Big box retailers and advocates for the poor are teaming up for their “biggest fight ever.” It’s against congressional Republicans who want to change the corporate tax code, in particular, taxes on imports and exports.
Debbie Hickey just bought some slacks for her sons, and she wanted to buy them at Walmart, “because they’re young and starting out in the business world. And they’re clothes are very economical."
What makes them economical is this.
“Vietnam. Made in Vietnam.”
The U.S. imports about $2.7 trillion worth of goods a year. Imports are cheap because labor costs are much lower in places like Vietnam and, for the most part, the U.S. doesn’t impose a lot of special taxes on them. When Walmart buys pants from Vietnam for $20 and sells them to Hickey for $25, the company is only taxed on that $5 of profit. Part of the Republican tax plan would change that. It would tax Walmart for the full $25. It’s called a "border adjustment tax." And Wall Street analysts expect some retail prices to go up as much as 15 percent.
“Wow. Ok. So that would make a difference on where I buy things like that. Honestly, 15 percent, I think is a lot,” Hickey says.
At the same time, the border adjustment would hike taxes for companies that import, it would cut taxes for companies that export. University of California, Berkeley Economics Professor Alan Auerbach is one of the architects of the plan.
Auerbach says, “Our current corporate tax system is just broken, there are just so many problems.”
The corporate tax code has been accused of slowing growth, forcing companies to shift profits overseas, or even shifting the entire company. Advocates say border adjustment would solve that. And Republicans love it for one more reason.
“The fact that it’s encouraging companies to locate profitable, productive activities in the United States, companies that might otherwise locate them in countries where the taxes are lower. There’s no longer an incentive to do that,” Auerbach says.
Even if this plan sounds like one dreamed up by President-elect Donald Trump, it actually predates his campaign by several years. In fact, it originates from the left, and Auerbach — who advised Democratic presidential nominee John Kerry — thinks labor unions should embrace border adjustment. But right now, that seems unlikely.
Bob McIntyre, director of the left-leaning Citizens for Tax Justice, think that since the poor and middle class spend the vast majority of their income, they shoulder most of the import tax. “The Republican Party has been trying to get some weirdo consumption tax for at least the last 40 years,” McIntyre says.
Meanwhile, companies that export a lot will pass their new tax windfall on to shareholders. McIntyre says this is the same regressive tax Republicans have always pitched.
“They like taxes that hit the middle class and poor and they hate taxes that the rich have to pay, and now they’re in power.”
Academics point to economic theory which says, as the U.S. reduces its trade deficit, the dollar will gain in value and offset any benefits to U.S. exports.
Wall Street buys the theory, but not the simplicity. Brian McGough, a retail analyst for Hedgeye, says, “This is a paradigm shift. And a paradigm that’s been in place for 30 years won’t change in a week, won’t change in a month, and it won’t change in even three or four years."
McGough predicts major bankruptcies. And this is where the retail lobbyists come in. They have been marshaling resources and planning a full-on, “battle royale” to keep border adjustment out of the tax bill. McGough gives border adjustment only a 30 percent chance of getting to the president’s desk.
Proponents, however, say Congress has run out of options. If the corporate tax code is going to change, border adjustment might be the only thing both sides could agree on.
