Could US corporate taxes get any worse? How about a border adjustment tax?

The current US corporate income tax code is extraordinarily complex. It tends to favor larger companies. It also tends to favor companies who can squirrel away their profits overseas. Even worse, it really favors companies that can afford to hire lobbyists to create loopholes and to hire lawyers and accountants necessary to exploit the loopholes.

The US has the highest corporate tax rate in the developed world, which is especially harmful to mid-size and smaller firms. Even with the high tax rate, the US collects much less in taxes (on a relative basis) than its peers, as shown in the figure below.

A border adjustment tax would reduce (or eliminate) the corporate income tax. It would alter the current corporate tax structure by essentially imposing a tax or levy of 20 percent on all imports – including components and parts used in assembly – while exempting US exporters from any taxes. In other words, US companies would no longer have to report revenue generated by their overseas sales as taxable income. At the same time, they could no longer claim expenses incurred by importing goods and materials as deductible from their federal tax obligation.

The proposed border adjustment tax may be the most revolutionary idea in corporate tax reform in decades. If approved, it would transform the corporate income tax code into something similar to the European value-added tax or VAT. Overnight, the tax would create new categories of corporate winners and losers and will most likely drive up prices for US consumers.

  • Winners: Export-driven companies, including manufacturers of electronic equipment, machinery, aircraft, munitions, cars, and tobacco. Indirect winners would be small and medium sized business that benefit from a vastly simplified tax code.
  • Losers: Any business that relies heavily on imports including retailers, foreign car dealers, toy manufacturers, and oil refineries. Major retailers like Walmart and Target that get many of their products from Asia and other markets with cheap labor would be hard hit by the border adjustment.

There’s a chance that the BAT may be DOA. Republican senator Lindsey Graham has said that he can’t find even 10 votes in the US Senate for the current boarder adjustment tax proposal.

Nevertheless, the current US corporate tax system is a massive drag on business growth and doesn’t even do a good job at what it’s supposed to do – generate tax revenues. At this point it’s difficult to conceive of a scheme that could be any worse than the corporate tax system currently in place.

In case you were wondering … here are the top imports and exports by state. It seems Wisconsin spends a lot of money on imported sweaters.

Global trade stalls while protectionism expands: Are you ready for a trade war?

Global trade is slowing and protectionism is growing. Trump and Clinton will make it worse. Are you ready for a trade war?

In October, our newsletter sent up a warning flag that growth in global trade seemed to be slowing down.

Now, it appears the growth in global trade has stopped.

Export-Growth-EconMinute

 

In the U.S., it’s even worse. As shown in the figure above, U.S. exports have decreased by 4 percent over the past year. That’s a reduction of $95 billion.

Recent research finds world export volumes peaked and flattened in early 2015. The same finding holds for import volume and for total volume (export plus import). In other words, no matter how you measure it, world trade has come to a standstill. And, it’s a worldwide halt in trade growth. Both industrialized countries’ and emerging markets’ trade volumes have stalled.

So what?

Trade is a big deal and it boosts the U.S. economy. Yes, even trade with Mexico. Yes, even trade with China. Strong exports did more to pull the economy out recession than $830 billion stimulus blowout.

In 1960, 20 percent of homes in the U.S. didn’t have a phone and no one had a cell phone. Today, even the homeless have mobile phones. One big reason is trade that has driven down the price have having a phone.

As trade improves incomes in China, India, and other developing countries, that money will be spent on imports from the U.S. By 2020, per capita income in China is projected be $6,000 higher than today. That’s a billion or more people with huge increases in purchasing power.

There’s a national security component, too. Evidence is building that that the more trading partners a country has, the less likely it will be to engage in a war. That was the entire basis for the European Economic Community, which morphed into the EU.

Who’s to blame?

Research indicates protectionism is a big reason for stagnating trade. Across the world, countries have adopted policy initiatives harming foreign commercial interests. In recent years, protectionist measures outnumbered free trade measures by a 3-to-1 margin.

In the U.S., both Clinton and Trump have campaigned on anti-trade issues. Both Trump and Clinton have openly opposed the Trans-Pacific Partnership.

  • Trump says he’s against “bad trade deals,” but hasn’t named a trade deal that he think’s is “good.”
  • Clinton once praised TPP as the “gold standard” of trade deals, but has since reversed her position.

While we can never predict what will happen once Trump or Clinton enter the White House, it’s clear that pro-growth trade policies are not a priority for either Trump or Clinton.

There’s an old saying that protectionism is a politician’s delight: It delivers clear benefits to those that are protected, while spreading the costs across the public. In this way, protectionism is one of the worst forms of cronyism. Cronies can always get trade deals while the unconnected sit on the sidelines. Be prepared for a short list of winners and a long list of losers as world trade dries up.

The challenge to business, your business: How to make money in the age of protectionism, if you’re not a crony?

If you’re an importer, line up suppliers who won’t be subject to onerous trade rules. Or, set up a U.S. subsidiary who can technically satisfy the new rules. Yes, it’s a pain.

If you’re an exporter, find strategic partnerships in the countries with why you do business. A joint-venture with a local partner (such as a distributor), may allow you to satisfy “local content” rules without providing actual local content.

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Britain’s exit from the EU will rattle the U.S. economy

U.K. voters elected to exit from the European Union. This is a major shake up for the U.K. and the rest of Europe and is almost certain to rustle, rattle, and otherwise jolt the U.S. economy.

The first impacts will be seen in foreign exchange markets as skittish investors pull out of U.K. and European markets to put their money in the safety of U.S. assets. Several economists predict the impacts of Brexit on the U.S. will be confined to our financial markets. Nevertheless, the result will be a rising dollar relative to the pound and the euro.

Many economists expect some ripples of Brexit hitting the U.S. economy. In which case, the next round of impacts will be seen in trade as a surging dollar suppresses demand for U.S. exports. In addition, economists are forecasting a slowdown in the EU economy, further depressing demand for U.S. exports. As a result, several researchers have cut their forecast of U.S. economic growth to less than 2 percent over the next year.

On the upside, a stronger dollar will reduce the cost of imports lowering U.S. production costs, boosting consumer buying power, and limiting inflation.

The U.K.’s exit from the EU may stifle cross-border merger activity as London is no longer seen as a gateway to European markets.

Brexit’s biggest unanswered question: What will happen to free trade?

While much of the U.K. vote to exit the EU was driven by concerns over immigration and hatred of the EU’s bloated bureaucracy, the Brexit campaign was suffused with protectionist undertones. Both Hillary Clinton and Donald Trump have clearly stated their opposition to free trade deals. If Brexit boosts protectionism worldwide, expect to see much slower growth—or recession—in the next few years.

The bottom line …

Pros: A strong dollar will reduce the cost of imports and keep inflation in check. U.S. importers and consumers will benefit from lower prices. It’s a good time to take that European vacation.

Cons: A strong dollar and EU economic slowdown will reduce demand for U.S. exports. Increasing protectionism will reduce opportunities of international trade. U.S. exporters will be harmed. Potential slowdown in already slow employment growth.