Goldman Sachs has said that the radical Republican overhaul of the tax system involving stiff penalties on imports could push up US dollar by approximately 25 percent. The company was referring to the colloquially named “border adjustment cash flow tax”. It added that international capital flows and currency markets may face a sudden adjustment. This report comes in the wake of pro-business GOP leaders in House of Representatives providing an outline to a radical tax blueprint. The document was aimed at making the American firms much more globally competitive. This will also simplify the older American system. The 35 percent rate of tax imposed by the US federal reserve is regarded as one of the steepest in the industrialized world. The US government at present taxes American firms not only on domestic profits but also on the foreign earnings repatriated to the United States.
Bumbling US tax system
The US tax system is universally criticized. It has also forced American multinationals like Google and Apple to squirrel away a massive $2.6 trillion dollars outside the US jurisdiction. They also engaged in the fiendishly complex transfer pricing process. These are done with the help of foreign subsidiaries. American companies are also relocating outside the United States.
House GOPs have proposed to slash this 35 percent rate to only 20 percent. This is a little above 15 percent rate proposed by President-elect Trump during the election campaign. If this is done, capital investment in the United States can be quickly written off, and not depreciated over a number of years. This will encourage business investments. Investments until now was lackluster in the United States. The world has also seen lukewarm investments from the time of 2008 financial crisis. The net interest expenses, however, will not be deductible. This will negate the tax bias which is in favor of debt. Companies which are heavily in debt, like real estate developers, including Trump Organization, will suffer as a consequence.
In a controversial move, Kevin McCarthy and Paul Ryan, the majority leader and House Speaker respectively, wants to minimize the tax on domestic production and increase levy on goods produced outside the country. This makes for a never before policy that is not seen anywhere else in the globe. If this is indeed implemented, then expenses due to domestic business like production costs and wages will be tax deductible.