Pass Tax Reform, Then an Import Tariff Only if Needed
With respect to tax reform, President Donald Trump has proposed:
Lowering income tax rates, especially for corporations, and
Imposing tariffs on U.S. imports to encourage U.S. companies to “buy American” and to discourage them from off-shoring American jobs.
We think that the first step, tax reform, properly done will not only boost economic growth but dramatically reduce economic incentives to offshore production. So pass tax reform now and only an import tariff if needed.
If the U.S. corporate income tax rate were reduced from its current level of 35 percent to 15 percent, as Trump has proposed, or even 20 percent, as the House Republican leadership has proposed, that step would boost U.S. economic growth and increase U.S. hiring, because a low corporate tax rate would make the U.S. a much more attractive place to be located.
Two economists who helped draft the Trump tax plan, Larry Kudlow and Steve Moore, agree. In fact, they urge Congress to pass the corporate tax cut immediately, and come back to the individual tax cut later.
They claim that the corporate tax cut and immediate expensing would largely pay for themselves due to increased business investment and economic growth, and they point out that the Tax Foundation concurs.
We would add that mandates requiring companies to offer very expensive health insurance, mandated paid leave, costly bureaucratic restrictions (e.g., CAFÉ standards), and even state and local laws raising the minimum wage make U.S. products and services more expensive and therefore less competitive.
Trump has promised to roll back some of those mandates and regulations and has already taken steps to do so.
Of course, some multinational corporations would still want to operate offshore factories to sell their products in other countries where they have significant markets, just as Toyota and Honda build cars in the U.S. for American consumers.
Congress and the White House should invest their time and political capital getting tax reform done right—and quickly. Then give it a few years to see what happens. If the administration is still convinced that offshoring is hurting the U.S. economy, Congress could then consider some type of tariff.