What Does Donald Trump’s ‘Big Border Tax’ Threat Really Mean?

January 10, 2017, 12:08 PM UTC
Photograph by Kena Betancur—AFP/Getty Images

In a series of tweets, President-elect Donald Trump has recently threatened several companies with “big border tax” if they expand manufacturing facilities abroad for products to be sold into the United States, but he has provided few details.

Whether he is talking about a tax or a tariff is unclear, experts said, reacting to Trump’s terse warnings to United Technologies (UTX), General Motors (GM), Ford Motor (F) and Japan’s Toyota Motor (TM).

Trump has said U.S. companies that shut manufacturing plants and lay off workers only to open new facilities abroad would pay a 35% tax or tariff on products they ship back to the U.S. market.

Asked about the issue on a conference call with reporters on Monday, Trump transition team spokesman Sean Spicer said the president-elect had been focused on U.S.-based employers that “move overseas for the express purpose of selling back to the U.S. market with non-U.S. workers. … That continues to stand.”

Further details were not immediately available.

Q: Could Trump impose his own import tax on U.S. companies?

A. No. Congress writes the tax laws and the revenue-raising power of the federal government is held primarily by the House of Representatives under the Constitution. Tax laws are enforced by the Treasury Department and the Internal Revenue Service.

Q: Could Trump impose a tariff on his own?

A. Perhaps, but he would likely face a legal challenge. Like taxes, tariffs are also revenue-raising measures.

New York University School of Law tax professor Daniel Shaviro said the president’s power to impose tariffs on his own was “highly contested. … Targeting one particular company would certainly add to the legal, as well as the policy concerns.”

Shaviro said selective tariffs on individual companies, including foreign-based ones, would likely draw a challenge through the World Trade Organization and trigger retaliation.

Brooklyn Law School professor Rebecca Kysar wrote in an op-ed last week in the New York Times that Trump was floating the idea of a 5-10% imports tariff imposed by executive action. She said that would be unconstitutional, citing the origination clause that vests revenue-raising power in Congress.

Q: Is Trump signaling support for a border tax in Congress?

A. Some experts said Trump’s tweets might mean he supports an unprecedented export-boosting approach to corporate taxation that is being proposed by Republicans in the House of Representatives, including House Speaker Paul Ryan.

Known as border adjustability, the approach is intended to help U.S. manufacturers by favoring exports over imports. As laid out in Ryan’s “Better Way” agenda, companies would pay no tax on revenues from exports and would be unable to deduct the cost of imports from their taxable income.

Advocates said if that approach became law, it would attract investment to the United States, provide incentives to manufacturers to maintain or expand their U.S. facilities, and dissuade companies from leaving the country. But some tax experts are skeptical it will be approved by Congress.

Q: Are Trump’s tweets in line with the border adjustability plan?

A. Not exactly. His comments have stirred anxiety in business circles about the possibility of a special penalty tax on U.S. companies that send jobs overseas. By contrast, the House Republican proposal would treat all imported products equally, whether produced by U.S. or foreign-owned companies.

Q: Where does Trump get the 35% figure he cites for the tax or tariff he has warned U.S. companies that shut manufacturing plants only to open new facilities abroad will pay on products they ship back to the U.S. market?

A. That is not clear either. Experts said the president-elect may be referring in his tweets to the current 35% U.S. corporate income tax rate. That would also differ from the House Republican plan, which would impose a 20% tax on imports.

While some experts said Trump could follow the House Republican approach and subject all imports to a lower tax rate, others said Trump had indicated an interest in using different tax rates to penalize or reward certain business behaviors.

For example, a tax reform plan released by Trump in September called for cutting the corporate tax rate to 15% but added a potentially important caveat: “This rate is available to all businesses, both small and large, that want to retain the profits within the business.”

Q: When might we know more about Trump’s plans?

A. Trump himself could offer more details at any time, including at a news conference scheduled for Wednesday. Some expect House Republicans to unveil initial tax reform legislation by the end of February. That timetable could slip as Republicans and their staff discuss sweeping reforms with the Trump transition team, analysts said.

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