Under the border adjustment tax (BAT) plan, imports will be penalized and exports rewarded… which theoretically, in a perfect world without pushback, would leave our economy nicely balanced and undisrupted.
But I doubt it will happen that way, because the importers and exporters are not the same businesses. I’ve written extensively about this topic in my three part series, "Tax Reform: The Good, the Bad, and the Really Ugly" in Thoughts from the Frontline. (subscribe here for free.)
Tariffs Ruin Christmas
Virtually all the shiny presents under your Christmas tree were made outside the US. The companies that import them could be border-adjusted right out of business under the Better Way plan.
Here’s an example. Suppose you are a toy company and you spend $1 million to bring in toys from China. You package and distribute them to retailers around the country, generating an additional $500,000 in costs for yourself. You sell them at wholesale for $2 million. What’s the tax consequence?
You just spent $1.5 million to generate $2 million in revenue. But the $1 million you spent on the imports is no longer deductible on your tax return. So your taxable profit isn’t $500,000, it’s $1.5 million. At 20%, your corporate income tax is $300,000 instead of $100,000. This plan triples your taxes.
Would you stay in business under this plan? Would the retailers and consumers still buy as many toys? You will have to downsize and probably lay off workers.
What the Republicans want us to do is to buy American-made toys instead of Chinese imports. With the BAT in place, US-manufactured products that compete with the products we buy from foreign producers will cost 20% more, priced in US dollars.
Meanwhile, those who export products from the US will see the reverse effect.
At best, there will be an adjustment period, which will be far longer than those who propose this plan think, as workers retrain for new jobs.
The problem is that the importers and exporters don’t all operate in the same states and counties, so the people who lose their jobs because of the import tax will end up having to move to where the exporting jobs are.
The Border Adjustment Tax Will Hit Retailers Hard
As you might expect, the retail industry is dead set against the BAT. Walmart, Target, and the like are already lobbying hard against it.
“Consumption” is what retailers sell. They want us all to consume more stuff from their stores. Consumption taxes reduce the amount their customers have available to spend, so these taxes are a direct revenue loss to retailers, at least in the short term—and the short term is 5–10 years. These types of adjustments do not come quickly.
The retailers aren’t just whistling Dixie. The BAT would hit them hard at a time when they can’t afford many more hits.
Retailing at scale is all about logistics. The big box stores actually do a pretty good job of that, but now they have a new problem. Consumers carry these little comparison-shopping supercomputers in their pockets and are not shy about finding a better price.
Now, Amazon sells many imported products. So does Walmart. The border adjustment tax will hit both of them, but it will hit the old-style retailers just as hard, at the very time they are struggling to compete with Amazon. Walmart may survive, but I’m not sure companies like Sears will.
I’m very frustrated with some of my Republican friends who don’t see this, or who assume new jobs will magically appear for those who’ve been displaced.
In conversations with border adjustment proponents, I’ve heard very little about implementation plans. They don’t seem to have considered how to get the economy and the population from here to there in a way that avoids negative transition costs.
That’s a big problem. Even if it all works according to plan, there will be pain in the transition.
Understand, I wouldn’t be so against the BAT if we could fast-forward five years and arrive at the new equilibrium point without all the adjustments that will have to happen in the meantime.
Manufacturing Jobs Are the Last War
As I mentioned in Thoughts From the Frontline on Feb. 7 (subscribe here for free), 80% of the manufacturing jobs that have gone away in the past 20 years have been displaced by technology, not “offshoring.”
The next front in the "jobs war" is going to be the service economy.
There are hundreds of small stores and establishments in the service industry that are going to be “disintermediated” out of business. That’s a fancy way of saying that online and more efficient establishments will be taking or eliminating their jobs.
That is why I applaud the idea of what the Republicans are trying to do with the Better Way plan, because they are trying to stimulate new businesses in the United States.
New businesses are the font from which growth and new jobs spring. However, the mechanism by which they plan to accomplish this laudable goal is going to create more problems than it solves.
John Mauldin is the chairman of Mauldin Economics, which publishes a growing number of investing resources, including both free and paid publications aimed at helping investors do better in today's challenging economy. Mauldin uncovers the truth behind, and beyond, the financial headlines.
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