Can you guess how many items in your closet, kitchen or living room are made overseas versus in the U.S. of A.? It’s probably a big number. From your Nike sneakers to your smart phone to the avocados for your salad, America imports a tremendous amount of goods – in part because companies find it cheaper to grow or manufacture overseas and ship goods here to sell at your local stores and online. We consumers pay less for the goods we want.
If a part of proposed tax reform is enacted, the price of consumer goods may increase substantially. Republicans in the House of Representatives have tax reform on the docket for this year, which is a much-needed step to simplify our tax system and lower taxes on businesses and individuals. However, the proposal includes a border adjustment tax (BAT), which would give breaks to American companies that ship products overseas while stripping away tax breaks from companies that import goods from other countries – essentially leading to a 20-percent tax on imports.
Supporters of the bill explain that the BAT will lead to a sharp and fast rise in the value of the dollar – anywhere from 20 to 25 percent – and encourage U.S. job growth. Demand for made-in-America goods would push up the dollar’s value while costs for retailers would decrease. It should basically be a wash leading to no cost increases for consumers. Meanwhile it could trigger a rise in jobs as the incentive to move jobs abroad would be gone.
Opponents (from the Federal Reserve Bank to retailers) aren’t convinced. They say prices for clothes, cell phones, foods, and other everyday items would go up.
In a blog, the New York Federal Reserve concluded:
In the long run, market forces are expected to undo the tax effects on import and export prices, but both will be affected in the interim. Before the U.S. dollar prices of imports and exports come down—restoring the pretax relative prices—both imports and exports will become more expensive and U.S. foreign trade will be dampened, with the net effect on the U.S. trade balance difficult to gauge. The effects will also be heterogeneous across firms, depending on whether the firms are exporters, importers, or importing exporters. But our research suggests that both firms and households will be faced with higher prices for imports and domestically produced goods alike.
One of the most vocal critics of the plan is the National Retail Federal, which is the world’s largest Association of retailers including Target, Home Depot, Nike, and Wal-Mart. They think the BAT would “crush” small retailers and hurt retailers overall according to CNBC:
"In the face of limited U.S. manufacturing, America's small retailers rely heavily on imports and do not have the ability to cut their prices or pass along these increased costs to consumers. For example, specialty apparel stores, which import approximately 97 percent of their inventory, would end up with a tax bill that is three to five times larger than their profits and would have to raise their prices by 15 percent or more to maintain current profitability," David French, NRF's senior vice president for government relations, tells CNBC.
The CEO of Kohl’s didn’t mince words, saying, "the impact on consumers, our customers is going to be massive."
Individual retailers are quite worried:
Ledbury, based in Richmond, Virginia, imports 98 percent of its high-end men's shirts from Europe. It does about $10 million a year in business, but the border tax might mean it would have to raise prices or cut workers' hours.
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"For a business like ours that is running [to] break even, it's going to have negative impacts. I would say this is absolutely the wrong thing to be doing right now — we are in a challenging time, particularly in the retail business," CEO Paul Trible says. The company already pays more than 19 percent in duties on the cotton shirts it imports. Shifting production to the U.S. would be too costly, while moving to an Asian manufacturer would affect quality, Trible argues.
This tax hinges on the value of the dollar accelerating quickly. Perhaps it would be happen, but that’s a big gamble. On the contrary, consumers are extremely price sensitive and will quickly stop buying products that become more expensive overnight.
Tackling much-need tax reform is welcome and long-overdue as are the other steps that Congress and the White House are making to scale back over-regulation that has driven the costs of products and the costs of doing business higher -particularly over the past eight years. There’s a reason the business environment in the U.S. makes it cheaper to produce overseas.
Congress should just be careful that their good work and commitment to encouraging growth isn’t thwarted by proposals that may intend to stimulate U.S. production and jobs growth, but fail to meet those outcomes and instead inflict pain. We’ll be watching to see what happens to the BAT as we enjoy our guacamole and shop for Spring outfits.