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Proposed US tax frightens American retailers

  • News
  • February 8, 2017
  • Courtney Devereux
Proposed US tax frightens American retailers

Concerns grow as the United States’ Republican party pushes towards implementing a Border Adjusted Tax, but what is it, and how will it affect New Zealand?

While still in the works, the tax plan would implement higher taxes on imports to encourage more production in the US; as well as discourage companies from moving their bases overseas for the lower tax rates, then selling stuff back to the US. It would also make exports and profits earned overseas tax-exempt.

The new tax law would replace the current Corporate Tax Code, which has been the current tax law since 1986.

What the Border Adjusted Tax focuses on is US President Donald Trump's goal to “keep money in the US.” This would be achieved by putting a larger tax on imported goods, meaning companies and corporations would be forced to operate more from the United States to avoid this tax.

It would replace the current corporate tax code with a flat tax on all imports and domestic sales, but offer a break on any products leaving the country for sale overseas. 

The Border Adjusted Tax was first proposed by Sen. Ted Cruz during the Republican primaries and has since gained considerable Republican support in the new Congress, presumably because the US trade deficit has become a very fashionable focal point.

The scheme would raise living costs for most Americans, creating possible growth of 20 percent on most imported consumer items. And although it is expected that currencies will adjust, for the middle-income families it will mean another average of $1700 US dollars spent annually on tax.

It could also inadvertently hurt exporters. Take, for example, an exporter who uses some imported parts. The original Trump plan would have allowed that firm to make the most cost-effective choice. The border tax, however, by burdening those imports, might well render the firm’s overall export product uncompetitive, forcing cutbacks and layoffs.

Opponents say it will hurt American consumers, and advocates say it will keep businesses from leaving the United States.

Just this week, a coalition called Americans for Affordable Products, representing retailers including Walmart, Macy's, Nike, Gap and Crate & Barrel, came out against it. They say a 20 percent border adjustment tax on imports would make essentials like clothes, food, medicine and gas more expensive.

With expected outrageous taxes on imported goods, several mall brands have closed down since the start of the year. Claiming that with the rise of online shopping they were struggling; but a rise in import tax will bankrupt them completely.

Traditional retailers are in a weaker position than they’ve been. To, on top of that, move to the BAT would hurt it more.  Retailers have been headed to Washington in a frenzy for months now to rally against it; this new coalition is the next step.

This coalition against the tax has been in the works since November, when Trump won the election and retailers across the country realized how harmful the tax plan could be for business.

This would result in a higher tax bill, which would be several times larger than their profits, something retailers won’t be able to absorb. The fallout could mean stores shuttering, layoffs, or higher prices.

A large segment of retailers is hurting right now, and this is an industry that’s in middle of trying to reestablish itself since online shopping took precedent.

When prices go up, consumers will have less in their pockets to spend, and it’ll exacerbate the situation. Retailers are trying hard to moving to adapt, but this is not a good time to put a burden on them as the Americans for Affordable Products has pointed out.

For the New Zealand market, those who export to America will likely decrease in annual revenue as buyers either cut back on imports or will be expected to drop prices to cater to rising taxes. Exports from America are expected to remain in a similar tax bracket as now.

Pros and cons of the Border Adjusted Tax:

Pros:

  • Creating Jobs in the US
  • Expected rise in the US dollar
  • Less tax on smaller business’
  • Equal taxes for larger corporations who import
  • Currencies eventually expected to adjust
  • Opportunities for business’ to ‘re-establish’ themselves

Cons:

  • Expected 20 percent tax rise in imported goods
  • Burden for already struggling brands
  • Loss of jobs for developing countries
  • Higher cost for Medicines that have to be imported
  • Expected dollar crash after it adjusts
  • Concerns for business’ that rely on outside traders
  • Business’ may have to raise prices to consumers to cover tax rise

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