The Health Care Debacle has a Sequel

What will “Tax Reform” Do to Gas Prices?
What will “Tax Reform” Do to Gas Prices?

The dramatic implosion of the American Health Care Act has sparked a firestorm of speculation about what will happen to other Trump proposals. Will he win approval to build a wall, launch a nationwide infrastructure initiative or fund large scale increases in various elements of the Armed Services? Certainly the biggest question for financial markets is whether Congress will enact new tax legislation deeply cutting corporate rates as well as reducing personal tax rates for high income individuals.

Republicans at both ends of Pennsylvania Avenue seem to be forming a circular firing squad to punish those responsible for the legislative debacle.

Breitbart News quoted “a source close to President Trump” attacking certain White House staff as well as Speaker Paul Ryan, “This is another example of the staff not serving the president well and the weakness of the Paul Ryan speakership…This calls into question once again the speaker’s commitment to supporting Donald Trump and his agenda.”

The President himself directed the blame at the far right wing of the Republican Party tweeting, “Freedom Caucus, with the help of Club for Growth and Heritage, have saved Planned Parenthood & Ocare!”

Rep. Bradley Byrne,(AL-R) told reporters that the President and Speaker Ryan had spent too much time negotiating with the Freedom Caucus, "Those members don't change so at some point you've got to say there's nothing in the world that's going to change their minds…The vast majority of us in the Republican conference have been left out of these discussions and we have no idea what's going on, and I think that is a problem for our leadership and I think it's growing problem for the chances of this bill."

A “key GOP congressional aide” told CNN that one reason for the failure was the President’s negotiating ability, "He didn't care or particularly know about health care…If you are going to be a great negotiator, you have to know about the subject matter." The aide also commented that overhauling health care is far different from building a golf course.

There is probably a fair amount of truth to all of these allegations but those wishing insight into what may lie ahead for the remainder of the Trump agenda would be well advised to look beyond how effectively Republicans exercised their arm twisting skills and at the agenda items themselves as well as the underlying strategy selecting of crafting those items.

That seems to be the take of Trump’s son in law, Jared Kushner who the the New York Times reported argued in White House strategy sessions for several weeks that support for the health care bill was a “mistake.” Former Speaker Newt Gingrich reached the same conclusion, tweeting, “Why would you schedule a vote on a bill that is at 17% approval?”

In retrospect most people can appreciate that the protracted efforts to persuade lawmakers to support such a deeply flawed and unpopular piece of legislation was a mistake. But what does the White House do about a long string of campaign promises that look very different when they are scored by the Congressional Budget Office and subjected to public scrutiny than they did when they were offered on the campaign trail? That is a question that some Trump rivals began asking a year and a half ago during the debates leading to the Republican primaries.

It is always tempting for a candidate for public office to say what people want to hear and promise whatever seems most popular. The reason that most candidates for high office approach such promises more gingerly than did candidate Trump is they have come to realize the magnitude of political backlash that can result from false or failed promises.

Just as taking away health coverage for millions of Americans is a necessary consequence of eliminating the mandate to purchase coverage, cutting the Appalachian Regional Commission, Meals on Wheels or the National Endowment for the Arts is the consequence of big spending increases in other areas such as constructing a wall or greatly increasing the ships in the Navy.

That is particularly true when the pain happens to be a tax directed disproportionately at the voters who elected you. And that is precisely what the next item on the Trump agenda does.

The so-called tax reform bill that has been crafted by the House Ways and Means Committee at the hand of Ryan’s successor Kevin Brady (R-TX) calls for a reduction in tax rates on high income individuals adding $1.95 trillion to the public debt over 10 years and a reduction in the tax rate for corporations from 35 percent to 20 percent adding another $1.8 trillion. Absent rosy growth assumptions that bill with all of its puts and takes will add more than $2.4 trillion.

That is a very tough sell to begin with—especially since considering that everyone will share a portion of the increased debt but only a tiny portion of the population will benefit from the bulk of the tax cuts. But without one key provision the growth of the debt under this package would be nearly 50 percent greater. That provision, the Border Adjustment Tax (BAT), raises nearly $1.1 trillion in additional revenue over the period. The BAT seems to be very beneficial to some businesses and highly punitive to others setting off a major battle among corporate titans.

The Economist magazine has a good description:

Firms currently pay corporate taxes on their profits. Border-adjustment would change how those profits are calculated. Accountants could no longer deduct imports—say, goods brought in from China—as costs. And their exports would no longer count as revenues. For tax purposes, “profits” would be domestic sales minus domestic costs. Effectively, imports would be taxed, and exports would be subsidized.

Keven Brady R-TX) recently told CNBC:

For the first time, we'll be on a level playing field with China and our competitors. For the first time, we'll have eliminated any tax incentives to move jobs or research or headquarters overseas.

But what few have yet to realize (including many in the House Republican Conference and perhaps the Trump White House as well) is that the BAT is really a backdoor gas tax—in fact, a huge back door gas tax.

Noted global oil market expert, Philip Verleger, revealed that fact in a March 6 report entitled, “The Border Adjustment Tax, Really a Tax on Imported Oil”. Verleger who served on President Ford’s Council of Economic Advisers and in President Carter’s Treasury Department finds that nearly 60 percent of the taxes levied under this proposal will come from imported oil and oil products.

His analysis indicates that if 2018 global oil prices rise to $60 as currently projected by the U.S. Department of Energy and corporate taxes fall to 20 percent as provided for in the House Republican Tax package, the impact of the BAT would be to raise the cost of imported oil by 20 percent or $12 a barrel. According to Verleger, U.S. refiners will continue to require large scale foreign oil purchases for a variety of reasons including the fact that refiners need a significant share of their crude oil stock to come from heavier foreign grades for many of their final products.

Additionally, he predicts that the increase cost in foreign oil will permit a corresponding increase in the cost of domestic crude. Producers of domestic petroleum will enjoy a huge windfall at the expense of consumers. Verleger predicts that consumers should expect to pay markedly more for gasoline, diesel, jet fuel, heating oil and other petroleum products regardless of where the petroleum originated.

In an earlier report (Border Adjustment Import Taxation, August 15, 2016) Verleger estimated that we the impact on gasoline prices could be as much as $0.40 a gallon to gasoline prices in some parts of the country. That would be on top of the current tax of $0.184, raising the total federal revenues collected at the pump on each gallon to $0.584—a 217 percent increase from current levels.

There is one additional irony to the unpleasant policy outcomes of the House attempt at tax reform. Remarkably similar to the American Health Care Act the group that is in the cross hairs to pay the biggest price under the proposal are those who voted in the largest numbers for this President and the party in Congress expected to provide the votes to enact it. Struggling families pushed to rural areas and the exurbs of major cities by high rents and housing prices, families forced to drive greater distances each week than the rest of America will be pay a disproportionate share of the tax. Despite the fact that they are pressed to the edge financially they are slated to become the biggest contributors to a “tax reform” bill that is heavily targeted to helping those far more comfortable.

At this point the long promised effort for “tax reform” is likely to end up being the political twin of the American Health Care Act.

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