Trump’s ‘Retribution’ Tax Stirs Questions, GOP Resistance

(Bloomberg) -- Donald Trump’s threats to use taxes as “retribution” against U.S. companies that move jobs overseas are legally dubious, tax specialists say -- and they’re prompting resistance from some Republican leaders who fear a coming era of economic protectionism or international trade wars.

“There’s other ways to achieve what the president-elect is talking about,” House Majority Leader Kevin McCarthy told reporters Monday, arguing that changing the tax code is the way to entice companies to create jobs and keep them in the U.S.

“I don’t want to get into some type of trade war,” McCarthy said. Implementing large tariffs like those Trump proposed had little apparent support in the Senate either, where most Republicans have long backed deals lowering trade barriers, not raising them.

In a series of tweets Sunday, Trump warned that “any business that leaves our country for another country, fires its employees, builds a new factory or plant in the other country, and then thinks it will sell its product back into the U.S., without retribution or consequence, is WRONG!”

Trump’s approach is in keeping with his style of firing off tweets that stake out bold positions that may require eventual compromise. Nonetheless, the threat in his Sunday tweets is making some Republicans nervous because it contradicts longstanding free-market and pro-trade orthodoxy espoused by many party leaders, including Vice President-elect Mike Pence and Senate Majority Leader Mitch McConnell.

Even one of Trump’s closest allies in the Senate expressed wariness Monday.

“I’m not much of a tariff-oriented individual, but I look forward to seeing what is proposed,” said Senate Foreign Relations Chairman Bob Corker, who is in the running to be Trump’s secretary of state. “Let’s look at the proposals as they come in and what it actually applies to.”

Other Republicans, including Senator Pat Roberts of Kansas, expressed concern that foreign governments would retaliate with their own tariffs. “We don’t need a trade war,” he said.

Trade “is essential, especially right now, we’re going through a very tough patch in regards to the prices of all of our farm products,” said Roberts, chairman of the Senate Agriculture Committee. “From beef to all of our grain products, everybody is in the same boat. We have to export 25 percent of what we produce.”

Trump’s extraordinary threat is an attempt to make good on his campaign promise to stop U.S. jobs from moving overseas, which was central to his appeal among white voters without college degrees, who made up one-third of the 2016 electorate, according to exit polls. Those voters helped him win Democratic-leaning Midwest states like Pennsylvania, Michigan and Wisconsin, home to America’s once-vibrant manufacturing sector.

On Sunday, Trump repeated claims from his campaign that he’d impose a tariff of “of 35% for these companies wanting to sell their product, cars, A.C. units etc., back across the border.” He added: “Please be forewarned prior to making a very expensive mistake!” A Trump transition-team spokesman didn’t respond to a message seeking comment on the pushback from Republicans.

“Tax cuts and deregulation will make the American economy great again, but tariffs and trade wars will make it tank again,” David McIntosh, who leads the conservative interest group Club for Growth, said in a statement. He called 35 percent tariffs “devastating to consumers and businesses” and said McCarthy “is right to caution against protectionism and to urge a robust debate on free markets and trade.”

Republicans’ Plan

House Republicans have their own plans for a far-reaching overhaul of the U.S. tax system that would apply corporate taxes to all imports while eliminating them from exports. That so-called border adjustability would apply to all imported goods and services -- not just those from certain countries or from certain companies.

Asked if Trump’s goal aligned with Republican views, House Speaker Paul Ryan said Tuesday it’s "consistent with our goal to make American business and products more competitive in the global economy," but insisted twice that overhauling the tax code is the "best way to achieve that goal."

Proponents argue that such changes -- along with plans to cut the corporate tax rate generally from 35 percent to 20 percent or less -- would make U.S. tax policy more competitive globally and help eliminate current incentives for U.S. companies to shift their production and profit offshore. But critics argue that such changes could put the U.S. in violation of World Trade Organization rules that limit such adjustments to “indirect” taxes, such as value added taxes.

James Pethokoukis, a scholar with the conservative American Enterprise Institute, said Trump’s position “makes no economic sense from a pure pro-growth perspective.” He added: “Of course, ‘expanding the pie’ might not be at the heart of Trumponomics. This is economic nationalism. ‘Sovereignty is the new capitalism,’ as they say.”

Late last month, Trump and Pence, who’s still the governor of Indiana, intervened to prompt Carrier Corp. to keep 800 furnace maker jobs in Indianapolis instead of sending them to Mexico, as planned. The company still plans to send other Hoosier State jobs -- including coil makers and line workers -- to Mexico, meaning it could remain in Trump’s crosshairs for tariffs.

‘Cajole and Nudge’

His Twitter postings on Sunday “suggest this is just the beginning of an extensive and involved effort by Trump to cajole and nudge and even intimidate firms thinking about offshoring,” Pethokoukis said. “Trade is the issue Trump has been banging on about for 40 years.”

Trump’s goals are generally more in line with labor unions and Democrats, who have previously tried to discourage companies from offshoring jobs via tax-code changes and have run into Republican opposition. A senior Senate Democratic aide said it’s not clear that Trump’s approach is correct, but said the party is interested in working with him to find solutions. Other Democrats are more skeptical.

“This is not a fight he can win,” said Jim Manley, a lobbyist and former adviser to Senate Minority Leader Harry Reid. “Sure, he can score some victories with individual companies, but market forces are far stronger than any one person, even if that person is the president of the United States.”

Legally, Trump does have some unilateral powers to tax particular goods that cross the border, but not entire companies’ products, said Gavin Ekins, a research economist at the right-leaning Tax Foundation. “In reality, a tariff doesn’t quite work that way,” he said. “But you can tax a class of goods. It’s possible to say ‘I’m going to put tariffs on heavy trucks within this time range.’”

Ekins said Trump will likely face legal challenges and may need buy-in from Congress and the World Trade Organization to make his plans stick. “He can technically do this but there’s going to be push-back in many ways if he does,” he said. “He’s extremely constrained in what he actually can do in the very end.”

Chad Bown, a senior fellow at the pro-trade Peterson Institute For International Economics, said Trump has broad authority to apply import restrictions under national-security exceptions, but he argued that going after entire companies’ products would be “unprecedented” and could “backfire along a number of different dimensions.” Bown said that uncertainty about the sustainability of Trump’s plan could discourage U.S. firms from hiring, and he echoed the view that such moves could spark trade wars.

He cited one example: “In 2009, the Obama administration imposed restrictions on Chinese tires. In response, they hit restrictions on U.S. poultry products, in particular chicken feet, a Chinese delicacy that we exported a lot of.”

Steel Tariffs

Trump wouldn’t be the first president to unilaterally pursue protective tariffs.

In March 2002, for example, George W. Bush slapped tariffs of as much as 30 percent on steel imports to protect the ailing domestic industry, after his administration concluded that trading partners were engaging in predatory practices known as “dumping.” The move faced international push-back, and 21 months later Bush abandoned the tariffs under threat of a trade war with Europe.

Trump’s threats have the potential to backfire, particularly since Congress may not go along with them.

“This would be a 35% tax on all Americans—a tax that especially hurts low-income families. Maybe the slogan should be #MakeAmericaVenezuela,” Representative Justin Amash, a Michigan Republican, tweeted in response to Trump.

--With assistance from Lynnley Browning Billy House and Steven T. Dennis To contact the reporter on this story: Sahil Kapur in Washington at skapur39@bloomberg.net. To contact the editor responsible for this story: John Voskuhl at jvoskuhl@bloomberg.net.