Even though the president-elect Donald Trump has not moved into the Oval Office yet, the Republicans have already put forward the biggest tax overhaul in 30 years that would impose heavy taxation on the companies sourcing their goods from abroad.
The proposal of one of the largest tax code reforms has been recently made public, sending shockwaves through the American business sector by the end of last week. The Republican party has prepared a tax reform that will punish the U.S. companies for importing goods from abroad instead of buying everything that is "Made in the U.S." for their production and service needs. Even though the initiative does not come from the president-elect Donald Trump directly, he has repeatedly spoken of imposing protective tax tariffs during his presidency and claimed that "fixing" the tax code was his top priority, said Financial Times.
The proposed border tax adjustment is technically not a purely import tariff but more of a restriction that will be imposed on the U.S. companies to prevent them from deducting the import costs from their taxable income. Essentially, this means that the so-called border tax adjustment will considerably raise the bills of import-dependent companies as they will be effectively taxed on the full value of the completed sale instead of just the profits part as it was previously done, explain the experts.
Considering that 95% of all clothes Americans wear as well as the majority of consumer electronics are produced outside of the United States, the president-elect will have to find his way out of the conflict of interests around promoting domestically-produced products while imposing unbearable import costs on the big number companies.
“Our goal should be to try to make everything we can in the United States so that the money gets put in the pockets of Americans. We want to see the potential for a change in that border adjustability so that American jobs are protected. That’s the point,” said the incoming White House head of staff Reince Priebus, as reported by FT and Salon.
The tax reform comes as part of the blueprint issued by the House Ways and Means Committee this June that outlines the committee's plans for a major tax overhaul that they expect to result in unprecedented economic growth for the United States. According to the proposal, imposing a tax on imported goods will prevent companies from moving their operations abroad and, as a result, create more jobs for America. The 30-page proposal discusses current American tax system in a very negative way by saying that today's tax code is to blame for many issues of the economy:
"Our broken tax code does more than just impose unnecessarily burdensome paperwork requirements, subsidize some industries at the expense of others, punish savings and investment, and force businesses to move overseas. The broken tax code also undermines economic growth – the growth that has been our country’s engine of prosperity for generations", says the report.
The Economist adds that the proposed border tax adjustment impedes imports into the United States while supporting the exports, the number of which has been unproportionally smaller. During his election campaign, Trump has repeatedly complained about the tax Mexico imposes on goods imported from America whereas Mexican products do not incur any similar taxation when brought to the U.S.
Business sector plans a rebel
Right after the tax proposal hit the news, several U.S. business sectors have expressed their discontent with the tax adjustment, with retail being hit the hardest. The main problem about the Republicans' idea is that a huge portion of American companies is heavily dependent on imported goods as the main part of their business strategy that allows them to keep the prices competitively low.
According to Financial Times, as much as 95% of all clothes sold in the United States is made outside of the country since the overwhelming majority of companies have relied on outsourcing and bulk buying for decades. Big companies like Wal-Mart (XETRA: Wal-Mart Stores [WMT]), Home Depot (NYSE: Home Depot [HD]), Nike (NYSE: Nike [NKE]) and IKEA would also be significantly affected by the tax changes because most of the products they produce are imported. Consumer electronics in the face of the largest Korean manufacturer Samsung, especially, and almost all largest producers, is yet another affected sector.
As it is clear from the graph, virtually all major industries that constitute a large part of consumers' purchases will be touched by the tax overhaul and its influence is likely to result in higher retail prices for consumers, as well. The experts estimate that the tax bills of textiles & apparel companies could increase by 300% to 500% compared to their profits before tax. American Apparel's Vice President told Salon that the import tax adjustment could well trigger an increase in the net prices of goods as the companies would be pushed to search for ways to stay solvent.
"The proposed border tax adjustment will distort the market, increase consumer prices and create an uneven playing field for companies and consumers alike. Our tax system should encourage, not destroy, free exchange and trade resulting in robust commerce and lower, not higher, prices for consumers,” Koch Industries said in a statement.
Despite the Republicans' intention to use border tax adjustment as a way to boost the American economy, the industry experts said that as soon as the companies feel the effect of the import tax on their taxable income, most of them would try to sustain themselves by raising product prices and potentially reducing payrolls. Both of these tactics would only further weigh down the economic growth in the U.S. In this situation, the American consumers, rather than the businesses itself, could be the ones suffering most from the tax overhaul aimed at businesses.
A huge number of retail companies watched their stock tumble late Friday and in after-hours on fears of the border tax implementation. A footwear company Deckers Outdoor (NYSE: DECK) lost almost 7% on Friday whereas such brands as Coach (NYSE: Coach [COH]) and Ralph Lauren (NYSE: Ralph Lauren Corporation [RL]) dropped more than 3%, with Fossil (NASDAQ: Fossil Group [FOSL]) losing 7.79%. Another footwear brand, Boot Barn (NYSE: BOOT), declined by roughly 4% by the end of the last trading session. The sector as a whole has moved in a slight downward direction, too.
The Republicans' bold tax overhaul plans have washed away the optimism of the business sector towards Trump's administration that has been seen as business-friendly in the post-election days after Republicans promised to cut the U.S. corporate tax down from 35%.
The border tax adjustment will be presented for an approval to Donald Trump next year after he officially enters the Oval Office.