by Victor Mozambigue
Border Adjustment Tax is a big agenda on President Trump’s to-accomplish list. While some view it as ‘protectionism’, economists are happy with the possibilities that this tax could bring. CEOs of major retail organizations including Target and GAP, met President Trump and a key lawmaker recently to talk about their concerns about the border tax. However, it will not change the plans to launch a major tax reform in 2017. Kevin Brady, Texas-Republican and the chief architect of the tax, said that the tax reforms would be good for business and middle-class families. He also said that he is ‘confident’ that the border tax will be a part of the tax reforms package in Trump administration. Let’s understand the Border Adjustment Tax and the possible consequences if it is brought to action.
— Markham Hislop (@politicalham) February 5, 2017
What is Border Adjustment Tax?
In simple terms, a Border Adjustment Tax is merely a tax on imports while imports are subsidized. Economists are in favor of the tax it may help in strengthening the relative position of dollar against other currencies. In the long term, such an adjustment eventually evens out. The problem lies in the short-term risks of such a decision. A Border Adjustment Tax is will help in raising the revenues of the government and give a necessary to economic growth. It is expected to reduce the tax burden from households as well as corporations.
Why is there a controversy?
As we mentioned above, short-term upheavals are certain if Border Adjustment Tax is levied. The first major change for the firms would be the calculation of their corporate taxes. Exports made by the firms cannot be added as ‘revenues’ and imports will now not be reduced as ‘costs’. After the tax is levied, profits earned by any company would be their domestic sales adjusted for domestic costs. Firms will change their accounting methods to comply to the new tax.
Exporters are delighted with the new tax while importers are actively protesting it. The retail industry, for example, keeps stocks of imported goods. Now these imports will be taxed. Walmart, Target, GAP, Nike, and Target are companies that rely heavily on imported goods. The head honchos of the retail industry suggest that it would hurt their bottom lines. Exporters, like the aerospace industry, support the tax as they will be overall winners in this scenario. Pfizer, Caterpillar, General Electric, Dow Chemical, and Boeing are some companies that are supporting the plan because they are net exporters.
The controversy also stems from the fact that many US companies have overseas operations. They do so to pay lesser taxes and reduce overall costs of their products and services. With the new tax reforms in place, the companies will not receive any further incentives to move their operations out of the US. The tech industry will be affected severely in this case. Per Luca Maestri, Apple CFO, “Essentially the supply chain for the tech industry is not in the US today…It is very hard for us to imagine that a border tax would be good for the US economy.”
What do the economists suggest?
The economists present a bigger and more neutral point of view to the Border Adjustment Tax debate. The tax is not expected to affect trade. If implemented properly, taxes on imports and subsidies on export will offset each other’s impact. If wages and prices rise in America or dollar appreciates after the move, the offset will be sooner and more effective. The dollar is more likely to appreciate after the decision which will cancel out any disturbances arising out of the tax plan.