The border tax debate heats up as more and more business leaders descend on Washington to meet with lawmakers to express concerns. Speaker of the House Paul Ryan was quoted as saying ““[The border adjustment tax is] putting American-made products at a huge advantage. There’s a built-in bias in our tax code to outsource and re-import into this country. That’s not good for American jobs, that’s not good for American manufacturing, that’s not good for American economic growth,” Ryan said.
Mr. Ryan is choosing to ignore an important part of the equation – the world isn’t going to stand by while we impose a border tax. They will be forced to impose border taxes of their own resulting in trade disputes that make it harder for American companies to trade around the world. This will accomplish 2 things: skyrocketing inflation (the prices for most goods and services must substantially increase) and a reduction in GNP.
The border tax would eliminate deductions for products, components and services imported into the United States – even if they are integrated into a US built product. The controversial tax proposal will provide tax relief for those who export goods and services made in America.
Unfortunately the President and CEO of AutoZone, and the CEOs of JC Penney and Target do not share the Speaker’s optimistic take. “The border tax may be good for America, but it is bad for Americans.” They met with leaders on capital hill to express serious reservations and ask for a more deliberate process prior to any border tax related changes.
The challenges to the border tax proposal are substantial. There is not an affordable capacity to generate the components or provide the services for a cost that is anywhere close to the current levels available offshore. In theory this would create new US jobs. In reality, if a component can be made for 5 cents in mexico and $1.50 in the US, it is obvious that a company will choose to import it anyway and simply pass on the additional tax in the sale price of the item in question. Imagine the impact on a piece of technology with 1,000 components. This doesn’t create new jobs. This generates a few more taxes for the US government.
What it will absolutely do is substantially increase the price Americans pay for every product, technology, service, energy (yes, half of our gasoline is imported), or food related item that passed across the border. This will significantly increase the price of everything from automobiles to avocados, from Televisions to Tennis shoes, from Smart Phones to Spirits (your favorite wines, beers, liquor – anything imported into the US).
Who benefits from this strategy? The American worker is being led to believe it will re-create the glory days of American manufacturing. Industry leaders from Ford, Caterpillar, Rexnord, the steel maker Nucor, and even soft drink manufacturers and CNC facilities are telling us otherwise. They are moving forward with plans to move plants to Mexico and abroad. The reason is simple: the actual cost of labor in the US, and the availability of natural resources.
Even if we had the capacity to manufacture it here, we do not have the raw components in many cases. They will have to be imported resulting in additional cost to the manufacturer or distributor, and the cost of these resources will not be deductible resulting in skyrocketing prices.
As the border tax debate heats up one thing is clear: If you want to purchase any luxury item, from a TV to a car, now may be the best time.
How will your business manage changes to international tax law? How will you need to restructure accounting systems and supply chain management to maximize profitability while reducing effective tax rates in the future? We invite you to contact the experienced international tax attorneys at Allen Barron to discuss your present business model, and the impact proposed changes may have upon your business. For a free consultation at 866-631-3470.
