Opinion: Trump's terrible tariff idea

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Opinion: Trump's terrible tariff idea 

Douglas Holtz-Eakin: Trump's bad tariff idea (and better one on tax reform)

By Douglas Holtz-Eakin

Updated 7:39 PM ET, Thu December 22, 2016

Trump mulls tariffs, stands by campaign pledge 02:25

Story highlights

• Douglas Holtz-Eakin: Trump reportedly mulling a 10% tariff on imports. That would clash with growth, raise consumer prices
• Trump team floats more promising idea for "border adjustment tax" that would incentivize firms to keep jobs at home

Douglas Holtz-Eakin is the president of the American Action Forum. He is a former director of the Congressional Budget Office and former chief economist of the President's Council of Economic Advisers under President George W. Bush. He was the top economic adviser to Sen. John McCain's 2008 presidential campaign. The opinions expressed in this commentary are solely those of the author.

(CNN)Comments from Donald Trump or his transition team tend to spur frenzied efforts to figure out the President-elect's policy intentions. So new rumors over his trade policies are hardly a surprise.

CNN reports the team is "discussing a proposal" for early executive action against foreign imports, according to multiple sources. Specifically, a "proposal to impose tariffs as high as 10% on imports."

Douglas Holtz-Eakin

That would be a step away from Trump's commitment to spur growth, wages and jobs in the United States. While it's true that some American workers and industries suffer from international competition, the economy as a whole is stronger and more productive when engaged in trade.

And the country's future prosperity demands that we reach out to the 95% of the world's consumers who live outside our borders. Raising tariff walls, hiding behind isolationist barriers, is a recipe for Japanese-style stagnation.

Here's another blunt reality. A 10% import tariff would be simply a tax that would raise consumer prices for every American family. It would clash directly with Trump's supposed commitment to lower taxes and grow families' budgets.

At the same time, according to CNN, the transition team is floating the idea of "a border adjustment tax" on imports -- an idea proposed by House Ways and Means Committee Chairman Kevin Brady -- as a way to spur American manufacturing.

Ryan won't commit to passing Trump tariff plan 01:25

This is an entirely different kettle of fish. Brady's plan isn't a trade policy at all. Today, a business producing goods in the United States and selling them overseas faces the corporate income tax on those exports. Under the House proposal (not current law) imports would not be tax deductible expenses. Since the tax rate is proposed to be 20%, this is a de facto 20% tax on imports.

Because it would exempt US exports from tax, it would allow them to compete on a level tax playing field in their country of destination -- both US goods and Brazilian goods, for example, would pay Brazil's taxes.

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Similarly, US goods and imports would both pay the US tax. Fair is fair, and the best products win in market competition.

Moreover, this isn't a matter of collecting cash in every port. Under Brady's proposal, as each firm prepares its year-end tax return, it would exclude from the tax base all cross-border transactions. Specifically, it would not report overseas sales revenue -- effectively exempting it from the US tax -- or costs of imports into the United States, thereby including the cost of imported intermediates.

This has three virtues. First, the tax code is much simpler. A US multinational firm engages in three types of transactions: between its foreign affiliates and others abroad, between the domestic company and its foreign affiliates, and between the domestic company and others in the United States.

Will Trump tariff plan affect ties with China? 04:23

To compute their tax under the House proposal, firms operating in the United States would need only to report transactions of the last type -- domestic transactions. This limited focus also makes it easier to verify that firms are complying with the tax code.

The second virtue? The incentives to "game" the tax system, or hide profits offshore, are eliminated. The tax base is unaffected by the value of exports or the cost of imports, so there is no payoff to manipulating "transfer prices" between domestic and overseas operations so that reported profits are lower in the United States and higher in overseas, lower-tax jurisdictions.

Most importantly border adjustment removes incentives for domestic firms to relocate production offshore. Because they will owe taxes on US sales whether production takes place in the United States or elsewhere, and owe no US taxes on non-US sales, they will gain no tax benefit from shifting operations abroad.

We can concede global production to our competitors and make it more expensive for US families to purchase those products. Or, in the context of a larger tax reform package, we can remove the incentives that drive production to other countries and increase jobs, wages and US prosperity. Interest from the Trump transition team in moving this effort forward is a good sign.