By Jon Barela
As efforts get underway to reform the nation’s tax code, several ideas are being considered. While many of the concepts to simplify and reduce the tax burden on American businesses and individuals are worthy of support, one plan, the so-called Border Adjustment Tax (BAT) should be rejected.
Better termed a “Consumer Tax”, the BAT neither simplifies America’s byzantine and outdated tax code nor does it reduce the tax burden on our citizens.
The BAT would levy a 20 percent tax on imported goods and would allegedly raise over a trillion dollars of revenue over the next decade, enough to pay for a significant corporate income tax cut. The proposed tax would adversely affect border towns like El Paso, and its negative repercussions would be felt across the country.
There are several problems with the BAT. First, whatever revenues generated at the federal level under the proposal will be far outweighed by the increased costs that will be passed along to hard-working American families. Items like gasoline, clothing, food, automobiles, and electronics would cost the American consumer much more. In fact, a UBS Securities analyst estimated that average prices in the U.S. could rise by a whopping 8 percent.
The average new car sold in America would be an additional $2,500, a gallon of gasoline would cost 30 cents more, and parents should expect to spend an additional $53 for back-to-school clothing and supplies. If BAT were adopted, lower-income Americans would feel the biggest hit and shoulder a proportionally larger burden.
BAT advocates claim that the dollar will rise 20 percent in value and companies will be encouraged to produce in the U.S. A stronger dollar would mean that U.S. import companies will have more buying power, and Americans won’t see prices go up.
But there’s the catch – the whole thing only works if the dollar very quickly rises roughly 20 percent in value.
However, most economists fear such predictions are overly optimistic and are skeptical that the dollar would become stronger. If the dollar doesn’t rise 20 percent, prices for consumers will rise, according to an analysis by the New York Federal Reserve.
Recently, Federal Reserve Chair Janet Yellen, testifying before the House Financial Services Committee, said “[t]he problem is there’s great uncertainty about how in reality markets would really respond to these changes” when questioned on whether or not the dollar would appreciate under a BAT.
Should the dollar appreciate and strengthen as its champions state, it could mean fewer exports for U.S. products as American-made products become more expensive to foreign consumers. The problem is already evidenced in our manufacturing sector, which experienced the steepest drop in demand in six years in 2015, according to data from the Institute for Supply Management.
Additionally, a BAT would lead to fewer jobs and higher unemployment. Increased consumer costs and fewer exports would translate into more Americans out of work.
Given the uncertainty of the tax, its scope, and its implementation, border regions like the North American Borderplex will definitely suffer a drop in economic activity as well as a loss of jobs. Already, uncertainty over pending policy proposals is stemming the number of Mexican shoppers crossing the border to shop in the U.S.
As costs snowball and import jobs transition to export jobs, the healthcare, transportation, and professional services sectors could be particularly hit with jobs losses throughout the country as the economy shifts and workers retrain. As evidenced by a lack of implementation plan, few are considering how to get the economy and the population from point A to point Z in a way that avoids transition costs and pain for the average American worker and their families.
Yellen also stated that a “strong set of assumptions is needed to believe that markets would fully offset those changes … It’s very difficult to know just what would happen.”
That’s because many of these issues are out of our control.
The BAT could spark a trade war killing millions of American jobs. Many trade and legal experts also question whether the proposed BAT violates rules established by the World Trade Organization (WTO).
While final language of the BAT isn’t available, a tax on imported goods and a tax exemption for exported items (which amounts to an export subsidy), would probably violate the so-called national treatment principle of the WTO and the rules of the General Agreement on Tariffs and Trade (GATT).
No clear explanation has been given by BAT backers on how the proposal will pass WTO muster. Commitments and agreements made by our country do matter.
The irony is that tax reformers want a simpler tax code, a very laudable goal. However, the BAT is far from simple. It imposes new and onerous burdens on businesses large and small and its application has been called “voodoo economics” and “overly complicated” by none other than Larry Kudlow, who served as a senior economic advisor to President Trump’s campaign.
Tax reform advocates in Congress and the administration are to be commended for their desire to reform our nation’s complex and outdated tax system. Many of their ideas are rooted in common sense simplicity that would grow the economy.
However, tax reform should never be done on the backs of working families and it should not be complex and unpredictable. The BAT – masquerading as a consumer tax – does just that, and it should be killed.