Border Adjusted Tax may be reality

The controversial “Border Adjusted Tax” crafted to tax all services and goods entering the United States has an even chance of being a law. This tax is a part of a plan hatched by the White House destined to reduce the present 35 percent corporate tax to about 20 percent. The aim of this proposal is to tax any goods which enter the country but avoid any tax on exports made from the United States.

It means that if a car is imported into the United States from Mexico, it would be taxed on its value. However, a vehicle exported to Mexico or any other country from the US will not be taxed at all.

Supporters and against it

The destination tax has its share of supporters and detractors. The former says that the tax will result in more goods being produced in the United States. More jobs will be created and unemployment will fall. Detractors, on the other hand, say that such a tax will send prices north and slash profit for a number of industrial sectors. They mentioned the retail sector particularly and warned about trade retaliation. The tax is similar to Value Added Tax or VAT as implemented in many other countries. Refiners, automobile manufacturers and retailers would be the hardest hit if imports are pull in under the tax dragnet. The stock market, on the other hand, is on a high, with Trump’s lower corporate tax promises.

Stocks have only gone north at prospect of a corporate tax rate of 20 percent from the existing 35 percent. Other positive factors include the corporate cash repatriation that are stashed in offshore accounts. The market has concentrated on the tax rate reduction of capital gains for a few investors. It is expected that the Congress will eliminate 3.8 percent tax, linked to Affordable Care Act. This will be applicable on and in addition to 20 percent tax rate imposed on capital gains.

Corporate tax

The incoming Trump administration and Republican dominated Congress will take a shot to overhaul both individual and corporate taxes. The process may include merging both Congressional proposals and Trump’s plan. Changes could be made for 2017 calendar year. According to Julian Emanuel of UBS, the tax rate for corporates will finally settle anywhere between 20 to 25 percent. Trump has earlier proposed a corporate tax rate of 15 percent. He also said that there is a high possibility of the destination tax being transformed into law.

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