Fortune: President Trump Shouldn’t Trust Paul Ryan With U.S. Tax Reform
There is a stark lesson to be learned from last week’s dramatic collapse of the American Health Care Act, as created by House Speaker Paul Ryan and backed by President Trump. To make massive changes in a democratic society, you need a bipartisan approach that benefits the vast majority of Americans, not the kind of ideological scheme created by Ryan and his Republican colleagues.
In retrospect, it was surprising that an astute politician like Trump threw his full weight behind a health care plan that took insurance away from 24 million people while cutting taxes for wealthy Americans, pharmaceutical companies and health plans by $885 billion. Trump dodged a bullet when support for the bill collapsed among Republicans, as it would have done great harm to the working class – the majority of them Trump voters, angry about disparities between the rich and the poor.
Next on their agenda, Trump and Ryan are planning to tackle tax reform. If Trump thought health care was complicated, wait until he digs into the complexities of the U.S. tax code, and has to deal with myriad lobbyists who jealously guard tax breaks on behalf of their sponsors.
It is time for President Trump to adopt an entirely different approach:
Giving the lead on tax reform to Ryan – who has yet to demonstrate he can deliver his Republican caucus – would be a monumental error, compounding the problems encountered on health care reform. Ryan and House Ways and Means Chair Kevin Brady are advocating a “border adjustment tax” (affectionately called BAT) of 20% on all goods coming into the U.S. They hope to raise $1 trillion to pay for tax cuts to benefit the wealthy and to persuade manufacturers to relocate to the U.S.
There are three fundamental problems with their approach:
Retailers like Walmart, Target and Best Buy import over 90% of their merchandise from outside the U.S., so they will be forced to raise their prices to consumers by 20%. These price increases will fall most heavily on people who can least afford them – the working class, discount store shoppers that voted for Trump. In addition, the retail industry employs 42 million people directly and indirectly, far more than the entire manufacturing sector. (Ref: https://nrf.com/advocacy/retails-impact) If the BAT is enacted, many retail employees will lose their jobs as retail profits are squeezed.
First, in response to the BAT, it is likely that China, Mexico and European nations will retaliate with 20% tariffs of their own. These will hit American exporters the hardest, especially high tech producers like General Electric, Boeing, Pfizer and Caterpillar that sell their goods to the Chinese. Rather than helping U.S. employment, they may be forced to shift production overseas to avoid the punitive tariffs. In addition, farmers will be hard hit as they export one-third of their crops – over $130 billion each year – to Mexico and Canada.
Secondly, it is a myth to think that the BAT will stimulate U.S. production in any meaningful way. Textile and apparel manufacturers are not coming back to the U.S. Nor are television set makers. Those industries were lost 30 years ago.
Take the auto industry for example. Today General Motors sells more automobiles in China than it does in the U.S., and its component parts are made all over the world. In competing with local Chinese manufacturers, GM can ill afford the higher costs and tariffs associated with U.S. exports if the BAT is enacted.
The long-term implications of Ryan and Trump’s strategy are even more severe. Since the end of World War II, the U.S. has had a bipartisan commitment to reach trade agreements with developed and developing nations to reduce tariffs to the benefit of U.S. consumers and exporters. If America abandons its commitments to free trade by attempting to renegotiate long-standing agreements, the world could devolve into a 1930s-style trade war that will harm everyone. President Trump may find the Chinese are a lot harder to negotiate with than the recalcitrant Republicans in the Freedom Caucus that doomed the health care bill.
There is a better way to go: Trump should give the assignment to pragmatic, non-ideological advisors like Gary Cohn, head of the National Economic Council, and Treasury Secretary Steve Mnuchin, and their staffs and let them devise a sound plan that addresses the most severe problems in the U.S. tax code. Given its complexities, they should focus on a few key proposals for which they can gain a bipartisan consensus, rather than trying to revamp the entire tax code – which they will find is an extraordinarily difficult task and virtually impossible to build a bipartisan consensus.
On the top of their list should be some of the following proposals for which there could be support on both sides of the aisle:
- Repatriation of cash held overseas by corporations with a one-year tax holiday if companies get a plan approved by the Treasury department to invest repatriated funds in the U.S. to expand U.S. manufacturing, research and development and workforce training.
- Reducing the corporate tax rate from its present 35% – the highest in the developed world – to a more competitive 25% in exchange for eliminating many of the corporate loopholes that enable many companies to pay minimal taxes or none at all.
- Reducing taxes on individuals earning less than $50,000 per year while paying for the reduction by cutting back on deductions like interest on mortgages above $250,000, state tax credits, etc.
- Providing workforce training tax credits to both individuals and companies to ensure that America has a more competitive workforce that is skilled in computerized, automated tasks.
- Reducing regulations on high-tech manufacturers and large exporters to make U.S.-based companies more competitive globally.
Even with these modest proposals, Trump will have to learn how to work with moderate Democrats in both the House and the Senate in order to gain backing for his legislation. In so doing, he will lose some of the extremists in his own party, but so be it. In the U.S. two-party system, compromise generally produces better outcomes than one-party legislation. Trump will also be forced to fend off the lobbyists – thus fulfilling his campaign promise to “drain the swamp” – in order to gain approval for his legislation. For example, will he and ex-real estate executive Mnuchin be willing to ignore the lobbyists from their former real estate industry to pass a tax bill for the good of the American people?
In spite of its obvious perils, tax reform presents President Trump the opportunity to fulfill his campaign promises to strengthen America’s economy, create jobs, and expand our leadership of the most important industries for the future.
It will make America even greater.
Bill George is senior fellow at Harvard Business School and former chair and CEO of Medtronic. He is also author of the book, Discover Your True North.
This content was originally posted on Fortune.com on 3/31/17.