INTRODUCTION
Faced with trade adversaries for years the US attempted to increase federal tax revenue while reducing rates for citizens without considering tariffs. The House of Representatives crafted a Border-Adjustment Tax (BAT) that positively resonated with conservatives interested in providing an economy in the company’s favor. Unfortunately, support quickly waned as more information about the tax was released, and the unknown costs associated with it were too extravagant to risk punishing Americans. It would give corporations in the US a profitable advantage of receiving a subsidy for exports. Simultaneously, prices of imports would increase before entering the country in the form of the tax. This would mean greater prices for consumers of foreign goods injuring a few prevalent industries.
Possible World Trade Organization (WTO) sanctions on the US dissuaded those that opposed the bill, hence its failure in the House. The biggest loser will be China because trade BAT implementation could reduce the superpower’s trade influence; Chinese companies will shift production out of China and to the US where the corporate tax rate would be Trump’s desired 15%; China’s corporate tax revenue would decline.
Retail, electronics, and home goods sellers will suffer the most on the supply side. The BAT targets imports, thus sellers of these goods would pay higher prices from taxes and be unable to deduct them from tax statements. This raises taxable income significantly, therefore the company pays more at the end of the fiscal year. Nevermind implications for increasing their prices on the consumer market. Rather than accepting implicit damages done by a border tax while encouraging corporations to move headquarters to the US, the House left no choice to fight for fair terms of trade except in the form of tariffs. There will be two parts to this article: In order to keep preferable trade status in the international arena, the US must draft, edit, and ratify a stable and lucrative corporate tax bill. Domestically, laws that will encourage exports and goods produced and sold in the US will have positive impacts on the economy.
DOMESTIC IMPLICATIONS
The Border Adjustment Tax, drafted in 2016 as part of the Tax Cuts and Jobs Act, is a tax cut for domestically located corporations to incentivize production and exportation. The US is wealthy and running a great trade deficit. This is not worrisome because countries that import more can afford to pay more for goods coming from international producers. However, by the Supreme Court’s decision of Perry v. United States in 1935, it is possible for the US to default on this debt if Congress allows it. According to US law, the Border Adjustment Tax is legal. However, Americans (business owners) fear it will wreak havoc on economic stability and mean throwing out checks and balances to give the executive more power.
The Border Tax would make the US a desirable location for product production, increase the number of domestic jobs available, and positively impact other economic factors such as unemployment rate, national income, and the deficit. The bill was created so President Trump could fulfill his campaign promise of lower marginal tax rates for Americans while maintaining a lucrative tax system.
On the other hand, the Border Tax would also raise the prices of Chinese, Vietnamese, Italian goods. It’s been argued that the BAT is a tariff; it’s also discriminatory in nature because corporations can no longer be legally deducted import and price changing costs from their tax statements. It “directly” taxes the population, not in the form of an income tax and makes an uneven playing field in international trade. Due to this fact Former Solicitor General Theodore Olson questioned the BAT’s constitutionality’; however, Section 8 of the Constitution states that duties and other taxes are not direct. In Flint v. Stone Tracy Co. (1911) the Supreme Court held that taxes on corporations didn’t need to apportioned by the states even if they are considered direct.
INTERNATIONAL IMPLICATIONS
The US’s current trade war creates adversaries by the minute, and soon the WTO, though not the most influential of international institutions, will get involved. This not only could hurt the US’s reputation, but it encourages the relatively economically weaker countries (i.e. Vietnam, Mexico, Canada) to find discrepancies in trade deals and file claims of exploitation.
Under WTO Regulations and Agreements, a tax such as this is legally discriminatory toward imports which authorize unfair trade practices between countries. It is questionable whether the WTO, under General Agreement on Tariffs and Trade (GATT) regulations, will prevent the US from adjusting direct taxes at the border. Countries could retaliate with similar systems, or bring it to the WTO. The US is the backbone of the WTO wielding the most influential power; indictment against it would probably favor American victory since the WTO can’t afford to lost an integral actor.
Other countries already tax goods at the border though. According to Former Speaker of the House Paul Ryan, this policy inherently taxes our trade deficit since it forces a more strategic method to be created for lowering income taxes. Canada, the US’s biggest trade partner, will suffer from its interdependence on our free market. In a letter to the US House of Representatives, car manufacturers, especially Canadian, voiced their grievances over the unfairness of the proposal possibly replacing NAFTA; it would increase costs, lower investment, and hurt the job market. However, Canadian dairy exports to the US have an over 200% tariff rate with no hint at buckling, but it’s considered fair to Canada.
Exotic exports come mostly from Malaysia; it exports most of its products to the United States. Electronics, medical equipment, rubber, and palm oil (a popular cooking ingredient) sold in the US originate across the globe. Everyday essential and intermediate good prices will increase. They will raise the cost of living in the US and increase the costs of expenditures for foreign corporations on the intermediate goods (used for production of final goods). As a result, the prices of final goods will increase and the economy may get caught in a cycle of increasing prices.
Investment abroad is key to Gross Domestic Product (GDP) and depends on interest rates and taxes. Though some foreign countries already have a low-tax advantage available for companies outside of a BAT, preventing companies from claiming deductions on imports from foreign subsidiaries would eventually hurt their economy. Japan already has a low corporate tax and a method for deducting foreign import costs. Japan would suffer less by costs inflicted by the BAT than China, who is without a similar system, but still has a lower corporate tax rate than the US.
The extra tax would hurt multinational corporations residing in countries with a soaring Value Added Tax. It’s not the responsibility of the US to look out for one business, but the entire economy of the nation at home. The Border Adjustment Tax is concerning, but fiscal policy depends on data trends and inferences about the economy as a whole, not satisfying one market.