Tax reform is up next on the legislative agenda, and lowering the corporate tax rate would be a huge boost for business growth. Yet many not in the business world believe the next move should be a border adjustment tax or BAT. Supporters of the BAT think this will help us compete more effectively in the global economy. They are wrong.
A BAT will strongly favor exports over imports. Quite simply, businesses that rely heavily on imports — virtually every U.S.-based major retailer as well as hundreds of thousands of small businesses — will see their costs skyrocket. That is because what we see on store shelves isn’t all we get. The electric components, chips, LCDs, and other necessary pieces embedded in these products are rarely U.S.-made. They come from the global supply chain, and that is why the BAT is a really bad idea. Nearly everything sold here, even when the final product is actually manufactured in the U.S., is made with a large percentage of internal components that are sourced throughout the world.
What does this mean? It means that when prices start soaring for TVs, phones, appliances, electronics, computers, even apparel, because of the border adjustment tax on the components that make up the final products, sales will slow dramatically because consumers will no longer be able to afford them.
When fewer people buy, consumer spending slows, and that is never a good sign. This could potentially be severe enough to raise the risk of a recession. And the trickle down will be job loss. Because when big box and small retailers sell less, they cut back on staff.
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Imagine how a 20 percent tax will tear into retailer payrolls and hiring. And, of course, that leads us to how long they can actually stay in business. This would happen not only in retail, but also at the firms that manufacture in the U.S. They will have less demand and will reduce staff.
But even with these negative effects, many non-business people are pushing for the border adjustment tax. Their flawed reason is believing the dollar will adjust to mitigate these effects. It won’t. What has been proven, however, is that raising prices on consumer goods decreases consumer spending. That is the last thing the U.S. needs right now.
BAT proponents should instead focus on capitalist incentives to lower the cost of domestic production through corporate tax reform. This will actually make us more competitive with the rest of the industrialized world. One way to do this is by accelerating the tax deduction of capital investments, such as plants and equipment. If the tax code provides an immediate or accelerated tax write-off, then we’ve got a realistic, competitive method of lowering the cost of operations and thereby lowering the cost of domestic production.
As an economic theory, the BAT may feel like an intuitive and smart direction but it isn’t. In reality, it will have a severely negative effect on the American economy. Like it or not, we live in a global supply chain. Levying a tariff on imports will raise the cost of consumer goods in an economy that relies on consumer spending for growth. That’s not good business. That’s not good for consumers. That’s not good for America.
Mark Dohnalek is president and CEO of Pivot International, a Kansas-based global product development, engineering and manufacturing firm.