There are few things that have the potential to unite the business community like tax cuts. Simplifying the tax code to significantly reduce both corporate and individual tax rates could free up significant revenue that could be reinvested in expanding one’s business. With the voters delivering control of both the White House and Congress to the Republicans, tax reform has been listed as one of their highest priorities for 2017.
One provision of the comprehensive tax reform plan that has been put forward by congressional Republicans could trip up the whole endeavor. Known as “border adjustment” or a “destination based cash flow tax,” the Republican plan looks to reform the way our system taxes imports and exports. It would effectively eliminate taxes on revenue from exports while for the first time stripping the deductibility of cost of goods manufactured overseas. House Republicans believe this provision would provide an additional $1 trillion over ten years to “pay for” lower rates. While proponents argue that this “levels the playing field” for U.S. manufacturers, it is clear that this change would immediately lead to higher prices and ultimately take money directly out of the pockets of U.S. consumers and businesses that utilize global supply chains.
As this column goes to press the fine details of this proposal have not been made public, but economists have spent the first quarter of 2017 arguing about who will win and lose if it were to be enacted. While it would be easy to say “exporters win and importers lose,” economists agree that it is more complicated than that since they expect that such a change would cause the U.S. Dollar to appreciate, in some models completely offsetting the negative impact of the tax on importers.
To be clear, prospects for the inclusion of border adjustment in the tax reform legislation that Congress is expected to consider this summer is far from certain. President Trump has not yet explicitly endorsed the idea, though his priorities will become clearer when he submits his tax and budget plans to Congress. Several prominent Republicans in both chambers of Congress have expressed opposition to the idea, which is especially critical in the Senate where Republicans only have a two vote majority.
Businesses and industry associations that rely heavily on imports are extremely concerned about this change and are not convinced that currency changes will offset this new tax. To help sound the alarm IWPA has joined the Alliance for Affordable Products (www.KeepAmericaAffordable.com). The webpage has helpful fact sheets and links to important analysis of the proposal. If, like us, you think this is cause for concern I encourage you to join the coalition and communicate your concern to your congressional representatives.
This year is the best opportunity for passage of meaningful tax reform in decades. Let’s make sure the bill doesn’t include a brand new tax that harms U.S. businesses and consumers to pay for it!