It’s not surprising that retailers fiercely oppose a Republican tax plan that would penalize imports because much of what America’s retailers sell is manufactured overseas. This reform forms the inaugural steps in many of the forthcoming steps under the “A Better Way” proposal which would include big cuts to tax rates for both individuals and businesses, the elimination of most itemized deductions for individuals and measures to encourage big capital investments by companies.
As per the current system, only the profits earned were taxed without considering the destination where it was earned. With the gradual shift to the destination-based cash flow tax system, corporate taxes will be border-adjusted with no tax on revenues earned outside the U.S… This, however, would help the companies to adjust the tax bills based on imports.
The “Border Adjustment” will Penalize LOW-COST OVERSEAS PRODUCTION and Incentivize HIGHER COST DOMESTIC PRODUCTION by increasing import prices toward the domestic standard price.
The overseas production/domestic consumption profit arbitrage will disappear along with a fistful of U.S. corporate profits. Although, much of that profit will eventually reside at the U.S. Treasury, the skeptics are concerned that production cost increases will be equalized by a combination of a reduction in corporate income tax rates and a much stronger U.S. dollar which is tenuous.
Under the Border Adjustment purview, it features:
- Broadens Federal Tax Base As
U.S. Consumption > U.S. Production.
- Tax Dollar Transfer:
From: Foreign Sovereigns
- Corporate Income Tax Application
Stratified Between Imports/Exports
- Corporate Income Tax Basis Shifted
From: Production Domicile
To: Consumption Domicile
- Exports Treated “Tax Favorable”
- Imports Treated “Tax Unfavorable”
Looking at the bright side of things, corporate tax has been cut from 35% to 20%, capital investment has been shifted from depreciation to expense, exports will be non-taxable and there will be the repatriation of overseas cash.
In the same way, if you look at the dim side of the Border Adjustment tax, import goods and interest on expense will be non-deductible. Profitability of U.S. based importing company will be significantly reduced. Capital spends will be higher with disruptions in global supply chains.
While the retailers oppose the tax, some exporters like Boeing Co., General Electric, and Pfizer Inc. have come out in support of the import tax.