we might reasonably call tax reform. I’m sure they can get some sort of small-to-medium-sized tax cut through both chambers. But when it comes to serious restructuring of the tax system, I’m dubious.

The border adjustable tax is a particularly heavy lift, given the opposition of key stakeholders and business constituents (including major retailers and the Koch brothers). It’s a tired refrain in the tax community but it’s still true: Tax reform creates winners and losers. That makes it hard. And unlikely.

The only way to make tax reform happen – even when the political winds are at the back of would-be reformers – is to fight hard for it. House leaders, including Speaker Paul Ryan, seem ready to go to the mat. But if the past is any guide, it will take more presidential leadership, too.

In an article for Tax Notes this week, my colleague Mindy Herzfeld looks back to the Tax Reform Act of 1986 and emphasizes the vital role Ronald Reagan played in getting the law passed. Without Reagan, tax reform wouldn’t have happened.

This year, it’s going to take another big dose of presidential leadership to make tax reform a reality – especially if the border adjustable tax is going to be a part of it. There is much to like about the House proposal for replacing our dysfunctional tax (Bill Gale of the Brookings Institution laid out some of the proposal’s most appealing qualities in a recent op-ed). But Washington is full of good tax ideas that went nowhere, thanks to policy inertia and active resistance from potential “losers” in the reform process.

If this year’s drive for reform is going to survive, President Trump will have to get busy. It’s going to take more than tortured interpretations of stray presidential comments to get tax reform written into law. It’s going to take real leadership.


Read Comments (5)

Edmund DantesFeb 6, 2017

Good article, Mr. Thorndike. Kudos also for your article, and Ms. Herzfeld's article, on how important Reagan was for the tax reforms of the 1980s. I don't usually see Reagan getting the credit he deserves for that.

If Trump is really smart, he'll phase out non-profit status, and make the huge repositories of billions in capital pay their fair share of taxes for the first time. He'll also take away the wealthiest's cherished tax preference, the tax freedom of muni bonds. That would free up an enormous amount of cash for middle class tax cuts. I'm not sure he's that smart.

As I recall, the first Bush tax cut was enacted by June of his first year? So speed is possible if people are determined.

Travis RechFeb 6, 2017

Agreed. I think his plan to allow Churches to behave politically is a great idea, especially in conjunction with removing their tax exempt status. I know I speak for many tax professionals when I say that I do enjoy looking over 'non-profit' tax returns, and I'd derive special pleasure from seeing what some religious institutions are doing.

Edmund DantesFeb 7, 2017

Travis, it's unusual for you and I to agree, but in this case we do. I was referring to the enormous amount of capital held in tax-free Ivy League endowments, as well as in foundations, but churches, schools, museums and hospitals should also be brought into the taxable tent. This would be an enormous simplification of the tax court, coupled with meaningful revenue increases.

Paul MancinoneFeb 8, 2017

I think the abolishment of not for profits is impossible and this belief is based upon sheer numbers. Almost 10% of U.S. wages is in this sector, and it's one of the largest industries in the U.S. Take away the charitable contribution and most of these entities will disappear, and the jobs will go with them. The U.S. is a humanitarian country, that's a core principal, and this would be a reshaping of who we are as a people. Hospitals are already in deep trouble, and their tax exempt status is based upon the concept of caring for those who cannot pay. That's the deal. Care for the needy and 'we' won't tax you. Universities are another story. There could be middle ground there, such as mandating that they be subject to local property taxes, etc. Most mayors would agree there! Harvard comes immediately to mind, etc. And don't forget the power of the not for profit lobby. Gates Foundation, and all these private foundations were created by the wealthiest people in America, "winners" as Trump would say, and he always listens to people with money. I just don't see it happening.

Mike55Feb 9, 2017

I'm not sure I appreciate the focus on universities, hospitals, etc., at least at this point in time. Assuming that one wants to tax organizations separately in the first place, wouldn't it make sense to go after the for profit flow-throughs before worrying about the nonprofits? It's sorta hard for me to begrudge Harvard its endowment when there are massive oil & gas MLPs (just one example) out there that dwarf it in size and also pay zero entity level tax.

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