The Border Adjustment Plan in the House Republican’s tax reform package won’t cause apocalypse. Really, it won’t. But that’s not what you’ll hear from the big box retailers and multi-national brands that are unleashing the attack dogs to kill it. If you listen to those folks, it will cause rampant inflation, the collapse of the world economy, and we’ll all be living in the streets. Now, I do understand their point of view. They’ve built their business model on geographically extended supply chains that continuously sniff out the lowest cost overseas producer. That model won’t be as profitable if the Border Adjustment plan is enacted, so it will adversely affect their businesses – but it won’t cause apocalypse. In fact, it would be the first meaningful step taken by any presidential administration in decades to help level the playing field for U.S. manufacturers.
Why is the Border Adjustment Plan a good idea? First, it’s not a tariff, which is basically a tax applied to imported goods. Tariffs are a red flag for the World Trade Organization (WTO). If we applied tariffs to goods imported from China, for example, the WTO – which can’t seem to find China at fault for much of anything – would take about ten seconds to decide that the U.S. is violating WTO guidelines. Some might say we should assess tariffs anyway and ignore the WTO. That would make me feel good, too, but why take the hard road when there’s an easier way?
The Border Adjustment Plan simply changes the way U.S. companies calculate their income taxes. It’s not complicated. Instead of a company taking a business expense deduction for everything they buy, they would no longer be allowed to take a deduction for what they buy overseas. Will they now pay more taxes to the U.S. government if they import a lot of stuff? Sure they will, but that’s precisely the point of the plan. It’s why Walmart, Target, et al are circling the wagons. But, I’m guessing those companies will find ways to stop doing so much of that and start buying more goods domestically. They’re smart people; they’ll figure it out. Also, since the Border Adjustment Plan is similar to the value-added tax that many countries already assess, there is a less of a chance that the WTO will raise a ruckus.
Another great thing about the Border Adjustment Plan? It is part of a House Republican tax reform package that will reduce the corporate tax rate from 35% to 20%. Of course, the big box retailers and multi-national brands love that part of it. If you asked them they’d probably say, “Let’s kill the Border Adjustment Plan and keep the lower tax rate.” I told you they were smart people, didn’t I? But they shouldn’t be allowed to have it both ways.
Third great thing about the Border Adjustment Plan? Because it is part of the proposed House tax reform package, there’s a good chance, if Trump gets behind it, the plan would make it through the House. There would be tougher sledding in the Senate, but then it would be time for the “Great Negotiator” to do his thing.
Fourth and best reason the plan is a good idea? It would provide a boost for U.S. manufacturers who have been playing on a wildly skewed field of battle. I can tell you from personal experience that those of us who have survived the last 35 years are lean, mean and ready to rumble. Imagine what we could do if we were allowed to fight overseas competition with two hands instead of one?