“Globalization presumes sustained economic growth. Otherwise, the process loses its economic benefits and political support.” — Paul Samuelson, American economist, and the first American to win the Nobel Memorial Prize
We recently discussed how our motto for this year and beyond will be to “make globalization great again.” The proposed corporate tax reform plan – which is a middle ground for the new administration and globalists – might actually help actualize our motto.
It starts with the current federal corporate tax rate, which is a staggering 35 percent. That means for every folding Franklin of profit your business earns, the government will collect a folding Tubman, Hamilton, and Lincoln from it.
There’s a proposal floating in Washington D.C. to drop the rate to 20 percent, which aims to incentivize U.S. businesses to increase production and hire more workers. In order to do it, they’d invoke a border adjustment tax is also known as a “destination-based cash flow tax” (DBCFT).
Don’t freak out. There’s a way to make this work for importers and exporters. Also, try not to think of it as a U.S. versus Anyone Else thing, either. Just because President Fanta-skin is pushing for it doesn’t mean it’s automatically horrible.
Let’s apply some logic and facts to the problem. (I know, I know, that’s a radical thought in this day and age.) Let’s review the pros and cons and how the government will make its determinations on the possible, upcoming border adjustment tax.
Good News For Exporters
The DBCFT would be well-received by owners because they’d theoretically pay no tax on their export-based profits. If a business can create a product or service in the U.S. and sell it overseas or over the border, the feds will keep their noses out of it.
This incentivizes businesses to:
- Stay domestic.
- Ship internationally and think globally.
- Lessen their dependence on international corporate loopholes.
- Pay their taxes.
- Create some jobs.
You’d just have to keep meticulous records of your sales and be able to prove that the production and manufacturing originates in the United States.
Importing Some Bad News
Unfortunately, importers will not receive the same red-carpet treatment. U.S.-based importers will pay taxes on domestic sales. This can have a big impact on big and small businesses, it all depends on your company and the origin of your goods. These sellers and retailers need to either incur the cost of this tax or figure out a way to neutralize it. That usually means the cost gets passed on to the consumers.
I can see how importers would feel like they drew the short straw. In their case, the viciousness of this cycle is in the eye of the beholder, because if this were to pass and importers waited it out just a bit, they can reap some benefits. The DBCFT could benefit importers because it should create a pattern:
- Imports will decrease,
- the dollar’s strength will increase,
- lowers the prices on imports.
Should this reform be enacted, the markets and prices could level themselves out and ultimately importers will not suffer very much, if at all. The whole point of this is to ideally create jobs in the United States or limit what gets outsourced in the way of product and labor.
The real “what if” factor is that a cooler head than the talking orange one in the oval office needs to explain this to other world leaders. Should that day come I’ll be sure to post my thoughts here on the blog.
For now we’re happy to be your cooler, thinking heads. Contact Brinen & Associates to discuss how we can help you ready your business for possible tax reforms.