Forget Obamacare — here’s the real Republican civil war

Border tax bottom line

While most of the media coverage out of Washington is focused on the repeal and replacement of Obamacare, there's a civil war raging between Republicans over the next big piece of legislation: corporate tax reform.

A provision of the House GOP plan, called a border adjustment tax, is already leading to public battles such as occurred Thursday on CNBC between two prominent Republicans, Rep. Devin Nunes of California and informal Trump advisor Larry Kudlow.

A "border adjustment tax" is fundamentally different from the "border tax" being tweeted by President-elect Donald Trump. One makes the tax code similar to the one used by the United States' major trading partners and is designed to boost exports, while Trump appears to support a punitive import tariff.

U.S. Speaker of the House Paul Ryan
Jim Bourg | Reuters

There is near total agreement among Republicans that the corporate tax rate should be lowered dramatically from its current 35 percent, and that the U.S. should move away from taxing corporate earnings generated around the world to taxing only what happens within the United States — known as a territorial system.

But then there's the border adjustment provision, or what's known as a "destination-based" tax. (You can read our explainer here, or an even more detailed explainer is here.)

Prominent Republicans are deeply divided over the merits of the border adjustment tax.

In addition to Nunes, those favoring border adjustments include House Speaker Paul Ryan and House Ways and Mays Committee Chairman Kevin Brady of Texas, not to mention well-known conservative economists like Douglas Holtz-Eakin, Alan Auerbach, and Larry Lindsey. The House blueprint, "A Better Way" includes a detailed explanation of the provision.

Completely against the border adjustment provision: the aforementioned CNBC contributor Kudlow, the Koch Brothers and Dan Mitchell of the libertarian Cato Institute, who says he actually agrees with liberal economist Paul Krugman for once in his life.

A United States Customs agent waits for a northbound truck crossing the border to enter the United States from Nogales, Sonora, Mexico.
Getty Images

To simplify, the provision would tax imports and exempt exports from taxes. Before you assume that is very bad for importers and a subsidy to exporters, read this.

If the border adjustment tax becomes law, it will be the most radical change to U.S. corporate taxes in nearly 100 years. Why bother to do something like this when it's so controversial and — according to some — confusing? First of all, it raises a lot of money: more than $1 trillion over 10 years.

In order to get closer to more "revenue neutral" tax cuts, it will be necessary to raise money somewhere else.

Mitchell says the U.S. should just cut spending by the amount of lost revenue.

Holtz-Eakin, in contrast, says border adjustment is critical, not because it raises so much money, but because "it maintains the integrity of the tax base." Without it, there will still be incentives for companies to move profits and capital overseas.

Then there's Kudlow, who worries that the complicated nature of the proposal threatens to derail tax reform completely.

The wildcard in all this? It's still not clear whether the president-elect and his team support a border adjustment tax.

Big battle over border adjustment tax