Consumers Will Take The Biggest Hit From Trump Border Adjustment Tax
In his campaign to “Make America Great Again,” President Trump singled out China as a country that was taking advantage of us. He promised to place an import tax as a punitive measure for any company that brings in goods from out of the country, most especially from China. On the flip side, he promised to offer tax relief to those companies who export American-made goods, and will lower the corporate tax rate from 35% to 20%. The tax is called a “Border Adjustment Tax,“ (BAT for short).
This sounds great in principle, but anyone who shops and looks at labels knows that almost everything we buy as consumers comes from China or other countries in Asia (with most fresh produce and groceries as the exception). As a long-time retail watcher, and knowledgeable about how narrow retailers’ operating income really is, I waited for the industry to respond. After all, absorbing that kind of tax could easily throw many of them into unprofitability, and it would be unlikely that lowering the tax rate or giving incentives to manufacture here would offset the cost of those taxes.
Perhaps most importantly, while overall it would be great to increase production of goods and services in this country (and it really would!), these changes cannot be made overnight. They take time, and the tax breaks would have to be really huge to even come close to matching cost of consumer products made overseas.
Finally over the past two weeks, the implications of the import side of this tax are starting to come clear. US Retail trade association RILA took a meeting with President Trump along with representatives from Target, Best Buy, AutoZone and others. They left and issued a rather bland statement, saying they hope to work closely with the president on “thoughtful tax reform.”
Doug McMillon, CEO of Walmart, had already met with the president a week or two earlier, according to Walmart representatives, and is also on Mr. Trump’s economic advisory council. So I assume he has had his say on the matter as well.
The day after the RILA meeting, Matt Shay, the CEO of the other major US Retail Trade Association, the National Retail Federation (NRF) spoke on CNBC and stated that the BAT tax would be effectively a “new national sales tax.” He also said, “I don’t think that’s what the voting population voted for in November.”
They may not have voted for it, but that’s what consumers will be getting. Retailers have created a new coalition, “Americans for Affordable Products” that argues against the BAT tax. The list of retailers who’ve joined the coalition is impressive. It’s worthwhile to scan through the list here.
“Good Karma” retailers like Tom’s Shoes and the Container Store are in, as are mammoth retailers like Walmart and Target. The Dollar stores are all present and accounted for, as are a multitude of retail trade organizations.
The site very clearly states that the BAT Tax is going to “make hard-working families pay more on essential products.” In fact, the coalition estimates that Americans will pay at least $1,700 more per year for essential food and products if this tax goes through.
In other words, retailers aren’t so dumb that they’re going to absorb these costs. They’re going to pass them on to the very consumers that can least afford it. This is very important for consumers to understand. Retailers aren’t being cruel. They’re just being realistic. They’ve got shareholders to please, operating income targets to hit, and the industry employs literally millions of people in the United States. A healthy retail industry is imperative to our economy.
On the flip side, consumers who are spending more on every item they buy will, by definition, be forced to buy less merchandise. And that will not help industry health.
The bottom line is clear: while consumers are moving towards a preference for locally sourced merchandise, these changes don’t occur overnight. And while shoppers like me can afford to pay extra to read the “made in America” sticker on a product label, the working poor simply can’t. Consumers are going to take it on the chin if the BAT tax gets passed. It’s as simple as that.