In an interview yesterday with Maria Bartiromo of Fox Business, President Trump suggested he’d propose a “reciprocal tax” on foreign imports. It is not clear what he meant, but the president appeared to be endorsing some sort of import tax that would vary country-by-country (and perhaps product-by-product). In other words: A tariff by another name.
Trump’s remarks show how far he has strayed from his original views on taxing cross-border transactions, opinions he has changed many times since he began running for president in 2015.
In his 2015 tax plan, Trump embraced a revised version of the US’s current worldwide tax system. Under today’s model, income generated anywhere in the world by a US-resident firm and its foreign subsidiaries is subject to the 35 percent US corporate tax (with a credit for foreign taxes paid). However, companies may defer those taxes until the income is repatriated to the US parent.
Trump would have taxed all future profits of foreign subsidiaries of US companies at a rate of 15 percent and, by ending the practice of deferral, taxed companies on profits in the year they were earned. He also would have imposed a one-time transition tax of up to 10 percent on existing unrepatriated foreign earnings.
In 2016, Trump revised his proposal—twice. In August and again in September, he proposed somewhat different tax plans. He retained the transition tax but never described what system that levy would bridge to.
His September plan adopted many elements of the tax blueprint proposed by the House GOP leadership the previous June. But he was silent on the border adjustable tax (BAT), which would tax imports but exempt exports. The then-obscure provision of the House GOP plan would become its most controversial element.
To further complicate matters, throughout the campaign Trump threatened heavy tariffs on specific countries—most often China and Mexico—in retaliation for what he saw as their unfair trade practices. How would the tariffs fit with the BAT? Again, Trump and his aides never said.
Since Trump’s inauguration, the White House has been sending multiple conflicting signals about the BAT. Trump himself has sometimes opposed it, calling it too complicated. But he’s also suggested that he favors some form of border tax. Has he meant the BAT, a tariff, or something else?
Other senior administration officials have pitched a value-added tax--only to see that idea shot down within hours. Like the BAT, the VAT would tax imports, which are consumed domestically, but exclude exports, which are not.
Now Trump sounds like he is headed back towards a tariff, though he could also be suggesting some version of the BAT, only with a new name. You can decide for yourself. Here is an edited (for space) summary of Trump’s interview with Bartiromo:
BARTIROMO: How are you on the border adjustment tax? Have you decided?
TRUMP: I don't like the word adjustment, because our country gets taken advantage of, to use a nice term, by every other country in the world. So when I hear border adjustment, adjustment means we lose. We lose. So I don't like the term border adjustment.
BARTIROMO: Any tax at the border?
TRUMP: Weak. Let's call it an import tax. Let's call it a reciprocal tax. You know, we have...
BARTIROMO: So it's in there. You want a...
TRUMP: We have countries, Maria, that charge us — our companies — 100 percent tax if they sell a motorcycle or if they sell — they make it in America, they make it in the United States, they sell it various countries. They sell very low, because the tax is 100 percent in some countries.
The tax is 50 percent, 30 percent, 40 percent. But if they make a motorcycle and they sell it back into the United States, they have no tax.
And do you think that's fair?
And do you think that's smart?
So I love the idea of reciprocal. You can call it a reciprocal or a matching tax or a mirror tax. There are numerous terms.
BARTIROMO: Yes.
TRUMP: But the reciprocal tax is very important….When you say reciprocal, nobody fights you. When you say I'm going to charge a 10 percent or a 20 percent border tax, everyone goes crazy, because they like free trade. Well, they don't say that the other countries are charging you much more than that.
But when you say a reciprocal tax — and I'm not saying that's what I'm doing, but there has to be a certain reciprocal nature to it. But when you say reciprocal tax, nobody can get angry. Even the other countries, if like — if they're charging you a 50 percent tax, you say, OK, whatever you charge, we're charging.
What exactly is Trump talking about? It is simply not possible to know.
But one thing seems clear: The President’s views on taxing cross-border transactions have been, shall we say, flexible.
