It is no secret that President Donald Trump wants to change what he sees as a bad trade deal. Congressional Republicans on the other hand want to avoid a tariff war and are still largely committed to free trade.
As a compromise, Republicans are getting behind something called a border adjustment tax, a simple explanation of which would be that it is a tax on economic activity generated within the United States. Exports wouldn’t be taxed, but imports would be.
A border adjustment tax is a key component of the GOP’s corporate tax reform plan which is designed to lower corporate tax rates from among the highest in the industrialized world to 20 percent. There is widespread agreement on the need to cut corporate taxes, but the border adjustment tax has generated controversy, especially among the business community and the right.
Among the supporters of this tax are American manufacturers such as Boeing and General Electric. “American workers and businesses are not competing today on a level playing field with foreign competitors because of an outdated and unfair tax system,” John Gentzel, a spokesman for a coalition of companies supporting the border adjustment tax told Reuters.
Meanwhile, some heavyweights have come out against the border adjustment tax. Walmart announced its opposition to the tax. “The border adjustment tax, for us, is a concern,” Walmart CFO Brett Biggs said Tuesday according to Business Insider. “Clearly anything that would potentially raise prices for our customers in the US is a concern for us.”
Other retailers such as Target and even some American consumer manufacturers such as Koch Industries have been lobbying against it. Koch Industries, which is owned by the libertarian Koch Brothers, has even gone so far to call it “devastating.” The Kochs have mobilized their leading activist organization, Americans For Prosperity, to fight the border tax.
The retailers and manufacturers of goods for domestic consumption are expected to be the hardest hit. The border adjustment tax is expected to raise the price of goods by 20 percent. Gasoline is expected to increase by at least 35 cents a gallon because America is still a major importer of oil. American families won’t be able to provide as much of the things they need and it could result in job losses for American companies.
A border adjustment tax, even when it is combined with lowering corporate taxes, could be devastating for most small businesses. Most small businesses deal in the domestic economy and do not export overseas. They would be faced with 20 percent higher costs which would be crippling. Also, they don’t have the political clout that Boeing and General Electric do in Washington D.C. This is cronyism, pure and simple.
There is a better way to achieve the goal of a destination based tax system without hurting American consumers and businesses as much. The Tax Foundation has an excellent proposal to replace the corporate tax with a value-added tax. It would put American products on equal ground with imports because they would be hit with the same amount of tax. It would strengthen American exports because they would be tax free with the elimination of the corporate income tax. It would make the economy explode and increase hiring and investment.
America needs to make better trade deals for both our businesses and consumers alike. But implementing a border adjustment tax is not the way to do it. They’re as harmful as tariffs for consumers and it’s ultimately corporate welfare for some American manufacturers.