Taxing Imports Should Not Be Part of Tax Reform

Taxing Imports Should Not Be Part of Tax Reform
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Last November, voters sent a clear signal that change was needed in Washington to get our economy back on track. The new Congress and President-elect Trump have signaled that comprehensive tax reform is at the top of their agenda. Unfortunately, it appears that Congress is planning to include a new tax on consumers as part of that reform: the border adjustment tax (BAT).

The BAT is a bad policy that takes money directly out of consumers’ pockets and picks winners and losers among businesses. As Republicans rarely show support for new taxes, voters should wonder about the motivation behind this poorly-disguised consumer tax. If the BAT in the GOP’s tax reform plan is implemented, both voters and policymakers will be unpleasantly surprised when they realize the immediate consequences for businesses, consumers, and the economy.

If implemented, the BAT would mean that U.S. exports will not be taxed, while U.S. imports are. To put it even more plainly, the BAT is a hidden consumer tax, and companies that import goods from overseas will suddenly be taxed on the full value of the sale rather than just the profit. As a result, companies will have to either raise prices, fire staff, or shut down altogether. Millions of consumers who shop every week at stores such as Walmart for standard items from apparel to smartphones rely on affordable goods imported from abroad. With more than 95 percent of shoes and clothing coming from overseas, it’s easy to understand how a tax on imports from other countries would directly impact almost all Americans. 

So why are Republicans suddenly proposing a new tax that is harmful to both businesses and consumers? Supporters are publicly stating that the BAT will bring jobs and businesses back to America, while also emphasizing that their plan can raise $1 trillion. Unfortunately, this rationale is insufficient to defend the hit that Americans will feel at the gasoline pump, the grocery store, and when shopping for other everyday essentials. While many voters felt post-election optimism with the promise of lower taxes, the inclusion of the border adjustment tax could completely negate those positive effects, causing many voters to consider the BAT as a broken campaign promise.

Major importers will be penalized, just so Republicans can say they are trying to bring jobs and businesses back to America. But if retailers are suddenly expected to buy the bulk of their materials and supplies from the U.S. — toppling an established supply chain — it will be almost impossible for them to continue operating smoothly and at a profitable rate. And who’s to say that even if companies were able to switch their supply chains without disruption, it would be economically viable to manufacture all of their materials in the United States? Not only will picking winners and losers like this create an uneven playing field for businesses, it will also hamper free trade and harms consumers.

True, the $1 trillion that the BAT would raise over the next 10 years would be a beneficial outcome. But the benefits are offset by the fact that Americans would be forced to pay higher prices for necessities such as groceries or clothing. As big as this number is, it’s not worth the cost to retailers, businesses, and consumers across the country.

Some economists believe that the U.S. dollar may appreciate enough to offset any negative impacts. But many analysts, including Goldman Sachs and RBC Capital Markets, are skeptical that any dollar appreciation would be sufficient to soften the blow of the tax on import-dependent retailers and other businesses. Even if the dollar does appreciate by the estimated 25 percent needed to make a difference, it certainly won’t happen overnight — and no one knows just how long it would take. In the meantime, companies and consumers will suffer the consequences, while economists wait to see if their theories play out correctly. Consumers — especially those in the lower-income brackets — don’t have that luxury. 

All Americans, no matter their party affiliation, want a stronger America, with more jobs, economic growth, lower housing costs, and lower costs of living. While the GOP’s tax-reform plan may be well-intentioned, the inclusion of the BAT will not advance these goals. The government should not be picking winners and losers, especially at the expense of the very people they are supposed to protect. 

David Williams is the President of the Taxpayers Protection Alliance. 

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