Just exactly what is the “big border tax” president elect Trump has announced? More importantly, how could it affect you?
There are many possibilities being shuffled around. A likely scenario may involve a flat 20% corporate income tax with benefits for activities within the US and ‘punishments’ for those carried outside. In essence, the plan will likely deny deductions for expenses on items imported to the United States. Imported widgets will pay income tax on the full cost, as opposed just on the profit. US produced items would be mostly or completely free of income tax to sellers.
This is heavy-duty stuff. For one, that would lead to an immediate increase in the cost of all imports. Just where do Wal-Mart and Best Buy get many items? It goes, however, well beyond the immediately obvious price increase of imports. Denial of deductions for activities abroad—designed to bring back to the US all possible activities, will also likely lead to lost deductions for wages and consulting fees US businesses abroad. Folks that work abroad may find their US employer losing deductions, making those jobs expensive and unattractive.
Border tax proponents say that the increase in the cost of imported items will be more than offset by the economics, which will invariably lead to a stronger dollar. Some estimates say that under this scenario, the value of a dollar may go up by as much as 25%. Before you crack open another cerveza, figuring how many more pesos you may soon get, think again.
The current upshot in gasoline prices was due in part to the fact that Mexico purchases most of its gasoline abroad. In fact, the US is the single largest importer of gasoline to Mexico, and gas is paid in dollars. Think how much more expensive gasoline will be with a dollar that is 25% stronger. Increases in energy costs cascade down to just about anything consumed, so prepare for immediately higher local prices, perhaps even runaway inflation. “Dollar gains” may disappear in the midst of local price hikes.
Bringing jobs back in to the US may be a noteworthy goal but comes with steep price tags. US exports will become more expensive due to a stronger dollar, and some will look for alternates (Japanese semiconductors of the 80’s come to mind). Lastly, other countries could consider retaliation if the tax plan smells like a subsidy for domestic US industries.
This is trickier than a Flying Wallendas tightrope walk.
Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the tax matters of U.S. expats in Mexico. He can be reached at email@example.com, online radio at mixlr.com/orlandogotay or Facebook: GotayTaxLawyer.