Dive Brief:
- Republican lawmakers will be proposing a corporate tax overhaul next year, which may significantly impact trade costs within the supply chain, The Wall Street Journal reported last week.
- Representative Kevin Brady of Texas, the key proponent of the plan, aims to lower the 35% corporate income tax in the U.S., replacing it with a 20% tax that bears some resemblance to a value-added tax (VAT). The 20% tax applies only in relation to domestically produced products and services as well as to imported goods.
- The plan works as follows: e.g. a U.S. manufacturer exporting goods to Spain would be subject only to Spain's VAT (currently set at 21%) and no U.S. income tax; a Spanish manufacturer exporting goods to the U.S., meanwhile, would be subject to both Spain's income tax and the U.S. VAT. U.S. goods sold domestically would still pay the 20% tax.
Dive Insight:
President-elect Donald Trump and the GOP are planning to use their control of Congress to enact a corporate tax overhaul, and while the political process is often slow, if all goes according to plan for legislators, supply chains should expect tectonic shifts in their operational costs within the next few years. The goal of this proposed plan is to "level the playing field" by placing a tax on imports and reducing the tax on exports through a lower corporate tax rate, thereby creating a favorable balance of trade.
Whether the plan achieves these goals is up for debate, however, and even the President-elect may be opposed. In his campaign platform, Trump openly opposed Mexico's VAT, calling it a "back-door tariff" that raised prices on U.S. businesses despite trade deals. Rather than force Mexico to eliminate its VAT (one of Mexico's main sources of revenue), Brady's plan suggests installing a U.S. VAT would create this favorable balance of trade worldwide.
What the tax change proposals do not address however is the amount of strain the new tax code would place on import-reliant businesses (absent other economic forces such as currency shifts). For example, the potential tax would cause suppliers in the retail sector to pass the buck for increased prices to the retailer, which will eventually be passed on to the consumer. In addition, supply chains that rely heavily on back-and-forth cross-border trade, such as the automotive industry, would face an additional tax upon import to the U.S. A lack of a U.S. VAT have been advantageous for these supply chains since it allowed automotive assemblers, for example, to avoid paying a VAT for importing finished goods, which are always of higher value.
Proponents of the plan argue the market would equalize in the long-run, but opponents claim that the short-run effects and market distortions caused by such an overhaul would not be beneficial.
