GOP's Tax Reform Plan Brings Uncertainty to Oil, Gas
House Republicans have a plan – and President Donald Trump has made a promise – to reform corporate tax in the United States. Economists say it could be a game-changer for oil and gas.
Touted as tax reform worthy of the late President Ronald Reagan, the package of talking points, “A Better Way: Our Vision For A Confident America,” is making its way through the halls of Congress now that the new administration is installed.
Among the key elements of the proposal is a controversial border adjustment tax (BAT), which would cut the tariff on exports and levy a 20 percent fee on imports, and chop corporate taxes from 35 percent to 20 percent.
The U.S. corporate tax is currently the highest in the developed world, a function of decades’ worth of global trade policy.
“This tax burden is driving businesses out of our country,” said Speaker Paul Ryan, R-Wisconsin, when he unveiled the plan. “In 1960, 17 of the 20 largest global companies were headquartered in the United States. As of 2016, that number has dropped to just 6. Our plan lowers the corporate tax rate to a more globally competitive level.”
Ryan and others say any pass-through costs to the consumer would be balanced by an increase in the value of the U.S. dollar. Not only would the currency align, so would the price of WTI as it surges $10 per barrel past Brent, they argue.
The philosophy of taxing what comes into the country, but not what goes out, fits into the “America First” rhetoric that factored into Trump’s ascendancy. And for his part, the Trump Administration has floated the idea of selectively taxing imports – and in the case of Mexico, to force the country to pay for Trump’s border wall.
But that approach poses challenges, said Ed Hirs, managing director at Hillhouse Resources and an energy economics professor at the University of Houston.
“Take a look around you, your cell phone, the telephone you’re speaking on, the computer monitor, essentially the cost of those items for the importers is going to go up, which means of course it’ll be passed along to you, the consumer,” Hirs said. “They’ve got a naïve, simpleton assumption that the value of the dollar will increase enough to offset the losses to consumers. But that assumes that our trading partners and the Federal Reserve go along with this scheme.”
Indeed, Hirs and other economists suggest the move could easily lead to a trade war – and inflation.
“The simpleton plan that’s been proposed really has not thought through the downstream impacts,” Hirs said. “They’ve got their order of conditions of what will happen, but they really haven’t stopped to think that this is going to cause a very significant dislocation that just with the ordinary frictions in the economy will not be a trivial realignment.”
Still, the idea of reducing the corporate tax rate is one it seems everyone in the United States – on both sides – could get behind.
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