You don't need mythical importer-exporter Art Vandelay to tell you things are about to get complicated for businesses that trade with foreign countries.
President Trump is just halfway into his first 100 days in office, and his economic advisers seem to be stuck between a rock and a hard place on the issue of imports. On one side, there is a Congressional Republican plan that would tax imports to generate revenue and encourage domestic production and exports. And while the President's own stance on in-bound goods would seem to support that plan, push-back from the business community has been consistent and loud.
Though it's still too early to decipher exactly where this is all headed, we can get some insight on the issue from a bill unveiled by House Republicans last summer, which would adopt a territorial tax system, which taxes goods based on where they are consumed rather than where they are produced or where the company is headquartered. Currently, the tax code levies taxes on U.S. firms on their worldwide income so that, at least in theory, profits earned overseas are taxed at the same 35 percent rate as domestic earnings. However, taxes on foreign income are deferred until a firm either reinvests those profits in the U.S. or distributes them to shareholders.
To try to make sense of it all, I recently spoke with Joseph Rosenberg, a senior research associate in the Urban-Brookings Tax Policy Center at the Urban Institute. His research focuses primarily on issues of federal taxation, including business and corporate taxation, broad-based consumption taxes, tax expenditures, and tax incentives for charitable giving. He told me that, on the surface, the House Republican plan looks very simple.
"The purpose of the destination-based cash flow tax is to tax the sale of the goods in the U.S.," Rosenberg explained. "So in that case, the tax is rebated or exempted from exported goods and it is imposed on imported goods. Basically, the goods that are sold for final consumption in the U.S. pay the tax, while goods that consumed abroad do not pay the tax."
Seems straightforward enough, but as always, the devil is in the details, especially when the bill is starting to draw the ire of powerful, U.S.-based corporations.
The plan is running into serious opposition from the private sector, specifically among retail giants (Brett Biggs, the CFO of Walmart, spoke out against the border adjustment tax, for example) who rely on importing low-cost goods from overseas. That's problematic for a president that preaches a pro-business agenda. However, Rosenberg thinks that might not be too big of a hurdle.
"Some of the large retailers who are big importers have been some of the most vocal opponents," Rosenberg said, noting they haven't been the only ones who have come out against the proposal, but also pointing to support the plan has from companies such as Boeing, General Electric, and Johnson and Johnson. "But one of the dynamics that is usually true in tax reform is that the winners are fairly quiet while they try to ride it out, while the losers are quite vocal, and that seems to be the case here, too."
So while corporations might save on the corporate tax rate, some don't seem to be finding the GOP proposal any more palatable. Does that mean a territorial tax system is dead on arrival? Not necessarily, but it will probably require some tweaking beyond what we're currently seeing in the Congressional Republican plan.