Retail industry CEOs who recently met with President Trump spoke in favor of tax reform in general but against the border adjustment feature at the center of the Ryan-Brady tax reform bill developed by in the House of Representatives.
They are missing the forest for the trees by focusing on the narrow impacts of tax changes on their companies rather than the big picture benefits of reform for their customers and the overall economy. Ultimately, a stronger economy with rising incomes and better job creation means more money for families to spend in stores and online. That's what the Brady-Ryan tax plan will mean—a stronger economy—and that's good for retailers, even if they don't see it that way quite yet.
The border adjustment feature in the Brady-Ryan tax proposal sets up a corporate tax system that taxes all sales made within the United States the same regardless of where the company selling something is located or whether the production occurs in the United States or overseas.
The current corporate tax system, in contrast, typically means a lower tax rate for firms that produce overseas and import into the United States. U.S. firms that move production overseas do better than American companies that produce here because they get to put off paying taxes on the profits they make by producing in other countries.
But foreign firms that sell into the U.S. do the best of all, because the U.S. corporate tax rate is higher than other countries' taxes. It is disappointing that companies move jobs and production lines overseas, but the backward incentives in the U.S. tax system make this no surprise.
The Brady-Ryan tax plan will flip the situation. The proposal includes lower tax rates, strengthening U.S. job creation and economic growth, while giving both businesses and American families a simpler tax system. The border adjustment in the proposal addresses the vexing aspects of the U.S. tax code that today lead firms to shift their profits or invert their corporate structure to move their headquarters outside the United States.
"Retailers' concerns are understandable. They see the border adjustment as a big change that looks like it puts a 20 percent tax on everything they import—which at some leading retail stores, is just about everything they sell."
The border adjustment means that all products sold in the United States will face the same tax, regardless of where the item is made, and U.S. firms selling overseas will not face higher taxes than their foreign competitors. The incentives that lead firms to shift production to low-wage countries or to use accounting wizardry to shift profits to low-tax countries like Ireland will disappear. Decisions about where to invest and hire will be made on business considerations rather than driven by the tax code. The U.S. can be a great place to do business – and to hire and make things.
Retailers' concerns are understandable. They see the border adjustment as a big change that looks like it puts a 20 percent tax on everything they import—which at some leading retail stores, is just about everything they sell. But every other industrialized country already has the border adjustment, and it hasn't diminished global trade.
This is because the tax plan will set off other changes in the economy that offset the impact of the import tax, namely by leading to a stronger dollar. The effect of the import tax on things made overseas is then cancelled out because each dollar buys more of foreign products. Paired with the higher wages and lower family taxes in the tax plan, consumers will be significantly better off.
The border adjustment should be seen within context of a big and simple tax plan that treats U.S. businesses the same as foreign ones rather than the current system that disfavors American job creators. And the big picture is that the lower taxes on work and on saving and investment in the Brady-Ryan plan will drive stronger economic growth and job creation. That will be the main impact at the cash register—more sales.
Commentary by Phillip Swagel, a professor at the University of Maryland's School of Public Policy. He was previously assistant secretary for economic policy at the Treasury Department from 2006 to 2009. Follow him on Twitter @pswagel.
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