When President Trump wanted Mexico to pay for the expensive wall on the American-Mexican border, Mexico denied with all its might. So, Trump proposed the introduction of border tax which will make the imports from Mexico 20% more expensive. This additional tax will help the construction of the wall. However, the American companies fear for their future when the border tax comes into existence.
Recently, President Trump announced that his plans on announcing reforms to reduce overall tax burden will be revealed in two to three weeks. This has spiked the interest of the investors and the stocks surged. The tax reforms will make the exports cheaper and imports expensive. Combined with border adjustment tax, this could mean that the companies relying on imports will suffer greatly due to the reforms. So, car dealers, retailers, oil refiners and others who follow an import based business model vehemently oppose border tax. On the other hand, Boeing, General Electric and Dow Chemical which export predominantly welcome the border tax. Both the groups are spending millions of money in support of and against the border tax.
The House GOP plan is to introduce destination based border adjustment tax which will tax all the economic activities in the USA only. Exporters will be exempted from tax for selling goods overseas. Importers will not receive tax deductibles for spending on importing goods from other countries. The corporate tax will reduce to 20% from the current 35%. This new proposal will make the importers pay 20% more tax.
Economists have a very different opinion on the issue. The impact of tax rates won’t just affect the imports and exports. The exchange rates of the dollar will also be affected by this. As a result, tax cuts will result in appreciation of the dollar. This means that imports have to spend the same amount of money even with a border tax. Exporters have to lower the prices of their products to make their products affordable in foreign countries. So, in the end, importers and exporters will experience no notable change with the border tax.
The prediction of the economists is not just on paper. The European countries faced a similar adjustment when border adjustment was proposed. The value added tax programs introduced a new tax regime, but the cost for the businesses wasn’t affected by the change. So, the economists want the importers and exporters to stop panicking because there won’t be a massive change in their operational cost due to the border tax.
At the same time, no country has ever used a proposal similar to the House GOP. This means that nobody can be sure of the effects of the border adjustment tax in the current context. This keeps the American companies on edge because the exporters are set to gain from the tax reforms while the importers will suffer more. The economic situation in the country will change in a massive way and it could get ugly for certain businesses.