It’s Kochs vs. House GOP on business tax reform

In this uncertain world, there are still a few unalterable facts of political life. For example, Republicans always do what Charles and David Koch, the billionaire bankrollers of right-wing politics nationwide, tell them.

Then again, maybe not. As it happens, the Koch brothers are dead set against the House Republicans’ business tax reform plan, yet GOP leaders are pushing it anyway.

At issue is the proposed destination-based cash flow tax (DBCFT), which despite its eye-glazing name is anything but a tepid idea. To the contrary, it could affect long-standing business models across Corporate America.

Here’s the plan: Instead of today’s corporate tax, which charges rates up to 35 percent on worldwide income, adjusted for deductions and loopholes, the DBCFT would impose a flat 20 percent tax only on earnings from sales of output consumed within the United States (with an immediate write-off on capital investment and no deduction for net interest).

It gets complicated, but the upshot is that the cost of imported supplies would no longer be deductible from taxable income, while all revenue from exports would be.

This would be a huge incentive to import less and export more, a significant change for an economy deeply dependent on global supply chains, and which routinely runs an overall merchandise trade deficit.

Meanwhile, the plan would discourage companies from shifting earnings to subsidiaries in low-tax countries and encourage American and foreign companies to operate within the United States.

Authors of the plan like the increased taxation of imports – “border adjustment” in tax-wonk argot – not only because of these new incentives, but also because, without border adjustment, the huge cut in the top rate would blow up the deficit. Indeed, the plan would cost $1.2 trillion more over 10 years but for border adjustment, according to an analysis by the nonpartisan Tax Policy Center.

So what’s the Koch brothers’ beef? Their self-interest is a bit obscure: Koch Industries is privately held, and its financial data are not publicly disclosed. Still, the conglomerate is quite obviously a major player in chemicals and petroleum refining, sectors that import nearly half of their supplies and thus could take a short-term hit from the GOP tax plan, according to a JPMorgan Asset Management study.

Publicly, however, the Kochs maintain they would “greatly benefit,” as a recent statement from their top lobbyist put it. Their worry is that the plan “will distort the market, increase consumer prices and create an uneven playing field for companies and consumers,” with “devastating” long-term economic consequences. Koch Industries has funded a report by the Brattle Group, an economic consulting firm, arguing that border adjustment would drive up gasoline and diesel prices.

They have a point, in the sense that the GOP plan depends on a lot of variables – dollar appreciation chief among them – that might not pan out under real-world conditions.

As the JPMorgan study notes, the greenback would have to rise 25 percent to offset what would be a new 20 percent tax on imported inputs – propelling the U.S. currency to its highest level on record.

The international consequences of that are unforeseeable, but unlikely to be totally benign for everyone. Bear in mind that many other countries – China comes to mind – can and will manipulate exchange rates to protect their own short-term interests.

Trading partners could also challenge the GOP plan as a discriminatory subsidy at the World Trade Organization.

Neither President-elect Donald Trump nor tax-writers in the Republican Senate have embraced the House GOP plan yet; it may never come to fruition, in which case the surprising little debate between the Kochs and their presumed flunkies will have been academic.

Still, the tiff is interesting as a case study of internal GOP politics – and of the U.S. economy’s “path dependency.”

Theoretically free to reinvent our national business model, we are actually constrained by countless accumulated policy decisions of the past and all the accumulated investments and other commitments that were made in reliance on them.

Change is scary, even for the richest men in the world.

This story was originally published December 29, 2016 at 5:03 AM with the headline "It’s Kochs vs. House GOP on business tax reform."