Import-reliant businesses are shamelessly pushing back against those supporting the latest tax proposition. The border adjustment tax potentially positions export-based businesses for major gain while leaving their antithesis operators vulnerable to a decrease in sales and demand. Although intended to be a trade neutral deal, the border adjustment tax has companies with a high level of exportation at war with those who are fearful of raising consumer prices.
Industries at Risk
By taxing products based on where they are used rather than where they are produced, a border adjustment tax would theoretically have the greatest impact on major retailers, automobile manufacturers, and oil companies. These are the types of businesses with a high volume of products and materials imported from overseas. The items that are purchased on a regular basis, such as clothing, gasoline, and transportation vehicles may soon have consumers shelling out more cash than they’re comfortable with. These industries argue that such higher costs would result in a loss of demand.
Corporate Establishments vs. Consumers
If a 20% tax tariff, for example, is soon applied to the clothing sold at Target and the electronics sold at Best Buy, retailers will need to increase their prices in order to cover the difference in profit. The risk that these corporate establishments then face is a decrease in demand for products leading to a drop in sales. While small, everyday goods may not hold the key to a nation-wide economic downfall, higher ticket items such as a car could end up costing thousands of dollars more.
Our country’s current tax structure favors businesses who invest in lower-tax countries. Because of this, some of the tax burden falls on domestic workers. Our imports are less expensive because labor costs are lower in other countries, but if those imports take on additional taxes, someone needs to cover the difference. With the high unlikelihood of corporate establishments forgoing the revenue, the burden to pay falls on the consumer.
Accelerating Domestic Growth
On the other side of this debate are businesses who believe a border adjustment tax would fuel economic growth. Under such tax, exports from the U.S. would be tax-exempt but imports would be taxed at the border. Businesses in support of this motion argue that it would leave them more inclined to purchase from within the U.S., while also making selling American goods overseas less expensive and creating more jobs. If all goes their way, an increase in domestic purchasing would alleviate a significant portion of the current $330 billion annual trade deficit. Stores that function predominantly in the U.S., accommodating less frugal customers, could see high sales volumes because the increase in production costs would be minimal, if any.
So which is the safest move for U.S. businesses and our country’s economy? The answer is currently unclear. What we do know is that the U.S. is currently one of the only countries that does not impose a value-added tax charge on domestic production and distribution. Economists and politicians supporting inversion claim that the tax adjustment would rid of the incentive for American businesses to relocate their production, thus creating a greater balance in our economy.
Please check back for updates on this topic soon.