What’s All This Border Tax Buzz?
President Trump’s first congressional address in late February sparked discussion between everyone from economists to retailers to the general public after his commentary regarding tax reform.
“My economic team is developing historic tax reform that will reduce the tax rate on our companies so they can compete and thrive anywhere and with anyone,” the president stated. “Currently, when we ship products out of America, many other countries make us pay very high tariffs and taxes – but when foreign companies ship their products into America, we charge them almost nothing.”
Many viewers perceived these comments to be in support of the House Republicans’ already proposed corporate tax reform, A Better Way. With all the buzz surrounding what’s being referred to as the border adjustment tax, it can be hard to navigate between fact and opinion. Here’s a quick breakdown of what this bill is actually proposing, according to the Tax Foundation.
- The corporate tax rate would be lowered from 35 to 20 percent.
- Businesses would be able to write off capital investments in full for the year they were purchased.
- Overseas profits would not be taxed by the IRS.
- Interest would no longer be a tax-deductible business expense.
- Corporate taxes would be border adjusted.
Potential Negative Impact
Many large retailers that rely on foreign-made goods are worried that the border-adjusted business tax will have negative ramifications on their profits and customers’ wallets. One notable example being electronics retailer Best Buy. Analysts from RBC Capital Markets estimated the company’s projected net income of $1 billion would become a $2 billion loss with the tax.
In protest of these potentially negative effects on consumers, CEOs of Target, Best Buy, Gap Inc. and more than 100 other businesses launched a coalition named Americans for Affordable Products (AAP). The group voiced concerns that the tax would trickle down to consumers because the price of goods will need to increase to offset the tax’s potential impact on retailers’ profits. According to the National Retail Federation (NRF), the average American family could pay about $1,700 in the first year if the proposed changes outlined in A Better Way are approved.
Potential Positive Impact
Currently, the U.S. imports a lot more than it exports. Because of this, the proposed 20 percent import tax and 20 percent export subsidy have the potential to raise revenue by roughly $120 billion a year.
Many economists have weighed in on the potential impacts of a border-adjusted business tax. Some don’t think the proposed tax will have a notable impact on businesses. Their theory is that the border-adjusted business tax will force the value of the dollar to increase by 25 percent, thus offsetting the additional costs associated with imports.
Others disagree, predicting that the tax would discourage foreign countries from buying American-made products leading to inflation of the U.S. dollar.
There isn’t a firm date of when the details of the plan will be released but Treasury Secretary Steven Mnuchin said he expects the tax reform to be enacted before the August congressional recess. If there’s one thing we do know, it’s that we won’t know the effects of this tax reform until it’s put into place. In the meantime, retailers and other businesses that could potentially suffer negative consequences can begin to proactively assess what operational changes they can make to put them in a better position financially. Whether it’s bringing your supply chain back in-house or increasing your dependency on flexible labor, there are many approaches you can take to reduce costs and protect your bottom line.