Thursday, February 2, 2017

Border Tariff or Border Adjustment Tax?

According to Reuters Breakingviews there's a lot of talk these days about borders and taxes in Washington. U.S. President Donald Trump wants to hit firms that outsource with a simple tariff on imports. Republicans in Congress have pitched a more complex idea, a border adjustment, built into a corporate-tax overhaul. Breakingviews ticks through the winners and losers.

WHAT IS TRUMP'S TARIFF PLAN?
Angered over companies setting up factories in Mexico and elsewhere to produce goods for the U.S. market, as well as by those who already manufacture outside the United States, the president has threatened to impose a penalty in the form of a tax at the border. The levy, which he has suggested could be as high as 35 percent, would apply to firms that import goods to the United States. On Monday, he reiterated his threat to impose a "very major" border tax during a meeting with manufacturing executives. Separately, he'd also reduce the standard corporate tax rate to 15 percent from the current 35 percent.

HOW DOES THAT DIFFER FROM THE HOUSE REPUBLICAN PLAN?
Trump's particular target is U.S. companies that don't manufacture in America, and it's unclear how widely his punitive levy would, or could, be applied. But he's painted it as a simple border tariff. Lawmakers led by House Speaker Paul Ryan, on the other hand, would include border adjustments in a broader revamp. They too would cut the typical corporate income tax rate, to 20 percent in their plan. And they'd move toward a territorial system in which companies would be taxed where income is earned.

The cost of imported parts or finished goods for use or sale in the United States would no longer be deductible for tax purposes, while revenue from exports would be excluded from taxable income. The idea, House Republicans say, is to reduce incentives for companies to play games with the prices at which they move goods between jurisdictions or to move their headquarters abroad to reduce their tax bill. Currently, a U.S. company's overseas profit is taxed at home (often in addition to incurring tax overseas) but only when the money is brought back to the United States. Export revenue and import costs are both included in calculations of U.S. tax liabilities.

In an interview, Trump told the Wall Street Journal that such a tax is too complicated, though he later said he would work with congressional GOPers.

To read more go to Reuters Breakingviews.

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3 comments:

  1. Cost Of GOP Tax Plan May Outweigh Touted Benefits
    According to Law360,An empirical study by the Treasury Department of House Republicans' proposed approach to taxing international trade and corporate income shows a dramatic increase in the tax base, but experts caution that the plan hinges on a changing exchange rate and is unlikely to deliver all the anticipated benefits.

    The U.S. Department of the Treasury's Office of Tax Analysis recently released a paper concluding that the centerpiece of the GOP's blueprint to revamp tax laws by taxing imports, but not exports, yields a significantly larger tax base than the current system of taxing corporate income.

    Under the so-called destination-based, cash-flow tax, colloquially known as the DBCFT or border adjustability tax, companies will not be able to deduct the cost of imported goods, and this is expected to eliminate tax incentives for moving jobs and profits offshore, according to the GOP. The tax is also projected to raise approximately $1.2 trillion in revenue, which will allow Congress to slash the corporate tax rate from 35 percent to 20 percent.

    The Treasury paper, which comes with certain caveats, takes actual corporate tax returns from a sample of IRS statistical data during the years 2004 to 2013 and recalculates the end results by taxing cash flow — essentially, the amount of money that a corporation has at the end of a year after accounting for all the cash going in and out of a business — instead of income, which can be more difficult to measure.

    The paper concludes that the proposed system is a promising venture that could bring about incentives for economic growth, but experts are skeptical and say the plan is a gamble on whether a stronger dollar will result from the expected reduced demand for imports and the corresponding increase in exports.

    A stronger dollar would offset the increased tax on imports, but if the exchange rate does not fully adjust, consumers will end up having to foot the bill for the additional cost, according to William Gale, co-director of the Urban-Brookings Tax Policy Center.

    "The concerns of retailers and oil refineries and the apparel industry ... become more apparent. If the exchange rate doesn't adjust ... consumers get hit at the cash register," Gale said, speaking at a panel hosted by the Tax Foundation, a nonpartisan tax policy think tank.

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  2. Adam Posen, president of the Peterson Institute for International Economics, told Law360 that the exchange rate could go up on average, but that it really is more vulnerable to currency trading by speculators, investors and financial markets, which vastly outweighs the activities of importers and exporters.

    "The plan hinges on the exchange rate, but the assumption of the exchange rate adjusting is totally wrong and unjustified. The plan is fundamentally flawed because it assumes the exchange rate fully adjusts," Posen said.

    Elena Patel, a financial economist who co-authored the Treasury paper, also spoke at the Tax Foundation panel, saying that the study results include events, decisions and behavior — such as the recession and scheduled depreciation of assets — that are atypical of a normal business cycle, and that it hinges on the U.S. being a net importer during the 2004 to 2013 years. The paper also does not take taxes on financial firms into account.

    The study revealed that the difference between taxing income versus cash flow did not yield significantly different results, but that it was border adjustment, which removed foreign sales from the tax base, that resulted in a larger corporate tax base.

    Still, about 10 percent of firms would no longer have a tax liability under the Republicans' proposal, Patel said, noting that there is no real-world experience with a cash flow tax system to lean on.

    "You need to be aware of that when you're thinking of the design of the cash flow tax," she said. "What do you do with those firms that used to have a tax liability that now have moved into a permanent loss position? ... Their losses are so much that they don't offset their taxable income."

    Posen said that if the exchange rate doesn't fully adjust, there is likely to be more retaliation from trading partners, and lower-income people who rely on cheaply imported electronics, clothing and automobiles will be hit the hardest, he said.

    In addition, the House Republicans' blueprint would create distortions, as it appears to omit service industries, and would lead people to put more resources into sectors that are less taxed. Sectors that

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  3. will be hurt most by the DBCFT will inevitably lobby politicians for a more favorable treatment, ultimately leading to less revenue than anticipated, Posen said.

    "It's very unlikely to imagine a tax code that doesn't do carve-outs for industries to get votes. I just think in practice this thing isn't going to work," he said.

    Gale argued at the Tax Foundation's panel that DBCFT does not distort financing or investment and that it would be a progressive system if it works right, since it would solve the government's headaches associated with aggressive transfer pricing practices and international tax avoidance.

    However, the absence of distortionary effects renders the arguments for lower tax rates ineffective, he said.

    "If something is nondistortionary, you should tax the hell out of it as a basic principle of tax policy," Gale said. "There is no dead-weight loss associated with it. So, there is a little bit of a disjuncture between the notion that we need to move to a cash flow tax and we need to reduce the tax rate."

    Another problem with the DBCFT, which is similar to a value-added tax system used in other countries, is that it could potentially violate rules established by the World Trade Organization, since it allows for deducting the cost of labor.

    Gale noted that Congress could implement a straight-up VAT policy and achieve wage deductions through other means, such as payroll deductions or increased earned income tax credits.

    Posen also advocated for a real VAT system while compensating lower-income people who may face increased costs, or changes to carried interest rates — options that he said are safer and more predictable than the DBCFT to achieve the corporate tax cuts that the Republicans want.

    "I do know that if you're going to try to pay for [corporate tax cuts], instead of doing voodoo economics, there are much better ways to pay for it than the DBCFT."

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