How Trump's Corporate Tax Reforms Could Make Tariffs Irrelevant & Dampen NZ Exports
Tuesday, March 14, 2017 at 4:34PM
Bill Barclay

The Washington Post has just published a most enlightening/disturbing article by Stephen Perlstein today that explains precisely the reform package being proposed by House Speaker Paul Ryan and others that looks as if it will meet Trump's desire to see imports taxed, one way or another.

It carries the wonderful name "destination-based cash-flow tax." Described as one that has been around for 20 years years or more, Perlstein claims that:

"It is not a disguised tariff, or sales tax or value-added tax, although it would mimic their economic impact in some respects. It would not raise the price of imports by anywhere near 20 percent, nor would it bring millions of manufacturing jobs back to the United States."

The 'cash-low' part refers means that companies would would deduct the full value of any investments they make in the year they make them, rather than spreading them out - or depreciating them over many years as at present. And interest payments would no longer be deductible. This encourages investment through capital raising rather than borrowing, and Perlstein claims is strongly supported for its simplicity across a wide range of US business.

Then comes the 'crunch' - the 'destination' part - companies would only be taxed on profits on sales made in the US.  Profits made by overseas subsidiaries overseas - not now subject to US taxes if left overseas would not change. But sales of goods overseas of goods produced in the US would be treated as 'revenue,' and the expense of producing deducted in calculating taxable profit - 'all gain, no pain.'

But the opposite would be true for all goods produced overseas and imported for sale in the US - in that case the revenue would be counted, but the cost would not  - 'all pain, no gain.'

This "border adjustment" would theoretically remove the current incentive for companies to locate production and intellectual property, or realise profits in tax havens such as Ireland or the Bahamas. and this, according to Perlstein is what gets Trump excited - "Jobs would come back, tax revenue would increase and the trade deficit would disappear."

But would it? Perstein points oout that the dollar (US) would likely rise dramatically and take away any advantage in the form of lower or higher prices. He suggests that the only lasting impact would be "a nasty nasty global financial crisis," with substantial other consequential effects. "What the new tax code giveth in terms of higher or lower taxes, the currency exchange market would taketh away in the form of lower or higher prices." 

Importers are apparently pushing hard for the change while exporters are applying equal and opposite pressure on the Trump administration, and chaos reigns on the matter within the White House. 

What we need to be concerned about is that taxes of this nature would be totally in contravention of WTO rules, constituting a import duty by any other name. The price of our wine, beef and dairy would rise at the border regardless of the method by which the tax was imposed, and constitute a regressive tax on US consumption while moving the burden to employees and consumers.  - something that is unlikely to improve World trade - quite the opposite. 

Our exporters have every reason be concerned at what is happening right now in Washington where the asylum is now clearly in the hands of the inmates. Statements over recent days on climate change and "micro-wave" surveillance by Kelly Conway should have us trembling, but the nuttier it gets, the more I worry about North Korea - is anyone out there watching?




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