The (Border) Adjustment Bureau: Hold On to Your (Imported) Hats
Retailers would be wise to pay close attention to the upcoming tax-plan deliberations of the 115th U.S. Congress. A proposal currently being considered would adjust the U.S. corporate tax by making imports a non-deductible expense. This adjustment is intended to create incentives for domestic production, as companies would no longer be able to reduce their taxable income by deducting their overseas expenditures.
Here’s an example. Currently, if Joe Retailer imports $1 million of goods, spends $500,000 on domestic costs and sells the products for $2 million, Joe could deduct the cost of the imports and all domestic costs from the sales amount, and would pay 35% in taxes on $500,000, for a total tax hit of $175,000. Under the proposed plan, however, Joe would be able to deduct only the $500,000 in domestic costs, and would pay 20% in taxes on $1.5 million, for a total tax hit of $300,000.
Thus, some retailers importing goods made abroad fear a looming tax crunch. Recent media reports have highlighted the potential effects of the proposal on the apparel, toy, and electronics industries, although other import-heavy industries find themselves in a similar situation. According to one RBC Capital Markets analyst, cited in a recent Wall Street Journal article, the earnings loss to six large retailers from a “border adjustment” could total $13 billion. Other economists, however, are downplaying these concerns, noting that such companies could recoup any tax losses with gains from decreased importation costs and a stronger U.S. economy. Companies may also attempt to pass increased tax costs through to the consumer by raising the price of goods.
Of course, the final fully-negotiated tax plan may look vastly different from the current proposal. Indeed, President Trump has publicly criticized the border-adjustment component of the GOP tax plan, saying “Anytime I hear border adjustment, I don’t love it.” Even if passed in its current form, the economic effect of the proposal on retailers, consumers, and the overall economy is hotly debated. Nonetheless, it is worth keeping an eye on the result of negotiations concerning the “border adjustment”.
A final thought: Despite the murkiness of the future under the new administration and Congress, one outcome is crystal-clear:
Let me tell you how it will be
There's one for you, nineteen for me
'Cause I'm the taxman
Should five per cent appear too small
Be thankful I don't take it all
- The Beatles