Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24
How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - 17th Feb 24
Why Rising Shipping Costs Won't Cause Inflation - 17th Feb 24
Intensive 6 Week Stock Market Elliott Wave Training Course - 17th Feb 24
INFLATION and the Stock Market Trend - 17th Feb 24
GameStop (GME): 88% Shellacking Yet No Lesson Learned - 17th Feb 24
Nick Millican Explains Real Estate Investment in a Changing World - 17th Feb 24
US Stock Market Addicted to Deficit Spending - 7th Feb 24
Stocks Bull Market Commands It All For Now - 7th Feb 24
Financial Markets Narrative Nonsense - 7th Feb 24
Gold Price Long-Term Outlook Could Not Look Better - 7th Feb 24
Stock Market QE4EVER - 7th Feb 24
Learn How to Accumulate and Distribute (Trim) Stock Positions to Maximise Profits - Investing 101 - 5th Feb 24
US Exponential Budget Deficit - 5th Feb 24
Gold Tipping Points That Investors Shouldn’t Miss - 5th Feb 24
Banking Crisis Quietly Brewing - 5th Feb 24
Stock Market Major Market lows by Calendar Month - 4th Feb 24
Gold Price’s Rally is Normal, but Is It Really Bullish? - 4th Feb 24
More Problems in US Regional Banking System: Where There's Fire There's Smoke - 4th Feb 24
New Hints of US Election Year Market Interventions & Turmoil - 4th Feb 24
Watch Consumer Spending to Know When the Fed Will Cut Interest Rates - 4th Feb 24
STOCK MARKET DISCOUNTING EVENTS BIG PICTURE - 31st Jan 24
Blue Skies Ahead As Stock Market Is Expected To Continue Much Higher - 31st Jan 24
What the Stock Market "Fear Index" VIX May Be Signaling - 31st Jan 24
Stock Market Trend Forecast Review - 31st Jan 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Border Adjustment Tax Will Make The Jobs Problem Worse

Politics / US Politics Feb 27, 2017 - 12:27 PM GMT

By: John_Mauldin

Politics

Under the border adjustment tax (BAT) plan, imports will be penalized and exports rewarded… which theoretically, in a perfect world without pushback, would leave our economy nicely balanced and undisrupted.

But I doubt it will happen that way, because the importers and exporters are not the same businesses. I’ve written extensively about this topic in my three part series, "Tax Reform: The Good, the Bad, and the Really Ugly" in Thoughts from the Frontline. (subscribe here for free.)


Tariffs Ruin Christmas

Virtually all the shiny presents under your Christmas tree were made outside the US. The companies that import them could be border-adjusted right out of business under the Better Way plan.

Here’s an example. Suppose you are a toy company and you spend $1 million to bring in toys from China. You package and distribute them to retailers around the country, generating an additional $500,000 in costs for yourself. You sell them at wholesale for $2 million. What’s the tax consequence?

You just spent $1.5 million to generate $2 million in revenue. But the $1 million you spent on the imports is no longer deductible on your tax return. So your taxable profit isn’t $500,000, it’s $1.5 million. At 20%, your corporate income tax is $300,000 instead of $100,000. This plan triples your taxes.

Would you stay in business under this plan? Would the retailers and consumers still buy as many toys? You will have to downsize and probably lay off workers.

What the Republicans want us to do is to buy American-made toys instead of Chinese imports. With the BAT in place, US-manufactured products that compete with the products we buy from foreign producers will cost 20% more, priced in US dollars.

Meanwhile, those who export products from the US will see the reverse effect.

At best, there will be an adjustment period, which will be far longer than those who propose this plan think, as workers retrain for new jobs.

The problem is that the importers and exporters don’t all operate in the same states and counties, so the people who lose their jobs because of the import tax will end up having to move to where the exporting jobs are.

The Border Adjustment Tax Will Hit Retailers Hard

As you might expect, the retail industry is dead set against the BAT. Walmart, Target, and the like are already lobbying hard against it.

“Consumption” is what retailers sell. They want us all to consume more stuff from their stores. Consumption taxes reduce the amount their customers have available to spend, so these taxes are a direct revenue loss to retailers, at least in the short term—and the short term is 5–10 years. These types of adjustments do not come quickly.

The retailers aren’t just whistling Dixie. The BAT would hit them hard at a time when they can’t afford many more hits.

Retailing at scale is all about logistics. The big box stores actually do a pretty good job of that, but now they have a new problem. Consumers carry these little comparison-shopping supercomputers in their pockets and are not shy about finding a better price.

Now, Amazon sells many imported products. So does Walmart. The border adjustment tax will hit both of them, but it will hit the old-style retailers just as hard, at the very time they are struggling to compete with Amazon. Walmart may survive, but I’m not sure companies like Sears will.

I’m very frustrated with some of my Republican friends who don’t see this, or who assume new jobs will magically appear for those who’ve been displaced.

In conversations with border adjustment proponents, I’ve heard very little about implementation plans. They don’t seem to have considered how to get the economy and the population from here to there in a way that avoids negative transition costs.

That’s a big problem. Even if it all works according to plan, there will be pain in the transition.

Understand, I wouldn’t be so against the BAT if we could fast-forward five years and arrive at the new equilibrium point without all the adjustments that will have to happen in the meantime.

Manufacturing Jobs Are the Last War

As I mentioned in Thoughts From the Frontline on Feb. 7 (subscribe here for free), 80% of the manufacturing jobs that have gone away in the past 20 years have been displaced by technology, not “offshoring.”

The next front in the "jobs war" is going to be the service economy.

There are hundreds of small stores and establishments in the service industry that are going to be “disintermediated” out of business. That’s a fancy way of saying that online and more efficient establishments will be taking or eliminating their jobs.

That is why I applaud the idea of what the Republicans are trying to do with the Better Way plan, because they are trying to stimulate new businesses in the United States.

New businesses are the font from which growth and new jobs spring. However, the mechanism by which they plan to accomplish this laudable goal is going to create more problems than it solves.

Get a Bird’s-Eye View of the Economy with John Mauldin’s Thoughts from the Frontline

This wildly popular newsletter by celebrated economic commentator, John Mauldin, is a must-read for informed investors who want to go beyond the mainstream media hype and find out about the trends and traps to watch out for. Join hundreds of thousands of fans worldwide, as John uncovers macroeconomic truths in Thoughts from the Frontline. Get it free in your inbox every Monday.

John Mauldin Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in