RILA’s Brian Dodge: The new border adjustable tax is a dangerous and untested proposal built upon deeply flawed economics

Dollar Will Not Adjust As Backers Claim, Even In Long-Term, Hurting Consumers And Importers

Arlington , VA, 2017-May-24 — /EPR Retail News/ — An economic report released today (5/22/2017) from the international macroeconomics firm Capital Economics finds the economic theory behind the border adjustment tax to be a “gross simplification” of today’s currency markets. The report concludes that even in the long-term the dollar will appreciate no more than 8 percent in response to the House proposed border adjustment tax—well short of what proponents have suggested will be needed to offset higher costs on groceries, gasoline and thousands of items Americans buy every day.

“The new border adjustable tax is a dangerous and untested proposal built upon deeply flawed economics. The report shows the inevitable harm it will cause American families and businesses and it should give pause to lawmakers considering taking such a gamble with America’s economy,” said Brian Dodge, senior executive vice president for public affairs.

Available Empirical and Anecdotal Evidence Casts Doubt on Basic Exchange Rate Theory

The report, authored by economists Paul Ashworth, Justin Chaloner and Glyn Chambers, takes aim at the argument made by backers of the border adjustment tax that the policy will lead to a significant appreciation of the dollar, offsetting the impact on U.S. businesses and consumers.

Auerbach and Holtz-Eakin – “Border adjustments do not distort trade, as exchange rates should react immediately to offset the initial impact of these adjustments.” (Alan J. Auerbach, Douglas Holtz-Eakin, 11/30/16)

However, the report authors reject this premise, and found that any currency adjustment would fall far short of offsetting the harmful impact on American consumers.

“The notion of the border adjustment tax causing dollar appreciation is based on a simplification of currency markets, which are highly complex. The proposed measure has not been tried in any other country and there are many issues that pose a large number of questions as to what the consequences would be. Available empirical and anecdotal evidence casts doubt on basic exchange rate theory. Multiple barriers to adjustment plus the fact that traded goods and services only have a limited – possibly small – influence in determining exchange rates in today’s world of speculative capital flows means that we expect that most of the proposed appreciation is likely to fail to occur. Some adjustment could occur, but, given the considerable obstacles, we expect it to be no more than 30 per cent of the anticipated total, and it could well be a good deal less than that.”

Exchange Rate Doubts So Substantial BAT “Not Worth The Risk of Attempting It.”

Further, the report finds that the economic theory behind the dollar appreciation argument to be so unreliable that it is unlikely that currencies will adjust as predicted even in the long term.

“There are substantial reasons for believing that [full currency appreciation] will not occur, especially in the short run, but even over medium to long run timeframes and therefore it is not worth the risk of attempting it.”

Because Dollar Will Not Appreciate as Backers Predict, “Border Adjustment Tax Will Amount to a Tax on Consumers.”

“…retail markets are likely to experience the kinds of pass through rates seen in competitive markets. This means that the proportion of the expected exchange rate appreciation that does not occur (which we expect to be 70 per cent or more), which is the proportion of the tax that is passed onto American importing firms, is then likely to be passed on to ordinary consumers.

“Due to these likely price increases, the border adjustment tax will amount to a tax on consumers. It will have the effect of raising consumer prices, which will reduce real incomes and in turn living standards. Moreover, as with any tax on spending, it is probable that the impacts will be regressive in nature. That is, poorer consumers, who tend to save a lower proportion of their income and spend proportionately more, will be the hardest hit from the price rises stemming from the tax.”

BAT Backers’ Assumptions Are “A Gross Simplification of the Complexity of Today’s Currency Markets”

“…the confusing literature on exchange rate determination suggests that any exchange rate offset from border adjustment isn’t as predictable or as clear-cut as its proponents suggest because basic textbook theory is, at best, a gross simplification of the complexity of today’s currency markets. Given the large redistribution of wealth from importers to exporters that would happen in the absence of exchange rate adjustment and the many economic ramifications that could result from that, the policy is, at the very least, highly risky.”

About Capital Economics:

Capital Economics is a leading independent international macro-economic research consultancy, providing research on Europe, the Middle East, United States, Canada, Africa, Asia and Australasia, Latin America and the United Kingdom, as well as analysis of financial markets, commodities and the consumer and property sectors.

About RILA

RILA is the trade association of the world’s largest and most innovative retail companies. RILA members include more than 200 retailers, product manufacturers, and service suppliers, which together account for more than $1.5 trillion in annual sales, millions of American jobs and more than 100,000 stores, manufacturing facilities and distribution centers domestically and abroad.

Contact:

Christin Fernandez
Vice President, Communications
Phone: 703-600-2039
Email: christin.fernandez@rila.org

Source: RILA

RILA’s Jennifer Safavian: The border adjustment tax would jeopardize 42 million jobs retailers currently support

A Border Adjustable Tax Will Be ‘Uniformly Devastating’ To Retailers And Consumers

Arlington , VA, 2017-May-24 — /EPR Retail News/ — ​Today (5/23/2017), Retail Industry Leaders Association Executive Vice President for Government Affairs Jennifer Safavian issued the following statement as the House Ways and Means Committee began its hearing examining the economic and consumer impact of a border adjustable tax:

“As the nation’s largest private-sector employer, retailers support pro-growth tax reform that lowers corporate rates, scrutinizes all deductions and credits in the code, and creates a level playing field among industries.

“Retailers will continue to aggressively oppose any plan that attempts to shift the nation’s tax burden from certain corporations that currently are subject to low effective tax rates onto America’s working families. The border adjustment tax would jeopardize 42 million jobs retailers currently support, and would put an undue burden onto millions of American families that are struggling.

Retailers are confident that tax reform can be a win-win for job creators and American families. We urge lawmakers to scrap the controversial and divisive border adjustment tax and focus on crafting a tax reform plan that benefits all Americans.”

RILA provided a statement for the record during today’s hearing in support of pro-growth tax reform without a harmful border adjustment tax. In her statement, Safavian reiterated the fact that a BAT picks winners and losers and gives an unfair, anti-competitive advantage to companies already paying much lower effective tax rates.

“American companies are at a huge competitive disadvantage with our international competitors,” Safavian told the Committee. “This is not because of a mythical “Made in America” tax. Instead it is a result of the U.S. statutory corporate tax rate being extremely high by international standards…The border adjustable tax would not improve U.S. competitiveness. Instead, the border adjustable tax would impose price increases on American families, while also causing a devastating financial impact on the retail sector – so much so that the financial viability of many companies would be put into question.”

Safavian also focused on the impact to American consumers.

“The border adjustable tax, which would in effect place a new 20 percent tax on imports while completely eliminating the tax on exports, will force retailers to significantly raise prices on everyday consumer staples such as food, medicine, clothing, electronics, and home improvement items. Many personal necessities like life-saving drugs and items essential to the operation of U.S. small businesses, such as cell phones, have no domestically manufactured equivalent and will not in the foreseeable future. While margins on retail goods are already low, adding the border adjustable tax on top of the cost of those goods means that retailers have no other choice than to pass this additional tax onto American families.”

Safavian shared findings from a survey of American retailers conducted earlier this year on the impact of the border adjustable tax and the provisions of the House Republican Tax Reform Blueprint in their entirety (i.e. 20 percent rate, full expensing, territorial tax system). The results were uniformly devastating for the retail industry.

Examples of the representative responses include:

  • One retailer stated that their historic effective tax rate is 39 percent. Based on a three-year analysis, their effective tax rate would be between 140-288 percent.
  • Another retailer found that their effective tax rate would go from 37 percent to 102 percent as a result of the border adjustable tax.
  • Still another retailer’s analysis showed their effective tax rate would go from 38 percent to between 84-94 percent.
  • Beyond the increase in effective tax rates, one retailer explained that overall, they would go from a $1.5 billion net income to a $3.5 billion loss.

Safavian concluded her statement by reiterating the fact that should Congress impose a BAT, American consumers and retail jobs will be at risk.

“The border adjustable tax would disproportionately impact the retail sector because we import many products that are not able to be sourced domestically. Such a drastic new tax would undermine the benefits of a corporate tax rate reduction, precluding the industry from realizing potential economic growth. A border adjustable tax will lead to higher prices for American families and put many retail businesses at risk.”

RILA is the trade association of the world’s largest and most innovative retail companies. RILA members include more than 200 retailers, product manufacturers, and service suppliers, which together account for more than $1.5 trillion in annual sales, millions of American jobs and more than 100,000 stores, manufacturing facilities and distribution centers domestically and abroad.

Contact:

Christin Fernandez
Vice President, Communications
Phone: 703-600-2039
Email: christin.fernandez@rila.org

Source: RILA