The U.S. Republican Party is gearing up to work with President-elect Donald Trump on overhauling the corporate tax system, with an eye toward encouraging businesses to produce and invest at home.
The party’s tax proposal, drafted by House Speaker Paul Ryan during the presidential campaign, appears in sync with Trump’s “America First” slogan, calling for eliminating taxes on U.S. exports while imposing a heavier bill on imported goods.
Whether the proposal will become law is far from certain since it could run afoul of the World Trade Organization’s rules against export subsidies.
Trump, who will be sworn in as president on Jan. 20, has promised to lower the federal corporate tax rate from 35% to 15%, which would require legislation from Congress. The party’s proposal would cut the rate to 20%. The two sides are expected to start discussion soon.
The Republican plan strongly favors exports over imports. All exports would be tax-free, meaning an American company that makes all of its profits through exports would pay no tax. This could lower the price of U.S. goods abroad and boost their competitiveness.
Imports would face higher taxes. Currently, corporations can deduct the cost of goods purchased from abroad from their taxable income. They would no longer be able to do so under the Republican plan, meaning a company making zero profit on imports it sells would still be paying taxes.
The Republican Party hopes that by boosting exports, it will be able to protect domestic jobs and industries and encourage investment and manufacturing at home. Trump, for his part, has threatened a steep border tax on automakers that move production abroad. It is unclear how this would be carried out, but his idea is similar to the Republican proposal in that both are aimed at bringing companies back to the U.S.
Corporations are currently taxed based on where they do business. Republicans instead are drawing on the destination principle, under which taxes are imposed where goods and services are ultimately consumed.
This destination principle, widely adopted in the world, is usually applied to value-added taxes. In Japan, imports as a general rule are subjected to an 8% consumption tax — Japan’s version of value-added tax. Exporters, meanwhile, are reimbursed for consumption taxes on parts and materials used in products shipped abroad to prevent double taxation.
The U.S. does not have a national value-added tax. Many American businesses are displeased that they are not getting reimbursed on exports, even when the goods are taxed again at their destination.