Why the Primary Arguments Against the Border Adjustment Plan are Wrong

Yesterday, I explained why the border adjustment plan is a good idea, particularly for US manufacturers.  Today, let’s look at the two major arguments against the plan – that it’s too complicated, and that it’s a regressive tax, particularly on lower income people.  Here’s why those arguments are wrong.

First, let’s address the idea that the plan is too complicated.  Now, I’m neither an accountant nor an economist; I just run a manufacturing company.  And since I was an English major in college, my mathematically-minded wife has jokingly referred to me as having a “fluff” degree.  So numbers are not my strongest suit.

But the central idea in the plan – that you would no longer be allowed to take a business deduction for the expense of imported parts – simply isn’t that complicated, even for someone like me.  Conversely, if you export products or parts, the value of the exports would not be considered taxable income.  So the border adjustment plan isn’t actually a tax – it’s a change in the tax code.  For those companies that manufacture in the US, taxes would actually go down.  The CFO of our manufacturing company grasped it in about two minutes (it took me about ten).  The best explanation I’ve seen is from the Wall Street Journal.  Here’s the link:

http://www.wsj.com/graphics/border-tax/

Multi-national companies that do a lot of importing are, of course, opposed to the plan because it will cut into their profits unless they begin sourcing more in the US.  Fair enough.  But when I read that they’re opposed to the plan because it’s too complicated, I chuckle a little bit.  They can pay millions of dollars to accountants and attorneys to maximize deductions and profits, but they can’t figure this out?  I’m not convinced – and I don’t think most people who take a look at the plan will be convinced either.  It’s just not that complicated.

The second argument against the border adjustment plan is that it’s a regressive tax on consumers, especially low income consumers.  Tough to argue with this one, since – over the short term – prices on imported goods are likely to rise.  So lower income consumers, given that their income remains the same, would be forced to spend a higher percentage of that income on basic necessities.

Let’s first consider the source of this argument.  It’s coming from a group named Americans for Affordable Products, comprised primarily of importing big box retailers like Walmart.  I expect that Walmart’s objections have more to do with how the border adjustment plan will affect their bottom line and disrupt their current overseas supply chains than it is about keeping products affordable for those with lower incomes.  But that argument on their behalf won’t win the day, so I think part of their strategic calculation is to scare the heck out of us, and elicit sympathy for Walmart (of which they don’t get a lot). I’m not saying that the Walmart folks are bad people; only that their job is to protect their company’s bottom line by maintaining the status quo.

But let’s grant the assumption that prices on imported products rise, and we pay a little more until the marketplace adjusts to sourcing more US manufactured goods.  What I’ve not yet heard mentioned by Americans for Affordable Products is the effect of the border adjustment plan on US manufacturing jobs.  It’s important to note at this point that both the labor force participation rate and real median household income in this country remain lower now than in 1999; which is, not coincidentally, the year that Congress granted China permanent normalized trade relations status and the massive wave of offshoring manufacturing jobs began.  The border adjustment plan would make it more profitable for companies to source domestically, which would clearly boost U.S. manufacturing jobs.  Since the job multiplier effect is higher for manufacturing than for most other industries, many lower income people would be trading slightly higher prices on consumer goods for a decent paying job.  Ask around and you’ll find out they’ll take that trade.

Granted we’ve got a lot of work to do as a country to ensure that people are adequately trained to fill those jobs.  And that’s precisely what our education system is for, right?  But that subject, my friends, is for a different blog post.

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