Trump’s Border Adjustment Tax just means new loopholes? That’s the point!

I’m generally a fan of Tyler Cowen’s contrarian perspective on economicsⁱ – and a more thoughtful, gracious, and articulate online persona you’re unlikely to come across – but I’m not quite sure that he’s cynical enough to see his way to the logical conclusion of Trump’s forthcoming tax plan. Thankfully, I am! Tyler’s latest column for BloombergView hits and misses thuslyⁱⁱ :

Republican Representatives Paul Ryan and Kevin Brady are promoting as part of corporate tax reform what is now being called the “border adjustment tax.” This complex plan would require a lengthy column just to explain it all, but in the very simplest terms you can think of it as a move toward a value-added-tax structure with corporate investment subsidies built in.

Paul Ryan and Kevin Brady rightly see the writing on the wall that Herr Trump means business, especially when it comes to firing deadbeats who don’t performⁱⁱⁱ and fulfilling his campaign promises (unlike *ahem*). So it is that a border wall and taxes of all manner and all description are coming soon to a pocketbook near you. It’s the American way!

Under one somewhat-neglected feature of the tax, companies could no longer deduct advertising, interest, rent and employee benefit costs from their bills for tax due. This is a recipe for major tax dodges and the further politicization of government-business relations.

Sorry, but the fork on the path of government-business politicisation took a hard larry a long, very long time ago. Long before Solyndra became a household name and even before JD Rockefeller bought and paid for his monopoly to be “anti-trusted” and broken up in such a way that his already prodigious wealth grew at a rate multiples higher than it would’ve had only one Standard Oil ticker symbol been publicly traded. If we’re going to limit ourselves to the government-business relations of the Americas, look no further than George Washington’s immense land holdings in and around DC and his push to increase their value with federally-sponsored infrastructure projects once he became President. Sound familiar ? It should! The entire point of regulation is to pick favourite sons and to bestow upon them the riches they deserve. Even if getting what they deserve can be ruinous, let’s not delude ourselves into thinking that anyone who could wouldn’t give it a shot all the same. Anyways, there’s no “further” to be had. It’s already there.

To think through these problems, note that under circulating versions of the tax reform a company still can deduct its asset acquisition and inventory costs. So, to cite one potential problem, if a company acquires a building it can deduct that expense, but not if it rents a similar building. The result is that the rental market would suffer badly. Some companies would put up their own structures, but others might engage in temporary “repurchase” agreements so they are owning their space (“asset acquisition”) rather than renting it. That’s just one example of the big loopholes the new tax code could create.

Can you already see who stands to benefit from an increased pressure in major urban centres for commercial real estate ? “The Chinese” isn’t a bad answer, but “Trump and his backers” is a better bet still. El Presidente of the Former Bahamas Republic is a holder of no small number of buildings,^iv particularly in NYC where the market is already sizzling like Donny circa 1999 but could slow down with interest rate increases barring further intervention.

There is no single canonical account of how a border adjustment tax would work, so maybe that loophole won’t apply to your preferred version. (Here is a 2016 outline, but expect further changes and details; this KPMG document is useful on options.) But the general point is this: By creating such a sharp distinction between deductible and nondeductible business expenses, the opportunities for tax arbitrage and tax-code lobbying are huge. The suspicion is that most business expenditures could, one way or another, be converted into forms that allow for full and immediate expensing.

Tax arbitrage ? Sure, but lobbying of any kind ? Last I heard, that swamp was being drained too.^v You’re either in the inner sanctum of Trump’s clique or you’re nothing but minced meat. Hey that kinda rhymes! A sign of the times.

Again, you might identify a policy modification that would limit such tax code arbitrage, but I’ll predict that would open up another loophole in turn. Like our current system, the border adjustment tax would become a game of tax lawyers on each side, where the better paid advocates are working for the corporations rather than Uncle Sam.

There’s certainly no such thing as iron-clad legislation, but that, again, is no accident. The purpose of legislation isn’t, nor could it ever reasonably be, the soi-disant “intent” as pitched by politicians. The only intent is the intent to ABC : Always Be Closing. The intent is to make the coles notes version of a bill as spewed by MSM is suitably palatable that opposition is either mollified or outright neutered. The intent isn’t to account for every and all eventualities that might arise in conflict with the stated objectives but rather to guide the “unexpected” benefits towards politically favourable parties, which might include you or me or DJT but sure as hell isn’t Hillary “Looking Past The Election” Clinton and her pedophilic Foundation. That’s the important thing to note here : with any bill there will be winners and losers, and black swans will as ever be observer dependent (and primarily targeting the losers).

You might think it’s easy to fix these problems by allowing companies to deduct the expenses discussed above. But then the tax would no longer bring in enough revenue to support the rate cuts.

Bwahahaha what “support the rate cuts” ??! The deficit is going nowhere but up despite Herr Trump’s early pretenses to the contrary. Defense and infrastructure spending, particularly the former, are set to soar, no doubt to an extent that makes Bahamas’ eight-year-doubling^vi seem paltry and timid by comparison. Trump’s in it to win it, which means siphoning off as much of the WWII fumes as he can, just like everyone else in that mudpit. How not ?

So often, tax reforms that appear to be simplifying lead to further complications and manipulations, and that seems to be the case here.

Quite so, Tyler, quite so. And that’s precisely it. The only question worth asking with regards to new regulation is, as ever, Cicero’s : cui bono ?

In case you hadn’t figured it out yet, your job is life is to make yourself the answer to that eternal question.

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1. Ie. frequently trollish, no doubt including this piece. OMG PETE TOOK THE TROLLBAIT!!eleven!1 Ayup. Hook, line, and sinker, baby. But you still have to eat your veggies. No excuses.  ↩
2. Tyler can also be found blogging prolifically and profusely alongside Alex Tabarrok at Marginal Revolution. Although you may rightly wonder why I think so positively of him after reading this. ↩
3. Whether it’s the CIA or his pre-White House reality tv show. ↩
4. Page saved using my little two-step trick because it’s blocked from archiving using the usual one-step method. ↩
5. While a couple-a gents who were previously employed as lobbyists are now in Trump’s cabinet, Agent Orange signed an executive order on January 28th, 2017 – just one week into office – banning lobbying by former government officials for five years after they leave their publicly paid posts. ↩
6. An increase of 9% compounded annually for all you rule-of-72ers at home. ↩