Feb 03, 2017

Trillion-Dollar “Border Adjustment” Tax Increase Is Bad Politics, Even Worse Policy For American Consumers & The Economy

Post by Derek Yale

There are many components of pro-growth tax reform on which fiscal conservatives and free-market advocates can agree. Lowering rates across the board, broadening the base, and a simpler and flatter tax code will allow hardworking Americans to keep more money in their pocket, help grow the economy, and bolster employment and opportunity for all Americans. But the current proposal from Congress represents not only bad politics, but even worse policy.

Congressional leaders say they want to “leapfrog America back into the lead … by leveling the playing field.” But how do they plan to do it? Republicans are asking Americans to shoulder a $1.2 trillion tax increase – shifting the burden from corporations to consumers.

Economists, businesses, and analysts warn that Americans will see higher costs on everyday goods, more pain at the pump, fewer jobs, and less economic opportunity if the new trillion-dollar tax on consumers becomes law. Here’s what “leveling the playing field” in Washington would do to hardworking taxpayers everywhere else.
Larry Kudlow: GOP’s Border Adjustment Tax Is “Voodoo Economics”

“Trump Adviser Larry Kudlow Slams Border-Adjustment Tax Plans” “An economic adviser to President-elect Donald Trump slammed plans to create a so-called border adjustable business tax, and predicted it could kill efforts to overhaul the tax code. The House Republican proposal is overly complicated …  said Larry Kudlow, who helped write Trump’s tax-reform plans.” (Brian Faler, “Trump Adviser Larry Kudlow Slams Border-Adjustment Tax Plans,” PoliticoPro, 1/12/17)

  • KUDLOW: “That is an exercise in government planning and complexity that I believe is doomed to fail … I think the whole corporate tax reform, which is the most important pro-growth measure, will go down the drain over this … There’s a problem that exists, but this is not the right solution…” (Brian Faler, “Trump Adviser Larry Kudlow Slams Border-Adjustment Tax Plans,” PoliticoPro, 1/12/17) 

“GOP’s Border Adjustment Tax Is ‘Voodoo Economics” “President-elect Donald Trump is correct to criticize the House Republican plan to tax cross-border trade … said Larry Kudlow, who served as a senior economic adviser to Trump’s campaign.” (R. Williams, “Larry Kudlow: GOP’s Border Adjustment Tax Is ‘Voodoo Economics,” Newsmax, 1/17/2017)

  • KUDLOW: “[I]t’s ‘voodoo economics.’” (R. Williams, “Larry Kudlow: GOP’s Border Adjustment Tax Is ‘Voodoo Economics,” Newsmax, 1/17/2017)

Retailers Face Massive Tax Increases Under A Border-Adjusted Tax System

RBC Capital Markets: Major Retailers Would Face Tax Bills That Exceed Their Operating Profits Under House Republicans’ Plans To Create A ‘Border Adjustable’ Business Tax, Forcing Them To Raise Prices On Consumers. “Major retailers like Wal-Mart, Best Buy, Costco and Dollar Tree would face tax bills that exceed their operating profits under House Republicans’ plans to create a ‘border adjustable’ business tax, RBC Capital Markets said. The investment bank sided with retailers in a debate over the proposal, saying in a research note it would have a ‘seriously adverse’ impact on them. ‘If the US moves to a border-adjusted tax system, most of our retailers would be forced to raise prices (and revenues) or meaningfully change their import/domestic sourcing mix, or their earnings would be materially reduced,’ it said.” (Brian Faler, “RBC Capital Markets: GOP Border-Adjustment Plan Bad For Retailers,” POLITICO Pro, 12/12/16)

  • POLITICO: “Retailers Fear Massive Tax Increases Under House Republican Tax Plan” “Many retailers fear that, even with Republicans promising to slash the corporate tax rate, they will still face big tax increases that in some cases will exceed their profits. On high alert over the proposal, retailers have begun a big lobbying campaign on the Hill, warning lawmakers and their aides that any tax hikes will get passed on to their constituents in the form of higher prices.” (Brian Faler, “Retailers Fear Massive Tax Increases Under House Republican Tax Plan,” POLITICO, 11/23/16)
  • The National Retail Federation Warns That A Border Tax Could Shut Businesses Down Completely. “‘Our members have told us that the import tax could be as high as five times their profits,’ said David French, chief lobbyist for the National Retail Federation. ‘I don’t know how viable some retailers would be in the face of this import tax.’” (Brian Faler, “Retailers Fear Massive Tax Increases Under House Republican Tax Plan,” POLITICO, 11/23/16)

POLITICO Pro: “Some Of The Biggest Losers Would Be Retailers Like Walmart, Best Buy And Home Depot That Import Massive Amounts Of Goods And Materials On Which They Would Suddenly Have To Pay Taxes.” “The border adjustment plan would affect individual companies differently, depending in part on how much they import and export. Some of the biggest losers would be retailers like Walmart, Best Buy and Home Depot that import massive amounts of goods and materials on which they would suddenly have to pay taxes.” (Brian Faler, “Some Companies May Never Pay Taxes Under Border-Adjustment Tax Plan,” POLITICO Pro, 1/9/17)

Cowen Research Release A Study Highlighting Some Of The Big Name Companies That Will Be Hurt By The Border Adjustments High Tax Hikes. “Cowen Research published a report Thursday that estimates the effect of the reform plan, and other planned measures, like eliminating the deductibility of interest and a headline corporate tax cut, on different industries and companies. Here are some of the big-name firms Cowen says will be hurt by reform: 1. Apple: The world’s largest company would see its tax bill jump because it won’t be able to deduct the expense of assembly abroad. 2. Constellation Brands: The largest beer importer in America will not be able to expense the cost of goods it brings across the border, like its Corona brand. 3. Gap: Between 50% and 80% of the retailer’s cost of the goods its sells comes from abroad. Walmart: 4. Walmart’s low margins means that it may not be able to survive a tax hike on imported goods without raising prices. 5. Target: Will suffer from the same conundrum as Walmart, but will be worse off since less of its revenue comes from domestically-sourced groceries. J.C. Penney: The department store has high debt loads, and interest on debt will not be deductible under the Republican plan. (Christopher Matthews, “These Companies Will Be Hit Hardest By GOP Tax Reform,” Axios, 1/27/17)

Border Adjustment Tax Would Result In Higher Costs For Hard-Working Families

More Than A Hundred American Businesses Are Opposing The Republican Border Tax: “Don’t Make Hard-Working Families Pay More On Essential Products” “Nike, Rite Aid, The Gap, Best Buy and Abercrombie & Fitch have joined a new advocacy group aimed at killing House Republicans’ plans to create a border adjustable business tax. They are some of the more than 100 companies and trade associations behind Americans for Affordable Products, an organization launched today that is pushing lawmakers to dump a plan to begin taxing imports as part of a broader tax-code rewrite. The groups, which rely on imports, fear the House Republican plan will mean huge tax increase even as Republicans promise to simultaneously slash the corporate tax rate … Other well-known companies joining the effort include Target, Walmart, QVC, Petco, AutoZone, Macy’s and Levi Strauss.” (Brian Faler, “Border Adjustment Tax Opponents Launch New Group Targeting GOP Proposal,” Politico, 2/01/2017)

“A Sweeping Tax Reform Proposal Meant To Boost U.S. Manufacturing Faces Mounting Pressure From Industries That Rely Heavily On Imported Goods …” “A sweeping tax reform proposal meant to boost U.S. manufacturing faces mounting pressure from industries that rely heavily on imported goods as President-elect Donald Trump and congressional Republicans work to finalize new tax legislation. As Republican members of the House of Representatives tax committee prepared to discuss tax reform this week, the panel received a letter from 81 industry groups rejecting the proposal known as ‘border adjustability.’ A lynchpin of the House Republican ‘Better Way’ agenda and viewed favorably by Trump’s team, the policy would help manufacturers by exempting export revenues from corporate taxes. But it would tax imports, hitting import-dependent industries.” (David Morgan, “U.S. Tax Reform Proposal On Border Trade Faces Growing Opposition,” Reuters, 12/15/16)

  • “Companies That Rely On Global Supply Chains Would Face Huge Business Challenges Caused By Increased Taxes And Increased Cost Of Goods.” “In a Dec. 13 letter to House Ways and Means Chairman Kevin Brady and incoming top Democrat Richard Neal, groups representing the auto and retailing industries, among others, said: ‘Companies that rely on global supply chains would face huge business challenges caused by increased taxes and increased cost of goods.’ They warned of ‘reductions in employment, reduced capital investments and higher prices for consumers’ as potential consequences.” (David Morgan, “U.S. Tax Reform Proposal On Border Trade Faces Growing Opposition,” Reuters, 12/15/16)

CNBC: Coach CEO Victor Luis Acknowledged That “Any Border Tax Will Lead To Higher Prices For The Consumer” And Everyday Goods Will Become More Expensive. “If we see this border adjustment in an economy where 70 percent of GDP is driven by consumption that is driven on imports, any border tax will lead to higher prices for the consumer … That’s just a reality that we’ll have to face if it comes to that.” (Rachel Cao, “Coach CEO: Any border tax will lead to higher prices for the consumer,” CNBC, 1/31/2017)

Economists Weigh-In Against Border Adjustments

Cato Institute Economist Dan Mitchell: “I’ve Never Understood Why Politicians Think It’s A Good Idea To Have Higher Taxes On What Americans Consume And Lower Taxes On What Foreigners Consume.” (Dan Mitchell, “A Remarkably Good And Reasonably Bold Tax Reform Plan From House Republicans,” International Liberty, 6/25/16)

President Of The New York Fed Bill Dudley: “… There Could Be A Lot Of Unintended Consequences.” “Another prominent critic of a ‘border adjustment tax’ emerged Tuesday: the president of the New York Federal Reserve. Bill Dudley was asked by Macy’s CEO Terry Lundgren at a meeting of the National Retail Federation trade group what he thinks of the idea of a border adjustment tax, which involves taxing imports at 20 percent, while making U.S. exports tax-free. … ‘I think that it will lead to a lot of changes in the value of the dollar, the price of imported goods in the U.S., and I’m not sure that would all happen very smoothly,’ Dudley said. ‘I also think there could be a lot of unintended consequences.’” (Michelle Caruso-Cabrera, “NY Fed’s Dudley Sees ‘A Lot Of Unintended Consequences’ From Border-Tax Plan,” CNBC, 1/17/17)

The Border Adjustment Tax Would Hurt The Economy And Lead To Unemployment

“The Enactment Of The Border Adjustment Tax … Will Have Profound Impacts On The U.S. Economy.” “The enactment of the border adjustment tax proposed by the Tax Reform Task Force will have profound impacts on the U.S. economy. For example, the cost of electronic goods produced in China, Japan, and other Asian countries will increase. Some portion of the increase will likely be reflected in the retail prices. The cost of imported automobiles will also be affected, likely leading to price increases for Audi, BMW, Honda, Hyundai, Land Rover, Mercedes, Toyota, and Volkswagen products, as well as for prices of other automobiles manufactured abroad.” (Philip K. Verleger, Jr., Et Al., “Border Adjustment Import Taxation,” The Brattle Group, 12/16/16)

  • A Border Adjustment Tax Would Lead To Price Increases And Negatively Impact GDP. “The resulting price increases would have noticeable impacts on the U.S. economy. Higher gasoline prices would require consumers to reduce expenditures on other goods and services. An examination of consumer expenditure patterns suggests that if the border adjustment tax were imposed solely on the petroleum industry, at a $50 per barrel crude oil price, it would lead to a 0.3 percent cut in consumer expenditures on other goods. This could lead to a 0.4 percent reduction in the U.S. nominal gross domestic product (‘GDP’). The impact on consumer spending and U.S. GDP would be much larger at global crude oil prices higher than $50 per barrel. For instance, were global crude prices to rise to $90, as forecasted by the U.S. Energy Information Administration (‘EIA’), the border adjustment tax would increase retail gasoline prices by $0.55 above the prices that would exist without the tax. Such an increase could have very serious economic consequences.” [citations omitted] (Philip K. Verleger, Jr., Et Al., “Border Adjustment Import Taxation,” The Brattle Group, 12/16/16) 

The Border Adjustment Proposal Will Lead To An Increase In Unemployment. “This analysis, while simplified, has been useful in attempting to quantify the potential effects of the Blueprint on both macroeconomic responses and industry-by-industry behavior. As for macroeconomic response, Scenario A creates a near-term increase in unemployment, returning to the CBO forecast in 2020 and then staying marginally below the forecast through 2026. Scenario B creates a dramatic spike in unemployment to levels above post financial crisis highs in 2010, falling significantly below the CBO forecast in 2022, and then rising to a level close to Scenario A as the analysis completes.” (“Macroeconomic Impact Analysis of the Business Provisions of the House GOP Blueprint for Tax Reform,” Inforum, 1/10/17)

  • Some Of The Hardest-Hit Industries Are Healthcare And The Accommodations Sector. “As for industry-by-industry conclusions, most industries experience job contraction relative to the baseline scenario. Several of the hardest hit are in the healthcare space—hospitals, ambulatory health services, and nursing and residential care. In Scenario A, these sectors experience peak job losses in 2018 of 5-6%. In Scenario B, job losses in these sectors increase to 15-20% in 2018. In addition to healthcare, the accommodations sector also fares poorly under the tax with employment decreases of 15% in Scenario A and 20% in Scenario B. Employment changes for these sectors, in large part, can be traced to decreased consumption of these services stemming from higher costs because of the modeled tax.” (“Macroeconomic Impact Analysis of the Business Provisions of the House GOP Blueprint for Tax Reform,” Inforum, 1/10/17) 

The Border Adjustment Tax Would Cause Consumer Gas Prices To Increase

“The Passage Of The Border Adjustment Tax Will Lead To Significant Increases In The Prices Paid For Petroleum Products,” Including Gasoline And Diesel. “No sector, though, will be more affected than petroleum. … The country’s continued reliance on imports, as well as the offsetting increase in exports of crude oil and petroleum products, creates a situation where the passage of the border adjustment tax will lead to significant increases in the prices paid for petroleum products and the prices received by producers of domestic crude oil. This paper quantifies these impacts. According to our calculations, the retail price of gasoline would increase by 13 percent, or approximately $0.30 per gallon, should the proposed border adjustment tax become law with a 20 percent tax rate. Retail prices of diesel fuel would rise by $0.27 per gallon or approximately 11 percent.” (Philip K. Verleger, Jr., Et Al., “Border Adjustment Import Taxation,” The Brattle Group, 12/16/16)

CNBC: “US Drivers Will Pay For GOP Border Tax At The Pump, Says Goldman Commodities Chief” CURRIE: “You do end up with higher gasoline prices. So the question, who’s ultimately going to pay for this tax, it’s going to end up being U.S. consumers.” (Tom DiChristopher, “US Drivers Will Pay For GOP Border Tax At The Pump, Says Goldman Commodities Chief,” CNBC, 1/31/2017)

Economists And Analysts Doubt That The Dollar Would Appreciate Enough To Offset The Tax

Goldman Sachs Economist Alec Phillips: “It Is Unlikely That Nominal Or Even Real Exchange Rates Would In Fact Adjust So Quickly And Perfectly.” “Goldman Sachs economist Alec Phillips doesn’t expect the dollar to appreciate as theory predicts. In a research note, he said, ‘It is unlikely that nominal or even real exchange rates would in fact adjust so quickly and perfectly.’” (Courtney Reagan, “How A Controversial GOP Plan Could Boost The Taxes On A Sweater From $1.75 To $17,” CNBC, 12/20/16)

AEI Fellow Desmond Lachman: There Are Reasons To Doubt That The Border Tax Adjustment Will Result In A Rapid And Large Dollar Appreciation. “There would seem to be at least two reasons to doubt that the border tax adjustment will result in a rapid and large dollar appreciation even though one might still subscribe to the idea the tax adjustment will in the end have little impact on the U.S. trade balance.” (Op-Ed, Desmond Lachman, “Would The GOP’s Border Tax Adjustment Lead To A Trade War?,” The Hill, 1/18/17)

  • Retaliatory Measures From U.S. Trade Partners Would Boost Their Currencies And Prevent Any Improvement In The U.S. Trade Balance. “The first is that one would suppose that foreign exchange participants would anticipate that U.S. trade partners are likely to respond to the border tax adjustment by retaliating. They would do so by taking similar trade measures as did the U.S. with the aim of boosting their own exports and of penalizing U.S. imports. If the U.S. trade partners did indeed act in that way, those measures would have the effect of boosting those countries’ currencies in much the same way as the border tax adjustment would boost the dollar. At the same time, those retaliatory measure would prevent any improvement in the U.S. trade balance.” (Op-Ed, Desmond Lachman, “Would The GOP’s Border Tax Adjustment Lead To A Trade War?,” The Hill, 1/18/17)
  • The Adverse Effect Of A Strengthening Dollar On Emerging Market Economies Would Lead To Them Importing Less From The U.S. And Mitigate The Dollar’s Appreciation. “A second reason for doubting that the border tax would lead to a rapid and strong dollar appreciation is because of the adverse impact that such an appreciation would have on the major emerging market economies. Those economies would be hit hard by a dollar appreciation since their corporate sectors are excessively indebted in U.S. dollar terms. Indeed, according to the Bank for International Settlements, emerging market corporations constitute a major risk to the global economic recovery since those corporations have increased their dollar-denominated borrowing by around $3.5 trillion over the last eight years. If a dollar appreciation were now to cause the emerging market economies, including China, to falter, those economies would import less from the U.S., which would limit the degree to which the U.S. trade balance might improve. That, in turn, would have the effect of attenuating the dollar’s tendency to appreciate because of the border tax adjustment.” (Op-Ed, Desmond Lachman, “Would The GOP’s Border Tax Adjustment Lead To A Trade War?,” The Hill, 1/18/17)

Morgan Stanley Analysts Foresee A 10-15 Percent Rise In The Dollar As Opposed To The 25 Percent Necessary To Offset The Border Adjustment Tax. “Morgan Stanley foresees a smaller rise in the dollar in the event of a 20 percent border-adjustment tax, rather than a one-time 25 percent appreciation of the dollar, as implied by textbook theory. ‘We think a 10-15 percent rise in USD is reasonable,’ Castagno and his team wrote. ‘Even if we don’t get a full exchange rate offset, the policy will still have a large impact on U.S. competitiveness and, therefore, the dollar.’ In other words, their projections suggest Trump may succeed in endowing exporters with a competitiveness boost since the dollar is unlikely to adjust fast enough to absorb the tax change.” (Sid Verma, “Trump’s Border Tax Threat May Weaponize The Dollar,” Bloomberg, 1/11/17)

TD Securities Analyst Mark McCormick Foresees A 10 Percent Rise In The Dollar. “This view is echoed by Mark McCormick, of TD Securities Inc., who predicts the dollar may advance by 10 percent. ‘Exchange rates are unlikely to adjust rapidly enough in order to internalize the tax change,’ the analyst wrote on Jan. 6. ‘In other words, a border adjustment tax is likely to boost the USD but the net change (USD strength and export subsidy) will likely still favor U.S. exporters and production.’” (Sid Verma, “Trump’s Border Tax Threat May Weaponize The Dollar,” Bloomberg, 1/11/17)

President Of The New York Fed Bill Dudley: “I’m Not Of The View That Import Prices Would Go Up 10 Percent, The Dollar Would Appreciate By Exactly 10 Percent, So That The Value That Retailers Pay For Imported Goods Would Be Exactly The Same In Dollar Terms.” “Most supporters of the tax argue that the dollar will strengthen so much as a result of border adjustment that imports will in effect become cheaper or at least remain the same — and therefore, consumer prices will not increase. But Dudley indicated skepticism about that idea. ‘I’m not of the view that import prices would go up 10 percent, the dollar would appreciate by exactly 10 percent, so that the value that retailers pay for imported goods would be exactly the same in dollar terms,’ Dudley told the NRF audience. Lundgren pointed out that for new dollar strength to negate higher import prices, the greenback would have to increase specifically against the currencies of countries that make the products sold by American retailers.” (Michelle Caruso-Cabrera, “NY Fed’s Dudley Sees ‘A Lot Of Unintended Consequences’ From Border-Tax Plan,” CNBC, 1/17/17)