The most potentially impactful piece of the initial Republican tax reform plan is the concept of a border adjustment tax to replace much of our corporate tax income. Essentially, instead of taxing companies on revenue produced domestically, which in theory punishes domestic production and also is vulnerable to international tax sheltering, they would tax cash outflows leaving the US.
So, what are the consequences of that plan and which tech sectors would be impacted most dramatically?
The consequences of such a plan would almost certainly be higher costs of goods for Americans. For all of our myriad problems stemming from globalization and automation, one positive aspect has been drastic drops in the prices of goods. America is a consumption driven economy and consumers, often despite low incomes and other burdens, feel free to spend heavily on consumer goods because our prices relative to our annual incomes are the cheapest of any country in the industrialized world.
A border tax would change that. The tax would impact retailers and other import driven industries most heavily and those retailers, already reeling over the last few years, would pass that cost straight on to consumers. Americans, many of whom may like the sound of forcing companies to pay to send capital out of the country, probably wouldn't like to pay 30% more for their underwear at Walmart.
From the tech side, of course new startup brands that rely on imported goods would be hit hard, but the greater question would be whether the border tax would apply to online purchases and, if so, at what level. If such a tax were applied to Amazon, to name one major example, it would put almost impossible strain on their business model, causing prices to rise drastically.
So, what might be a good alternative to such a game-changing measure? As usual, steering a moderate course is probably the best economic answer. A tradeoff of anti-tax inversion and international sheltering policies with greater enforcement (and perhaps a one-time holiday to bring capital back in) in exchange for some significant deregulation could result in both more hiring and economic activity as well as higher tax revenues. This, in turn, could enable a lower corporate tax rate and for small companies to treat all income as corporate income, which could lead to a major economic boost that is sustainable.