Tax Reform, Not Tariffs

Stephen Moore

by Stephen Moore: I've said some nice things about Donald Trump of late and have been excoriated by many on the anti-Trump right (in contradistinction from the anti-Trump left) for this act of treason. I like the fact that Trump really is a magnet for millions of hard-working and patriotic middle class voters who are disaffected with both parties. I don’t like his protectionist trade policies. As Larry Kudlow and I wrote several months ago: “On trade, America cannot lead from behind.”

Yet there is a reality in the Trump movement that is painfully obvious: voters are not for free trade. We haven’t made the sale. They’re not buying into the comparative advantage argument and though I think they do realize, as Ted Cruz has correctly pointed out, that tariffs will make things from diapers to sweaters to iPhones more expensive at Walmart and Target, they worry about the destruction of good middle class jobs. I’m not going to lecture on why I think they are wrong. It is what it is.

By the way, I like Mr. Trump’s relentless focus on jobs — and the villain here isn’t Mexico and China, it’s Washington, D.C. and a president who for seven years has been an unmitigated anti-business disaster.

So how do we keep trade lines open and free as possible while satisfying the backlash against trade of working-class Americans? Mr. Trump says we should have a tariff as high as 45% against the Chinese, because he says Beijing has manipulated its currency by 45% to gain the upper hand in trade. That’s not going to work and will do more harm than good.

But there’s a better way to do this that doesn’t violate any of our existing trade deals or even trade deals going forward and that is through a “border adjustable” flat tax, meaning that it taxes imports and relieves all taxes on exports. Right now America has the stupidest tax system in the civilized world. Right now the U.S. has a 35% percent business income tax that operates like a tariff on our own goods and services. So we tax the hell out of what we produce and we lightly tax what is imported. The average tariff in the U.S. is less than 5%, according to Bryan Riley, a trade expert at Heritage.

The guy who gets this is Ted Cruz. His tax plan, which Arthur Laffer and I first designed, would tax business at 16% but would not tax our exports. Cruz is right when he says this automatically gives us a 16% advantage. This will accomplish what Mr. Trump says he wants: A reward for companies that “invest in America, return to America, or stay and thrive in America.”

Conservatives have long dismissed the importance of a border adjustable tax system — and some economists say it really doesn’t matter in the long term. But they are wrong. It does matter. If you tax something, you get less of it, and if you tax something less, you get more of it. The Cruz plan taxes exports less and imports more — in a way that is fair and equitable. That’s smart.

Meanwhile, both the Cruz and Trump plans lower the corporate tax rate to the teens from 35%. That too will bring companies and jobs back to the U.S. in the millions. In the 1980s and 1990s as tax rates fell from 70% to 40%, net foreign investment into the U.S. soared by more than $2 trillion, creating 40 million new jobs and across the board income gains for the middle class.

One problem with conservatives is that we have gotten out of the habit of listening to what voters are telling us that they want. If their policy prescriptions differ from ours, we attack them as “low information” voters. But you never get anywhere as a salesman by blaming your customer — in this case, the voters — if they aren’t buying what you’re selling. You listen to them and tailor and market your product in a way that gets them to buy it.

With a border adjustable flat tax, we can have free trade and tax reform and millions of new jobs for the middle class to boot. We can also unite the free market conservatives with the Trump army to defeat the left.
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Stephen Moore (@StephenMoore)  formerly wrote on the economy and public policy for the The Wall Street Journal is a distinguished visiting fellow for the Project for Economic Growth at The Heritage Foundation and an economic consultant with Freedom Works. He also served as president of the Club for Growth from 1999 to 2004. Moore encouraged the ARRA News Service editor at SamSphere Chicago 2008 to blog his articles. This article was shared at The American Spectator.

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