Donald Trump

The 5-Step Process for Playing Defense Against Trump's Bad Ideas

What could President Trump really do to punish American companies for moving abroad? Well, Congress might try to replace global corporate taxation with a 20% VAT-style levy on everything sold inside the U.S.


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By now we should be familiar with the pattern: President-elect Donald Trump tweets out some crazy-sounding policy-related ideas, journalists and Democrats freak out, the conversation quickly progresses from an argument over the proper adjectives to describe the idea to meta-arguments over Trump's possible motives and whether we should even be paying that much attention to what the president-elect tweets in the first place. Then before you know it there's a new crazy-sounding policy-related idea transmitting from Trump Tower through social media, and away we go again. From flag-burning to alleged massive voter fraud, it's a profoundly unsatisfying way to process an unusual politician's public utterances.

Instead of beginning with generalized hyperbole and speculative divinations of dark motive, I suggest something closer to the opposite: Working from the practical specifics backward, and saving the ominous political vagaries for last, so that you can rally defenses where necessary and also arrive at a bit of perspective before declaring every impotent brainfart proof of incipient fascism.

You can use my still-in-beta 5-Step Process for Playing Defense Against Trump's Bad Ideas™ on any number of topics—why, just yesterday, the incoming president was complaining that China didn't "ask us if it was OK to devalue their currency"! But to get things rolling here I'm going to apply it to Trump's weekend tweetstorm about unleashing "retribution" against U.S. companies that dare close down any operations in America while opening facilities abroad. First, the president-elect in his own words:

The U.S. is going to substantialy reduce taxes and regulations on businesses, but any business that leaves our country for another country, fires its employees, builds a new factory or plant in the other country, and then thinks it will sell its product back into the U.S. …… without retribution or consequence, is WRONG! There will be a tax on our soon to be strong border of 35% for these companies …… wanting to sell their product, cars, A.C. units etc., back across the border. This tax will make leaving financially difficult, but….. these companies are able to move between all 50 states, with no tax or tariff being charged. Please be forewarned prior to making a very … expensive mistake! THE UNITED STATES IS OPEN FOR BUSINESS

Trump had previously tweeted that "Rexnord of Indiana is moving to Mexico and rather viciously firing all of its 300 workers. This is happening all over our country. No more!"

So how do we deal with statements such as these? By asking ourselves five questions.

Question 1: What could President Trump do right away about this, using his executive authority?

Scott Lincicome, a Cato trade analyst and must-follow on Twitter, sorted through the policy translation this way:

In other words, the president does not have the authority to wave a magic wand and conjure a 35 percent tariff. However, he might well be referring to a concrete proposal percolating in the House of Representatives, which gets us to

Question 2: What relevant legislation might Congress—including a 52-48 Republican Senate majority that includes at least 11 GOP senators who didn't endorse Trump and three others who likely hate his guts—pass?

Lincicome's Option 1 refers to a proposal floated (without a bill yet attached) within the House GOP as part of a corporate tax overhaul that would see rates chopped from 35 percent (hence Trump's tweeted number?) to 20. In what would amount to a pretty radical restructuring of international trade flows, corporate taxes would no longer be collected from wherever American firms earn profits, but rather on every sale from every company (domestic or foreign) inside the United States. According to the Wall Street Journal description,

where a company establishes its formal headquarters would matter less. So the plan could deter the practice of putting a company's legal address in a low-tax country, a move known as an inversion. Under the plan, the U.S. would also give up any claim on taxing its companies' foreign sales.

The location of profits wouldn't matter either, sharply limiting the benefit companies have gained from putting intellectual property in tax havens. Instead, the system might encourage companies to locate manufacturing in the U.S. to export to foreign markets. […]

The proposal would operate like provisions other countries use to border-adjust their value-added taxes so those levies apply only to domestic consumption.

So are American consumers and retailers and gas-purchasers really ready for a Republican-pushed VAT-style consumption tax at home? Veronique de Rugy explained in this space why she, for one, is not:

To pay for their desired cut to the corporate tax rate, Republicans are suggesting a conversion of the corporate income tax into a "cash flow tax," or a consumption tax base with a deduction for payroll. Protectionist "border adjustments" then make it "destination-based" by exempting exports from taxation and denying deductions for imports. The move might be better described as belonging to the idiotic school of export mercantilism, meaning there would be higher prices for consumers (including domestic producers that use imported parts). I can also guarantee that contrary to the promise lawmakers will make about it, this feature would not appreciably boost exports.

But the real danger from the plan comes from how it would change political incentives. Whereas corporate income tax rates have declined throughout the rest of the world as nations compete to keep businesses from fleeing their jurisdiction, the destination-based cash flow tax would be inescapable. If you sell in the U.S. market, you would pay the tax, regardless of where your company is located.

That means that future politicians would have little incentive to keep rates down.

This is just a recipe for bigger government, as Europe discovered when it instituted the very similar value-added taxes.

There will be a lot of lobbying and horse-trading and public discussion between now and any such kind of corporate tax overhaul. So this, the most likely vehicle for President Trump's retribution against American companies, will not likely happen any time soon. And for other reasons as well, including possibly:

Question 3: Are there any other constitutional or treaty-based limitations on President Trump's stated goals?

It certainly prevents the literal, unilateral application of Donald Trump's tweets, yes. On the narrower, more likely, and yet still far-off case of the GOP-led Congress ushering in a VAT-style territorial consumption levy as part of corporate-tax overhaul, the question gets more complex. While the World Trade Organization has certainly allowed for border-adjusted taxes in VAT countries, such a large change will be litigated within an inch of its life. And how will America's co-signatories within the North American Free Trade Agreement respond?

Generally speaking, and despite domestic politics to the contrary, America has disproportionate influence in its favor on global trade disputes, so the betting is that such a law, if passed, would eke through. But that wouldn't stop other countries from figuring out ways to retaliate, thereby hurting the very American exporters the proposal is designed to boost, which consumers are hit with 20 percent price increases for a lot of stuff.

Question 4: But might something good come out of this?

Sure, anything's possible. Lowering the corporate tax rate, which would be a good thing (especially when paired with eliminating various carve-outs, holidays, and loopholes), seems likely, and maybe this process can somehow end up with lower net taxation and tariffs, plus greater simplicity and predictability. But I doubt it.

Why? Because a president who ran and won an upset victory on protectionism is surely going to govern as a protectionist. A dealmaker who is already intervening in the siting decisions of Indiana factories is not someone likely to be eliminating tax complexity. Vice President-elect Mike Pence, who used to be a free-market conservative, said this weekend after being asked about Carrier that, "The president-elect will make those decisions on a day-by-day basis in the course of the transition and in the course of the administration." That is a recipe for ad-hoc rule, not set-it-and-forget-it tax reform.

Question 5: How might he be changing the political conversation in such a way to make what is currently unlikely possible?

This in some ways is the most important question, yet by asking it first instead of last many Trump opponents are inviting people to tune out their critiques. Yes, it is ridiculously authoritarian for a powerful politician to suggest, say, revoking the U.S. citizenship of people who burn American flags, but that's just not going to happen given our current Supreme Court jurisprudence, as well as composition of the Senate. If a president-elect wants to begin even a totally speculative conversation about a right or principle you hold dear, by all means get after it, but when you don't work through and foreground the practicalities of it, many people's ears will soon become desensitized to the sound of shrieking.

But not that we've worked down this far, let us acknowledge something very troubling. Mike Pence is hardly the only former free-trader to totally change his spots in the face of Trump's protectionist political success. Arguably the most chilling moment of the Republican National Convention is when party chair Reince Priebus crowed from the stage that "Donald Trump wants to bring jobs back from overseas and hold companies who want to send them abroad accountable." Trump advisor Stephen Moore—an economist who worked for Cato for 10 years, founded the Club for Growth, and defended trade and immigration for decades—sent shockwaves through Republican Washington last month by proclaiming that he's now a "populist" firmly on the Trump train. (Do read Moore's own explanation for his conversion, and especially Donald Boudreaux's open letter in response.)

Trump is forcing Republicans to decide between Trumponomics and the contrary beliefs they have championed (rhetorically, at least) for decades. With each new intellectual turncoat, and every new political victory, the ideological landscape is altered that much more. President Trump might not have the votes in the Senate for the worst of his economic ideas in 2017, but opinions could shift faster than we currently think possible.

Fighting on the level of ideas, even in the abstract, will remain crucial during the Trump presidency. But recognizing where the short-term damage might come, and reshuffling priorities accordingly, is the first step toward making sure that those long-term appeals don't fall on deaf ears.