Politics

Border Adjustment = Massive Impact

Headline:

Taxing The Trade Deficit To Broaden The Tax Base

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For those of you that studied economics in college the proposed “Border Adjustment” is an idea that contradicts a crucial concept of what you learned…that is…those companies with the lowest cost of production have a great advantage versus their competitors.

Border Adjustment
Image source: Wonderlane – Flickr

However, the “Border Adjustment” Will Penalize LOW COST OVERSEAS PRODUCTION and Incentivize HIGHER COST DOMESTIC PRODUCTION by Paradoxically Increasing Import Prices Toward The Domestic Standard Price.

If Proposed = The Dramatic/Global Economic Impacts cannot be over-stated as…

U.S. Corporate Income Tax Rates Shift/Apply:

From: The Point of Lowest Cost Production

To: The Point of Highest Revenue Generation

…thereby crippling imports to the United States.

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Basically, the overseas production/domestic consumption profit arbitrage disappears. Also disappearing, though, could be a fistful of U.S. corporate profits.

Not surprisingly, much of that profit will eventually reside at the U.S. Treasury …as this economic policy is not just about protected trade…but also about broadening the U.S. Tax Base.

As U.S. Consumption towers over U.S. Production the “Border Adjustment” = a veiled federal government “Tax Grab” from American Businesses and Foreign Sovereigns….arbitrarily adjusting a company’s tax basis to suit its appetite for greater revenue.

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FURTHERMORE, THE ROADBLOCK TO IMPORTS WOULD ESSENTIALLY BE A PUNITIVE TAX ON U.S. CORPORATE DOMESTIC REVENUES GENERATED FROM PRODUCTS MANUFACTURED OFFSHORE.

The counter argument that production cost increases will be equalized by a combination of a reduction in corporate income tax rates + a much stronger U.S. dollar…is tenuous…at best.

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“BORDER ADJUSTMENT” DETAILS

FEATURES:

1. Broadens Federal Tax Base As

U.S. Consumption > U.S. Production.

2. Tax Dollar Transfer:

From: Foreign Sovereigns

To: U.S.

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3. Corporate Income Tax Application

Stratified Between Imports/Exports

4. Corporate Income Tax Basis Shifted

From: Production Domicile

To: Consumption Domicile

5. Exports Treated “Tax Favorable”

6. Imports Treated “Tax Unfavorable”

GOOD STUFF:

1. Corporate Income Tax Cut:

From: 35%

To: 20%

2. Capital Investment =

From: Depreciation

To: Expense

3. Exports Not Taxable

4. Repatriation Of Overseas Cash

BAD STUFF:

1. Imported Goods = Not Deductible

2. Interest Expense = Not Deductible

3. U.S. Based/Net Importing Company

Profitability = Destroyed

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4. Inefficient Capital Spend = Higher Priced

Domestic Production To Adapt

5. Ignores Transformation Of Production Assets

From: Humans

To: Robotics

6. Global Supply Chain Disruptions

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7. Production Based Economy = Backward Looking

8. Protectionist Trade Policies = Admission of Inability

To Effectively Compete

9. Economic Damage To Existing Trade

Partners = Substantial

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10. $US Denominated Debt of Foreign Economies =

Resets Higher

11. Penalizes Countries With Lower Standards of Living

12. WTO Non-Compliant

UNCERTAIN GOOD STUFF:

1. Foreign Companies Domicile: To U.S.

UNCERTAIN BAD STUFF:

1. U.S. Exports Suffer As Nationalism/Strong Dollar

“Trump” Free Trade

2. Tax Impact: Foreign Domiciled Companies:

Producing Overseas and Selling To The U.S.

3. Tax Impact: Countries With Existing Trade

Deficit With U.S. = Britain = Economic “Friendly Fire”

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4. U.S. Consumers = Less Choice

5. U.S. Consumers = Higher Prices

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When the “Border Adjustment” is likely proposed the ONLY SUBSEQUENT CERTAINTY = COORDINATED GLOBAL ECONOMIC RESPONSE AIMED AT UNCLE SAM…and A Trade War Becomes A Possibility.

Article by GlobalSlant