Tax reform is one of the most important things the Trump administration might achieve. High on the new president’s list of priorities, the reduction of tax rates for corporations and individuals would be a tremendous boost for our economy, not to mention the purely moral aspect of allowing people to keep more of the money they’ve earned. However, there is one little-understood aspect of the proposed tax reform package that should have all Americans worried: the benignly named “border adjustment tax.”
This new tax is being floated as a way to raise revenue to cover the cost of the border wall, as well as to make up for other decreases in the corporate tax rate, and also as a way to incentivize exports and punish imports. Many people still mistakenly believe that importing goods and services is somehow bad while exporting them is good. This misunderstanding of trade policies is going to hurt American consumers considerably.
Here’s how the tax works. Proposed by Kevin Brady and Paul Ryan, the border adjustment tax would disallow the deduction of business expenses incurred in other countries from a company’s taxable income. Currently, if a company buys inventory overseas and sells it domestically, it only gets taxed on the profits, not the entire revenue. This is the same for domestic companies that do all their business in the United States, and it’s easy to see why. If you purchase $100,000 of equipment to produce goods that only sell $110,000, it makes no sense to tax the whole $110,000, as doing so would make an otherwise profitable enterprise too expensive to sustain. Taxing only the profits allows companies with a large volume of sales but a narrow profit margin to continue to operate successfully.
Eliminating this system for imported goods means that many imports will simply not be worth the money. That means fewer available options for you and me. Those bananas grown in Costa Rica may disappear from supermarket shelves, forcing us to subsist on less exotic, homegrown produce. Turnips maybe. Yuck. Other imports will still be profitable, but only at increased prices, so once again, the American consumer is harmed by the tax.
The other piece of the border adjustment tax, designed to encourage exports, allows exporting companies to deduct business expenses, but exempts revenue earned abroad from taxation entirely. Thus, the company in the example above would be able to reduce its taxable income by the $100,00 in expenses, while not being taxed at all on the $110,000 in revenue. This means that, from the IRS’s perspective, the company will look like it lost $100,000, and can use that claim to qualify for tax refunds. In other words, it would be possible for a profitable exporter to get checks from the government, as if they were on the brink of bankruptcy.
Now, this is hardly fair, but perhaps the more important point is the incentive effect it will have on business. Notice that in the cases of both the exporter and the importer companies are punished for selling to Americans. Under such a tax structure, no company, whether it be located in the United States or elsewhere, will want to sell its products to American consumers if it can find buyers elsewhere. The tax advantages of selling to foreigners will simply be too great. This is not to say that no one will sell to Americans, it’s just that they will need an added incentive to do so, an incentive most likely to found in the form of higher prices.
So, let’s review, The border adjustment tax will remove some imports from the market, giving us fewer choices about what to buy, for the rest, it will raise the prices we pay. The tax also unfairly rewards those who sell their wares abroad, giving them no reason to want American customers unless they can charge higher prices as well. Americans get it both coming and going.
For a populist administration that claims to care about the plight of the working man, pushing a tax plan that will substantially increase his cost of living seems an odd choice.
Then again, no one ever said politics was rational.
This article originally appeared on Conservative Review.
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