Can We Get to the Bottom of Trump’s Border Tax?

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10%. 20%. 35%.

These are all numbers that the Trump administration has put on the table, at various times, as suggested levels of import tax that the administration threatens to levy on goods from countries such as Mexico if the U.S. companies importing them don’t move their overseas operations back to the States.

...Right?

Not so fast. It turns out that there are a few different things this whole “border tax” thing could mean.

“Border Tax No. 1”

Initially, to prod U.S. OEMs such as Ford, Dow Chemical and Dell to reshore their overseas manufacturing operations, Trump was eyeing an across-the-board tax on imports as high as 10%, according to CNN.

“Border Tax No. 2”

Then, Trump floated the idea of a 20% tax on all imports from Mexico as a way to pay for the “great, great” border wall, which, as some journalists put it, got commentators all across the airwaves talking about higher prices of guacamole.

Will the Real “Border Tax” Please Stand Up?

Basically, the so-called border tax by another name is this: the border adjustment tax (BAT). Essentially, as many reporters have made known, what everybody’s really talking about when we throw around “border tax” is the House Republicans’ proposed corporate tax reform, birthed in June 2016.

Here’s the deal, as explained by Fortune:

“One of the plan’s features is that it’s “destination based” with “border adjustment,” meaning that it taxes only economic activity in the United States. So when a U.S. company sells goods or services overseas, that revenue is ignored – not subject to U.S. tax at all. By the same token, when a U.S. company buys goods or services overseas, that expenditure is also ignored – and is therefore not a deductible expense for U.S. tax purposes. Now combine that feature with another part of the House GOP plan, which lowers the corporate tax rate from 35% to 20%. The result is that when a U.S. company buys avocados from Mexico, or anything from anyplace outside the U.S., it can’t deduct the expense on its U.S. tax return, but a company buying the same thing within the U.S. can deduct the expense; so the first firm effectively pays 20% more than the second. That’s where all the talk about a 20% border tax comes from, and why so many talking heads are saying it would help exporters and hurt importers.”

Wild Card: The U.S. Dollar

The tax deduction for importers versus exporters and how it’s related to the proposed corporate tax rate reduction is only half the story.

As a CNN Money report puts it, for the border adjustment tax to initially make exports cheaper and imports more expensive, “the U.S. dollar has to go up — bigly.”

Basically, economists argue that the value of the dollar would immediately rise, as foreigners would swoop in to buy dollars in order to snap up U.S. exports, “which would momentarily drop in price — until the dollar’s rise offset the new tax effects. Importers would be no worse off because the dollar’s greater buying power would just balance their new tax disadvantage, so, if you believe the economists’ models, your imported avocados (or anything else) wouldn’t cost any more at all. For exporters, the stronger dollar would likewise nullify their new tax advantage, so they’d be no better off,” according to Fortune.

My Favorite Analogy: Border Adjustment Tax is Like Golf

CNN Money wins on sketching out a fun picture on why dependence on the dollar is so tricky:

The issue is that the dollar is influenced by many things. It's sort of like golf.

Let's say you have to make a hole-in-one on the 18th hole to win a championship. Sure, you have to hit the ball perfectly.

But the golf ball's destination also depends on the wind, the texture of the grass, the slope of the green ... you get the idea.

The dollar has its own influences, not just tax policy. It's hard to predict, let alone make, a hole-in-one on tax reform. For the dollar, its wind, grass and slope are things like Fed rate hikes, commodity prices and the strength of the U.S. economy.

Of course, if the WTO doesn’t approve the BAT but the U.S. goes ahead with it, other countries can sue — and we all know how quickly WTO cases get settled. For more reading on the ins and outs of the BAT from a policy perspective, here’s a good primer from the Tax Foundation.

So what does this all mean for Mexican and U.S. supply chains from a sourcing and supplier relationship perspective? Read our Q&A with sourcing expert German Dominguez.

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