Tax and tribulations

COMMENT: There is a lot of speculation about President Trump's Border Adjustment Tax (BAT), but little consensus on what it means, writes Ben Hackett.

Strictly speaking it is not a tariff because that comes under the domain of the Senate and it would be contrary to World Trade Organisation agreements. But when you come right down to it, it may as well be a tariff at the whim of Trump.

So what is it? According to most commentators, the BAT is a shift away from direct corporate taxation of profits to a system of taxing imports. This does two things, potentially it raises the price of imports but at the same time it reduces the level of corporation tax due to the change in calculations of tax liability. Export companies are not required to pay the BAT making them effectively subsidised. 

For Europeans, this is similar to value added tax, but just on one direction of trade. It is also a tool for potentially differentiating by countries of origin or by commodity. The rationale is that there should be no trade distortions.

But wait, Trump is not talking about abolishing WTO tariffs where no free trade agreement is in place. This means that the BAT on imports will most likely raise prices to the consumer even if the corporation potentially pays lower tax. 

It is also argued that the dollar should strengthen as a result of cheaper exports, but logic tells us that a higher dollar exchange will make exports less competitive. Dissenters suggest that with the gain in the value of the dollar, the impact on imports will be diminished and the tax will not reduce imports. As exports reduce, US factories shut down and unemployment goes up, a scenario that we are not being given by the White House.  Are you still with me?

Trump does not really understand the issue either. Most of his speeches and tweets suggest that he thinks that it will be a tariff by another name. It certainly will not help to reduce the trade deficit. One thing is certain, retailers are up in arms with the US National Retail Federation strongly opposed and Germany is threatening countervailing taxes.

In sum, it is my belief that it is unlikely to have any effect on US imports. Much fuss about nothing when it comes down to it.

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