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Tax Reform 2017 – America First?

Wednesday, March 22nd, 2017

With all the noise about Russia, Obamacare and Immigration, you would be forgiven for not noticing but here is something important. The Trump Administration appears to be working on reforming major portions of the Tax Code in a way that could have far reaching consequences and rebalance the American economy against the rest of the world.
Nothing is cast in stone yet and speculation is rampant about the what, where, if and how of what is coming to the political agenda soon. Here is what we know. In the summer of 2016 the Republican Party published a white paper (of sorts) that outlined the contours of their ideas for tax reform. The white paper was called “A Blueprint for a better Way – Our vision for a confident America”.
The Tax Reform Program aspires to overhaul major components of the Tax Code. This overhaul includes the overall framework for taxing corporate AND personal income. In addition to major changes in the overall architecture of the tax code the white paper also calls for fewer and lower rates. After initial hesitation, the Trump Administration now appears to be leaning toward adopting many if not all of the ideas outlined in the white paper.
Once you’re through digesting the concepts and framework of what is being presented, one of the most eye-catching elements of the corporate tax reform program is the so-called Border Adjustment Tax (BAT). It envisions a 20% tax on imported goods and most probably also services. On the flip-side of the BAT, exports of goods and services will be exempt from taxation. Not to hold you in suspense, but this is not a Value Added Tax like that found in just about every other country on Earth, although it pretty much sounds like one.
In the next couple of blogs we will be discussing the ins and outs of the tax reform program but for now, I want to impress on you that this is important, especially if you are:
– a U.S. based manufacturer with exports to the rest of the world;
– a U.S. based importer, wholesaler, retailer, or other reseller of imported goods;
– a non-U.S. manufacturer exporting to the U.S.;
– a non-U.S. manufacturer with subsidiaries in the U.S.;
– anyone else involved in international trade of goods and services
If you work for anyone of these types of companies, this deserves your full attention for one reason and that is that implementation of the reforms will have a profound effect on the economy, aspiring to correct imbalances that have crept into the system for over thirty years.
These imbalances are threefold:
– Too much emphasis on imports (structural trade imbalance);
– Financialization away from industrial manufacturing (financial crisis of 2008);
– Excessive mushrooming into the economy of retail space (shopping malls and big boxes) far beyond what the American consumer can support.
With the Tax Reform Proposals coming up for publication and debate soon, I believe that the reforms hold the potential for changing the behavior of actors in the business community simply based on economic calculations of what constitutes a profitable course of action. Remember, it’s all still in a state of flux but it IS coming! Stay tuned.