2017-02-07wsj.com

Republicans see a once-in-a-generation opportunity to overhaul the U.S. tax code. Just weeks into Donald Trump's presidency, they are getting a taste of why such attempts are always confounding--every action creates an equal and opposite reaction.

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A border-adjusted tax would impose a levy on imports, including components used in manufacturing, and exempt exports altogether. Opposing it are retailers, car dealers, toy manufacturers, Koch Industries Inc., oil refiners and others that say it would drive up import costs and force them to raise prices.

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Last week, GE, Dow Chemical Co. and Pfizer Inc. joined a coalition backing border adjustment that says the proposal would help end disadvantages for American-made products. Meanwhile, Wal-Mart Stores Inc., Target Corp., Nike Inc. and Toyota Motor Corp. joined an opposing coalition, warning that border adjustment will cause consumer price increases.

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Mr. Trump initially labeled the idea "too complicated" and said he didn't like the term. "Any time I hear `border adjustment,' I don't love it," Mr. Trump said in a Jan. 13 interview with The Wall Street Journal. He has called for a "big border tax" that narrowly targets companies that outsource production for goods sold in the U.S.

The White House appeared to embrace border adjustment as a way to draw money from Mexico, only to back away and say it is one option. It didn't respond to requests for comment for this article.

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The Republicans' task is harder than in 1986, when they worked with Democrats to scrub the tax code. This time, many Democrats are poised to dismiss the GOP plans as unacceptable tax cuts for rich individuals tied to untested changes for businesses. A memo from Senate Democratic tax staffers in December called the House plan "highly regressive and fiscally irresponsible."

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The House plan would lower the corporate tax rate to 20% from 35%. Border adjustment would generate about $1 trillion in tax revenue over a decade to help pay for that, according to independent estimates. It would also transform the business-tax system so companies selling goods and services in the U.S. largely couldn't escape taxes by putting their addresses, intellectual property or jobs outside America in low-tax countries, a problem the Obama administration tried to tamp down.

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The argument for border adjustment hinges in part on how currency markets will respond. Economists expect border adjustment to increase the dollar's value as much as 25%, citing similar currency moves when other nations introduced border-adjusted value-added taxes.

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Tax experts are puzzling over how to describe who wins and loses from border adjustment. One thing is clear, economists say: If the dollar goes up 25%, U.S. holders of foreign assets--including pension funds and endowments--would suffer a one-time loss in wealth of more than $2 trillion.



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