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By Kitty Testa
Early last week, House Speaker Paul Ryan met with Donald Trump’s transition team to discuss elements of Ryan’s tax plan, euphemistically called A Better Way. The web site for the plan is light on details, but includes measures intended to increase exports using the tax code as an incentive.
The subject of last week’s meeting was the Border Adjusted Tax, a part of Ryan’s tax plan which treats business income generated from exports more favorably than business income generated from the resale of imported goods. The tax package includes a reduction in corporate income taxes to 20% for domestic revenue minus domestic costs. The current federal corporate tax rate is 35%, the third highest in the world.
In the publication that bears his surname, Steve Forbes explained it rather simply:
Here’s how, in essence, this sneaky, anti-consumer tax works. Importers will no longer be allowed to deduct an item as a business expense. To simplify things, let’s say a store imports a pair of sneakers for $40 and then sells them for $50, making a $10 profit on which it would owe taxes. Under the Republican plan, however, the retailer wouldn’t be able to deduct the $40 it paid for the sneakers. In fact, it would owe taxes on the entire $50! And who, ultimately, pays this tax? You, the consumer, in the form of higher prices or fewer choices of where you can shop. Retailers and their customers will be hit.
It won’t just be retailers selling foreign made goods that will need to raise their prices. Manufacturers import numerous components for finished consumer goods—plastic bottles, caps, and pumps which would now not be tax deductible. The domestic auto industry imports numerous parts from overseas. Oil refineries import crude to make gasoline.
The intent of the policy is to promote domestic production for export and discourage imports, but Ryan seems to be ignoring reality. There are numerous items that are simply no longer made in the US, and they’re not going to be made in the US because the capacity doesn’t exist to make them here. Almost no American manufacturer is outputting finished goods with zero imported raw materials, components and semi-finished parts. The manufacturing world is global, and this has resulted in less expensive goods for consumers. If manufacturing of materials currently imported shifts to domestic production, the costs will undoubtedly rise due to higher labor costs in the US. The tax rate reduction will fall far short of the increased costs of domestic conversion. Higher consumer prices would be unavoidable.
The Border Adjusted Tax also creates a compliance nightmare. As a corporate controller for manufacturing firms it is readily apparent to me that this would require new procedures for identifying all foreign-made components and raw materials as non-deductible for income tax purposes—at actual cost, as opposed to standard cost, which is how most companies value their inventory. Manufacturers without sophisticated Enterprise Resource Systems would bear the most difficult compliance burden. In any case, compliance burden will also contribute to rising costs, and thus rising prices.
This is another example of crony capitalism—tax breaks for domestic producers at the expense of retailers, who must compete for consumers with attractive prices or go out of business. The big loser here is the consumer, who ultimately bears the burden of all costs.
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