Beware of Tax Reform’s “Unintended Consequences”

There is little doubt that the U.S. needs comprehensive tax reform. The corporate income tax system is globally uncompetitive; the personal income tax system is so complicated that even the IRS can’t answer taxpayers’ questions.

The right reform implements a simple flat tax system with globally competitive rates. What should not be included is complex proposals, such as a proposed Border Adjustment Tax (BAT) that was under consideration in the U.S. House of Representatives.

The BAT taxes imports, but exempts exports. And, since the U.S. has a large trade deficit, the BAT raises significant amounts of revenue – $1 trillion over the next decade.

The problem is that the BAT taxes U.S. producers when they purchase supplies from abroad – a common practice in the modern global economy. Therefore, if implemented, the BAT will increase the costs of domestically produced goods and services and, consequently, harm U.S. consumers.

The impact on Californians’ insurance costs exemplifies how a BAT would harm the economy.

To keep costs low, insurers purchase reinsurance (insurance for insurers), often through international firms. Since this reinsurance would be subject to the BAT if it were implemented, the costs of insurance in California would increase significantly. According to a just-released study by R Street Institute and PRI, the BAT would increase Californians’ insurance costs by $1.91 billion annually!

In a recent announcement jump-starting the tax reform debate in Washington, congressional leaders announced that they would not pursue the BAT as it crafts tax reform legislation. This is a good thing. However, they would be wise to avoid similar proposals as they negotiate a deal. Complicated tax schemes, such as the BAT, raises the costs of many economic goods, and is the wrong approach to tax reform. The right way to reform our federal tax system is to avoid complex schemes, and instead implement a simple flat tax that is easy-to-understand and easy to comply with.

Wayne Winegarden, Ph.D. is a Senior Fellow in Business and Economics at the Pacific Research Institute and Managing Editor for EconoSTATS.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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