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Faculty Insights

WSB Faculty Weigh In on Big-League Changes to Tax, Trade, and Regulations

By Clare Becker

March 29, 2017

Issues around tax, trade, regulation, and corporate governance fluctuate with every changing of the guard in Washington. With a new administration in the White House, Wisconsin School of Business faculty are keeping pace with the developments.
Faculty experts from the Department of Accounting and Information Systems talked with Yuki Noguchi, NPR correspondent and visiting business writer in residence, about several of the most-watched trade and regulation changes proposed during the first few months of the Trump administration. Faculty members participating in the panel included PwC Professor and Department Chair Terry Warfield, Professor Tom Linsmeier, Assistant Professor Fabio Gaertner, and Assistant Professor Emily Griffith.

Terry Warfield
PwC Professor and Department Chair Terry Warfield. PHOTO: PAUL L. NEWBY II

Here are excerpts from three key topics discussed in the group’s roundtable conversation:
Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by the Obama administration in 2010. President Trump signed an executive order in February 2017 to try to reverse the legislation.
Warfield: Dodd-Frank was a broad-ranging bill that came out of the financial crisis. The crisis revealed a number of weaknesses in the system, including, obviously, what banks were allowed to do or should have been prohibited from doing. Dodd-Frank also had some provisions for funding standard-setters that increased their independence. That same funding is at risk if Dodd-Frank is rolled back in the form the administration is talking about.
Initially, Dodd-Frank was a regulation people railed against. Over time, however, I think people started having second thoughts. Let’s say banks repeat some of the things they were doing prior to the financial crisis: If there is a lack of oversight with respect to those activities, is that something we are going to be happy with?

Tom Linsmeier
Professor Tom Linsmeier discusses a question with NPR correspondent Yuki Noguchi. PHOTO: PAUL L. NEWBY II

Linsmeier: I think the primary outcome of the executive order will be to send the message to the enforcers of regulations not to interpret the agreements as tightly as they have in the past.
There are several Dodd-Frank regulations in place that have gone through all sorts of standard setting and administrative processes; it would be difficult for them to be rolled back at this point. The Securities and Exchange Commission is an independent regulator with an independent regulatory process, as are the Federal Reserve and other bank regulators. Given many of the major new regulations affecting banks have gone through rigorous independent due processes, it would be difficult to reverse them, in my opinion. That doesn’t mean that there aren’t other parts of Dodd-Frank that are potentially open to reversal.
Border Adjustment Tax
Under a border adjustment tax plan, businesses can take deductions on exports but are taxed on imported products.

Gaertner: President Trump’s January 3 tweet stated that General Motors should pay a border tax by selling a Mexican-made Chevy Cruze in the United States. We saw a similar tweet January 5 regarding Toyota. People started Googling this idea of the border tax to find out what it is and what it would mean. The closest thing we have to it right now is the GOP’s House plan [“A Better Way: Our Vision for a Confident America”].

Fabio Gaertner
Assistant Professor Fabio Gaertner. PHOTO: PAUL L. NEWBY II

Retailers hate the idea of a border adjustment tax because most of what they sell customers is imported. If retailers cannot receive tax deductions for the imports they sell, their tax bills would go up significantly. If you buy products from Walmart, there’s a good chance that what you’re buying is imported.
Warfield: With the border adjustment tax, there will be winners and losers. It’s very complex. The issue that President Trump ran on as a candidate was “buy in America, make in America.” There are a lot of companies that are making things in America but importing components, and this border tax will make it quite costly for them to continue to do business. The tax has the potential to drive jobs out of the United States.

The role of regulations: Repeal, re-evaluate, or remain in place?

President Trump has stated that he will repeal two regulations for every new one imposed. 
Griffith: Regarding Trump’s proposed two-for-one deal, I think the administration will just use a different counting system. Regardless of how many regulations they will repeal in exchange for new ones, they’ll change the math and broadcast it like they’ve achieved something.

Emily Griffith
Assistant Professor Emily Griffith. PHOTO: PAUL L. NEWBY II

Warfield: There’s a rush to judgement and a rush to sound bites. One of the reasons Trump says he wants to go after Dodd-Frank is because he’s hearing some of his friends aren’t getting loans, especially in small businesses. But if you unpack that, that’s a sound bite: Dodd-Frank doesn’t affect small banks. Small banks are not lending because the interest rates are too low to get a big enough return.
Linsmeier: One of the problems with regulation in corporate governance is that it often creates a focus on compliance as if there would be no oversight without that regulation in place. That’s simply not the case. Sometimes removing regulation gives people the opportunity to step up voluntarily and naturally fill in the gaps.