House GOP to move forward with border adjustment tax proposal (1 Viewer)

superchuck500

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It is effectively a modified VAT on all imports. Note that the plan is part of a broader corporate tax reduction - so some of the tax burden that is currently paid by corporate income tax would be shifted to the border adjustment tax . . . and, therefore, companies that create their products entirely within the US see substantial tax reduction.

In theory, the dollar rises in value to offset the border adjustment - while domestic concerns are made more valuable. But these forces don't always fully translate in a huge macro-economy.

Here is a basic economic summary of what a border adjustment tax is and the theory behind it:

The House Republican tax plan proposes to transform the corporate income tax into a destination-based cash flow tax (DBCFT), which would include border adjustments that exempt exports but include imports in tax bills. The effects of the border adjustment on the economy depend on how exchange rates respond. However, the potential response is a source of significant confusion and uncertainty. Here’s what we do and don’t know.

First, some background: The DBCFT is a modified version of a value added tax (VAT); it allows deduction for wages, while VATs do not. The VAT is a consumption tax, so it exempts the normal return from investment from tax. Thus, the DBCFT only taxes consumption financed by certain types of capital income – namely, returns to previous investments and supra normal returns to new investments.


A border adjustment makes sense for a domestic consumption tax like a VAT since exports are not consumed domestically, but imported goods and services are. This makes the border adjustment a policy that levels the playing field so that all goods consumed in the US face the same tax rate regardless of where they are produced. Thus, it is quite different from a selective tariff.

All advanced countries except the US already have VATs (on top of corporate income taxes), and all of those VATs are border-adjusted. The border adjustment for VATs is explicit – taxes on production are rebated for exports; imports are taxed.

While explicit border adjustments may seem like a strange concept to Americans, implicit border adjustments are already present in state-level retail sales taxes. Goods produced in state A and exported to and sold in state B do not face state A’s sales tax. Goods produced in state B and imported to state A do face state A’s sales tax.

The border adjustment for a cash flow tax would also be implicit – the tax would exclude exports from tax and would not allow deductions for the cost of imported goods. By ignoring foreign transactions, the cash flow tax with border adjustment also removes the incentive for firms to relocate profits or move profitable activities outside of the country.

However, the border adjustment in the House Republican plan is probably not WTO-compatible. The WTO requires that imports and domestically produced goods be treated the same. But the DBCFT taxes the whole value of imports while only taxing the part of domestically produced goods that relates to above-normal returns to capital owners. This could be addressed by separating the DBCFT into a regular value-added tax and a wage subsidy elsewhere in the system.

WTO issues aside, simple economic theory implies that the exchange rate should rise immediately (the dollar should go up in value) by the full extent of the tax.
A Quick Guide to the 'Border Adjustments' Tax | RealClearMarkets


One thing that jumps out is the likelihood that the dollar would see a jump that is roughly equal to the tax . . . 15 to 20 percent in this case. That has some benefits, but it also works contrary to other economic interests (in fact, Trump has stated that he would like to see a weaker dollar - so how the House's plan jibes with that it unknown).

Border adjustment tax would spike the dollar 'substantially,' Larry Summers says


Of course, retailers of low and medium priced goods (much of which are imported) are rallying to fight the border adjustment tax, arguing that it will result in a comparable price increase (15 to 20 percent) for consumers for all goods that are made outside of the US, and this would include component parts to goods that are subject to final production/assembly in the US. To the extent that the consumer market wouldn't fully accept such a price increase, the remaining liability would have to be paid by margin.

Some of this doomsday cry doesn't fully reconcile with the theory and objective of the tax, however. For instance, if the border adjustment is part of broader corporate tax reform, those impacted retailers will be paying less corporate income tax - so the hit from the border adjustment doesn't pass straight through to either the end-price of the goods or to the company's margin.

"[The border adjustment tax] will force consumers to pay as much as 20 percent more for the products they need. Gasoline is estimated to go up as much as 35 cents a gallon," said "Americans for Affordable Products" advisor Brian Dodge in an interview with "Power Lunch."

"Common household goods, apparel, things that people count on every day, pajamas, will cost more and really just so a certain, select group of corporations can avoid paying taxes forever. We think that's bad policy," he added.

However, other corporations in the U.S. are cheering the move. Names like General Electric, Boeing and Pfizer are members of the "American Made Coalition," which supports the border adjustment tax.

Brian Reardon, an advisor to "American Made Coalition," told "Power Lunch" the Republicans' tax reform bill will keep jobs and money in the United States and the border adjustment tax is the "glue" that keeps the whole thing together.

"The point is to ensure that when Americans are investing in the United States and creating products here that they are not at a tax disadvantage," he said. "The whole point … is to cut taxes so that we have more investment, more jobs, higher wages and at the end of the day, the consumer is going to be benefited, not hurt."
Border adjustment tax could hike prices by 20 percent, retailers say
 

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Well, if this is what people want, so be it.

If you want to make American production competitive you need to either lower wages or artificially inflate the cost of imports. I'm genuinely interested to see how this turns out.

It's usually a pretty futile effort to try to fight the forces of capitalism, but there are always tweaks that can try soften the blow of it's negative effects, at least temporarily. But let's not pretend this isn't just another version of welfare. We're just paying for it via sales tax instead of income tax.
 

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Interesting, thanks for posting.

At first glance my thoughts are that maybe Trump has more power over House Republicans then what I was thinking (assuming this is something Trump supports). While this is not a tariff, it operate in some ways like one and really goes against at least 70 years of orthodox conservative Republican belief.
 
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Interesting, thanks for posting.

At first glance my thoughts are that maybe Trump has more power over House Republicans then what I was thinking (assuming this is something Trump supports). While this is not a tariff, it operate in some ways like one and really goes against at least 70 years of orthodox conservative Republican belief.

I think at first Trump made skeptical comments about the plan - but then sounded more warm to the idea. Trump has definitely said that the he thinks the dollar's strength hurts the US economy - and the GOP plan would certainly increase the value of the dollar.


Everyone seems to be talking about a border tax these days — but few people seem to know what they’re talking about.

One reason is the neophyte US president’s own mixed message. As he has done on multiple occasions, President Trump has taken both sides of this particular issue at various times.

On January 16, Trump said he was hesitant to impose a border tax on imported goods as part of his anti-trade push: “Anytime I hear border adjustment, I don't love it,” he said at the time. It’s “too complicated,” Trump added.

Days later, the president had changed his mind. "If you go to another country and you decide that you're going to close and get rid of 2,000 people or 5,000 people ... we are going to be imposing a very major border tax on the product when it comes in," Trump warned during a meeting with CEOs.
The problem with Trump's border tax plan - Business Insider
 

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I'm all for taxing imports to aid domestic manufacturing, as long as it aids American manufacturing and doesn't pay for his fricken wall and foul headed immigration policies. Here's a novel idea - how about using those funds to subsidize health care costs for domestic manufacturers? Health care costs are the biggest impediment carrying cost of any manufacturer here in the US. Lowering that burden would be the single best way to level the playing field with China, India, etc. and boost the economy here.
 
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I'm all for taxing imports to aid domestic manufacturing, as long as it aids American manufacturing and doesn't pay for his fricken wall and foul headed immigration policies. Here's a novel idea - how about using those funds to subsidize health care costs for domestic manufacturers? Health care costs are the biggest impediment carrying cost of any manufacturer here in the US. Lowering that burden would be the single best way to level the playing field with China, India, etc. and boost the economy here.

The border adjustment tax would be part of the exchange for reduced corporate income tax - so it's not a special designation, it's the revenue-positive aspect of the reduction in corporate income tax, that would be substantially revenue negative. This is all general treasury, overall tax revenue business.
 

SaintJ

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Except it's regressive, if it makes sales taxes go up while lowering income taxes, since everyone pays sales taxes, but not everyone pays income tax.
 
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Except it's regressive, if it makes sales taxes go up while lowering income taxes, since everyone pays sales taxes, but not everyone pays income tax.
It's regressive - but it's not quite the same as a sales tax. The tax is levied on the imported goods at the time of importation, so it's paid by the importrer. It most likely ends up being paid by the consumer at the time of purchase, to the extent the market will bear it, but the mechanics are different. In theory, the consumer's dollar is supposed to be more valuable to the same degree that the goods cost more - so it's a wash, but that's just the theory.
 

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Well, whaddaya know...a GOP plan that isn't obviously terrible. It may even get bipartisan support.
 

LAhotsauce

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How about we first prove that more domestic manufacturing automatically means substantially more humans working there. Instead of just reducing taxes to allow for more capital spending on automated, non-human lines.
 

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There is no doubt that any tax like this, including VAT is fully paid by the final purchaser. Any price adjustments are to the non-tax portion as 100% of the taxed amount is passed on. The reason for VAT instead of sales tax is to ensure better collection and more even application of the tax taking the decision out of private hands about whether or not a buyer will owe taxes or is exempt.

The same argument can be made about corporate taxes being passed on, but it's much less direct or clear.

As you say though with import VAT the theory is that it self-cancels when the rates between the countries are reasonably close. I know there's been a lot of argument about it but it generally seems to make sense that in the long run it'd be a wash.
 

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I like this plan. Could provide boost for good paying jobs. If the importers get a tax break, then consumers may actually pay less, since the dollar may also be worth more. Hopefully the benefits to the treasury will be used to help the middle and lower classes.
 

lapaz

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How about we first prove that more domestic manufacturing automatically means substantially more humans working there. Instead of just reducing taxes to allow for more capital spending on automated, non-human lines.
You can't prove this, because new manufacturing will be much more automated, but they still generate some new jobs. We're heading into an ever more automated future. We're going to have to learn to adjust, but in the interim, we need as many job opportunities as we can get. Just because they won't be as labor intensive as the past, that's not a good reason to scoff at new manufacturing.
 

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You can't prove this, because new manufacturing will be much more automated, but they still generate some new jobs. We're heading into an ever more automated future. We're going to have to learn to adjust, but in the interim, we need as many job opportunities as we can get. Just because they won't be as labor intensive as the past, that's not a good reason to scoff at new manufacturing.
But that's not what the Trump campaign was run on. Also, what is the overall cost/benefit to the economy if all you're doing is creating a stronger dollar, possibly heightening inflation pressures, all for a few more jobs running automated lines?

The few benefits that do come of that ultimately accrue to who?
 

WhoDatPhan78

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Much of the 20% tax will get passed on to consumers.

Say something that cost 1.00 retail pre tax goes up to 1.15 post tax.

The consumer is also paying sales tax on 1.15 v/s 1.00.
 
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superchuck500

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But that's not what the Trump campaign was run on. Also, what is the overall cost/benefit to the economy if all you're doing is creating a stronger dollar, possibly heightening inflation pressures, all for a few more jobs running automated lines?

The few benefits that do come of that ultimately accrue to who?

I think it's clearly an upward bias with respect to inflation.

There's a sliding scale of benefit depending on the nature of the operation. But I think companies that manufacture exclusively within the US (no imports in the process at all) benefit because they get the income tax break and aren't paying the border adjustment that is meant, in part, to offset the tax break. The system also favors exports, so companies that manufacture exclusively within the US but also export could benefit even more after the adjustments.
 

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