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Affluent Investor | April 26, 2017

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Republican Tax Strategists Desperately Try To Put The Democrats Back In Control

Republican Elephant & Democratic Donkey  (Photo by DonkeyHotey) (CC BY) (Resized/Cropped)

Republican Elephant & Democratic Donkey
(Photo by DonkeyHotey) (CC BY) (Resized/Cropped)

With their Party having won control of all three branches of the federal government in the recent election, Republican tax experts are seemingly desperate to help the GOP give back its gains.  Evidence supporting this claim is the growing support among Republican tax scholars (and apparently legislators too) in favor of what they describe as a “border adjustable tax system.” They don’t call the Republican Party the “stupid party” for nothing.

The new revenue stream popular among certain members of the Republican commentariat calls for reducing the corporate tax in favor of a tax placed on goods made outside the United States, but that are exported to the U.S.  The argument is rooted in numerous falsehoods, fallacies, and plain bad economics.

Advocates lament the fact that almost all countries tax U.S. produced goods that are exported to foreign countries.  The argument, if readers can stop laughing (or crying), is that since other countries injure their citizens by virtue of taxing imports, so should the U.S. injure its own.

“Not so fast” say Republican cheerleaders of this most mindless of tax ideas.  They note that the U.S. corporate tax is “the highest in the industrialized world,” and their plan will bring the corporate tax down, only to replace it with a tariff on imports.

So while certain GOP tax strategists are correct in their desire to at least reduce the corporate tax rate (logic dictates that this double tax on individual earnings should be zero), they insult the logic of doing so with their call to tax imports in return.  Lest we forget, as taxpaying entities corporations are a fiction.  They’re owned by individuals, and as such individuals already pay all corporate taxes.  In this case, GOP tax wonks are calling for a reduction in one tax born by individuals in favor of another.  Not explained is why one tax cut for individuals requires an introduction of another.  Why can’t politicians get by with less? This question isn’t being answered, nor is it being asked.

Comical here is that Republicans want us to believe that their proposed tax is not a tariff, but that’s exactly what it is.  With an eye on reducing the tax bill paid by shareholding individuals via corporations, they’re going to force all Americans to pay a great deal more for the myriad imports they buy, and that enhance their standard of living on a daily basis.  Stating what’s obvious, when the Chinese, Japanese and Mexicans get up and go to work each day, Americans get a raise.  In their infinite un-wisdom, Republicans want to take that raise back in order to support bigger government.

“Not so fast,” they say again.  You see, the story they’re telling us is that through higher tariffs on imports, and lower taxes on goods produced in the United States, manufacturing jobs will come back to the U.S. to take advantage of the better tax environment for U.S. corporations.

The above is rooted in numerous fallacies that could fill many books, but the first one concerns this idea that our failure to tax imports has weakened the U.S. economy.  But as evidenced by the abundant imports directed at the U.S. by producers (including American companies) around the world, Americans are wildly productive.  We’re only able to import insofar as we export goods, services and assets of commensurate value.  Say’s Law is fairly simple.  The apparent problem is that Republicans generally only understand Say’s Law when Democrats are in power.

Still, the broad point here is rather basic, and requires repeat: Americans can only import insofar as they’re productive in the first place.  Sadly, the Republican tax plan would, if “successful,” reduce American productivity as tariffs always do, by definition.

To understand why, we mustn’t forget that manufacturing jobs that employ humans departed the U.S. for the same reason that farm jobs did over 100 years ago: the work no longer rates American effort.  Just as the tractor rendered farm work yesterday’s news, so has automation rendered labor-intensive manufacturing the stuff of poor countries.  Manufacturing jobs in China pay the equivalent of a Starbuck’s latte in daily wage terms, yet Republicans inexplicably want to bring low-paying jobs (jobs that make starting pay at McDonald’s quite princely by comparison) back to the states.  It’s the equivalent of a politician 100 years ago calling for the abolition of the tractor in order to bring back low-wage farm work.

Back to Say’s Law, if the U.S. retreats into labor-intensive manufacturing work, Republicans will no longer have to worry as much about voluminous foreign imports.  They won’t simply because a growing number of American workers will be earning too little to pay for them.

Interesting here is that another conservative strategist who supports this most ridiculous of VATs does so as a way of punishing foreign countries for “stealing” high level U.S. intellectual property (IP).  Ok, if we ignore how difficult it is for any country or company to know what’s good or bad IP, it’s passing strange that economists eager to curry favor with the supposed populist in President-elect Trump would promote a tax that would hit the poorest American consumers the most as a way of protecting the intellectual property of Apple, Intel, Microsoft (three of the most valuable companies in the world) from alleged theft.

So there we have it.  A Republican party that is supposedly anti-tax is being advised by top Republican tax strategists to legislate another federal revenue stream that will grow the tax that is government itself in order to protect U.S. companies from foreign imports stateside, and IP theft globally.  The tax will raise the cost of most everything for U.S. consumers, it will weaken the U.S. economy in a much bigger sense by virtue of Americans doing low-value work that others could do for them, and it will empower politicians even more when it comes to restraining the very trade that has made the U.S. the richest country in the world.

One comical argument offered to further what is absurd is that “we have to make things in America to make America great again.” The Republicans who still understand Say’s Law will hopefully alert their misguided comrades to the basic truth that the U.S. is the world’s biggest importer precisely because its people produce more goods and services than anyone else in the world.  At the same time, the Republicans who choose to understand basic economics no matter the inhabitant of the White House might also explain to the Party’s errant tax strategists that it’s not the job of the American people to fund an ever bigger government in the first place.

 

Originally published on Forbes.

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