No, a 20% Tariff on Imports Isn’t a Thing. What’s Really on the Table is a “Border Adjustment Tax.”

Jan 27 2017 |
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The details are still coming together, but here’s what it might all mean.

On Thursday afternoon, White House Press Secretary Sean Spicer caused an uproar when he told reporters President Trump was considering a plan to impose a 20 percent tariff on imported Mexican goods. Although Spicer eventually walked back his remarks, the idea had stuck — and lots of people started freaking out.

Let’s take a step back. There actually isn’t a 20 percent tariff being considered at all. What’s really being discussed is Border Tax Adjustment, part of Congressional Republicans’ plan to reform the corporate tax code. Here’s what it could mean for American manufacturers.

O.K., so what is this all about?

There’s a really complicated debate happening in Washington right now over how best to reduce the corporate tax rate. House Republicans have offered a blueprint that cuts the corporate tax rate from 35 percent to 20 percent, while making changes to deductions, treatment of overseas income, and how the tax is actually applied. One element of the plan is to implement Border Tax Adjustment, which is also being called a "Border Adjustment Tax." This tax would be paid on imports coming into the United States. Conversely, U.S. exports would be entirely exempt from corporate taxes.

Um, I’m really confused already.

What is a Border Adjustment Tax?

O.K., let’s put it this way. Have you ever traveled overseas and bought something? Then you might have noticed that you paid a “value-added tax,” called a VAT. The VAT is a consumption tax that is added by businesses at each point in the production chain, applying to both manufactured goods and services. But products are stripped of the VAT when they are exported, which benefits that country’s manufacturers.

Nearly all of America’s trading partners use a VAT system. The United States doesn’t. One consequence of this disparity is that U.S. exports shipped abroad are first taxed here at home, and then face VAT taxes when they enter another country. Again, in many foreign nations, their exporters receive tax rebates for shipping their goods to the United States. It's easy to see how U.S. manufacturers are at a competitive disadvantage in the current tax system.

So the U.S. is just going to have a VAT?

Not exactly, although the Border Adjustment Tax being proposed is designed to level the playing field for products stamped “Made in the USA” that are exported throughout the world. Under the proposal, which is not final, companies would be taxed cumulatively for products that they import. Exports wouldn’t be taxed.

The Border Adjustment Tax would thereby encourage companies to produce their goods in the United States, since they would not be taxed for their exports. Companies that employ U.S. workers also will be able to deduct their payrolls, providing another incentive for U.S. production.

One thing to keep in mind: This proposal also differs from a VAT in that it applies only to corporations, not individuals. 

How much would the tax raise?

It’s not entirely clear since the details of the plan are still being worked out, but the general consensus is that it would raise around $1 trillion. That would help create a lower tax rate for businesses. The top marginal corporate tax rate right now is 35 percent; the new rate would likely be around 20 percent.

Who would benefit from the adjustment tax?

Advocates for the plan argue that companies that make their products here and export them overseas — like Boeing and General Electric — would immediately stand to benefit, since they employ thousands of U.S. workers and sell a lot of products overseas. But even companies that primarily sell their products only on U.S. soil will benefit, since their foreign competitors will have to pay a tax. However, the fine print details are few and far between at this stage, so many U.S. companies are withholding judgement about the plan until they learn more.

Who is going to oppose this plan?

Already, many companies that import a lot of goods, retailers like Walmart, have been vocal in their opposition. Koch Industries Inc. is also an early opponent of the proposal.

I’ve heard such a tax might lead to big price increases on consumer goods. Is that true?

Not necessarily, no. Look, imports are going to be subjected to a higher tax, and it’s possible that retailers, for instance, will try to pass those costs on to consumers. But that decision would be entirely up to them — and it may not be good business for them to do so, since consumers may shift their buying habits to domestic products. Proponents of the plan argue that companies that rely on imports will look to increase their U.S. production, or sell more American-made products in their stores.

One thing to remember is that importers and those who have offshored production have taken advantage of cheap labor and massive government subsidies overseas at the expense of U.S. workers. The middle class has shrunk and the income gap between rich and poor has risen, especially after China’s entry into the WTO. Proponents argue that an adjustment tax would encourage more U.S. production — which would in turn create more good-paying, middle class jobs. Wages would be likely to rise, too.

Would a Border Adjustment Tax benefit U.S. manufacturers?

Again, it’s hard to say for certain, given the details are still being discussed. But in theory, yes. Companies that Keep it Made in America would benefit, while those that import their products would pay the adjustment tax. That would encourage U.S. manufacturing. We’ll be keeping a close eye on this plan as more details come out, watching to see how it impacts domestic production.

So, where does this debate stand?

The House Republican blueprint, which includes a border adjustment tax, will likely serve as the framework for the corporate tax reform debate in the House of Representatives. But, that is only a starting point in a very long process. Keep in mind that the last time we saw tax reform was in 1986, when Crocodile Dundee and Top Gun hit the movie box office. The Senate may develop a different plan entirely, and the White House will have its own views. We expect the pace to pick up in April or May. Republicans have a goal of achieving tax reform by August.