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As if this were not enough to make an agreement on which geese to pluck to fill treasury coffers rather difficult, there is the added problem that President Trump is coming off an embarrassing (although possibly temporary) defeat of his effort to repeal and replace Obamacare. A bully can be effective only if he succeeds: the Freedom Caucus ignored his threats of retaliation, voted with Democrats to scupper healthcare reform, and lived to tell the tale. A self-proclaimed first-class practitioner of “the Art of the Deal” who failed to negotiate his way through the health-care-reform jungle emerges doubly weakened. Not only was the President proved an impotent bully and ineffectual negotiator: House Speaker Paul Ryan could not deliver the votes which he had promised and which Trump needed, tarnishing his own reputation and making Trump suspicious of the Speaker’s ability to deliver the votes for a key part of the Ryan tax reform plan — a border adjustment tax.

That tax is designed to produce the revenue needed to offset major reductions in the corporate tax rate, from a nominal 35 per cent to 20 per cent (Ryan), more in line with the OECD average of 23 per cent, or 15 per cent (Trump). Stripped of nuance, the proposal is to tax imports at a rate of 20 per cent, to put them on a basis equal to that faced by American imports into countries that rely on value-added taxes. As things now stand, a Cadillac produced in the US is burdened with a 20 per cent tax in most OECD countries, while Jaguars, BMWs, and emissions-spewing Volkswagens face no such charge when sold in America. A Jaguar that is sold in the UK for the equivalent of $60,000, including VAT, is sold in America for $50,000 (ignoring some minor local taxes); a Cadillac that is sold in America for $50,000 must find a customer prepared to shell out $60,000 in Britain.

Ryan proposes to correct that in two ways: tax imports, and relieve goods exported from the US of any taxation by switching to a system that taxes goods at the point of sale. Boeing would pay no tax on the revenue from its sales to China; domestic airlines that prefer Airbus would face a 20 per cent levy, just as Boeing faces when it sells aircraft to countries that charge VAT. A small policy group of which I was a member (the Tax Reform Initiative Group, chaired by Doug Holtz-Eakin, formerly Director of the Congressional Budget Office) noted in its final report:

While the US has maintained an international tax system that disadvantages US firms competing abroad, many US trading partners have shifted to territorial systems that exempt entirely, or to a large extent, foreign source income. Of the 34 [other] economies in the Organisation for Economic Cooperation and Development (OECD), for example, 28 have adopted such systems.

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