Corporates are looking for tax moves early, but proposals like BAT are controversial.
Nearly a month and half into his presidency, and following his address to Congress, President Trump and his administration have yet to provide details about how they will pursue key policies impacting corporate treasuries. It still may be awhile before those details emerge.
The stock market roared its approval the morning after President Trump’s February 28 address to Congress, and some business representatives also expressed optimism.
“President Trump’s remarks tonight should help build momentum for the kind of big tax reform this country needs for economic growth and the creation of more high-wage jobs,” said Joshua Bolten, Business Roundtable President and CEO. “President Trump is right to emphasize the importance of competitive tax rates on business so US companies can win in the global marketplace.”
Seeking to build momentum, President Trump held a “working lunch” March 1 with Republican lawmakers to start the process of hammering out legislative details.
Nevertheless, a roundup by Bloomberg of reactions by economists and market strategists at major Wall Street firms revealed most of them to be underwhelmed. For example, Paul Ashworth, chief US economist at Capital Economics, said that the administration appears to be split on whether to a support border adjustment tax—essentially taxing imports but not exports—with Trump advocating a lower corporate tax rate without clarifying whether that would include the border adjustment. He added that conservatives in the House may oppose a plan that increases the deficit and will “fiercely” oppose federal infrastructure spending.
“The upshot is that, despite Trump’s upbeat assessment this evening, comprehensive tax reform is likely to take another 12 months, if not longer,” Mr. Ashworth said.
Replacing the current system with a border adjustment tax would represent “yuge” change for corporates, both in terms of systems and manpower. “A tax reform package that integrates border adjustments, having companies start to source where they produced their goods and services, and have a tax code that maps to that … That would be a radical change, and create more accounting and tax-type hobs in treasury groups than any other,” said Michael Thompson, managing director and chairman of Standard & Poor’s Investment Advisory Services.
Other elements of tax reform include a one-time repatriation tax as well as changes to interest-income deductions, but neither was touched on in Trump’s speech.
“These are conversation pieces that may very well be on the table, but nobody understands how they will come to pass and in what shape … whether there may be exemptions, for example, for companies with less than $1 billion in revenue,” Mr. Thompson said.
Chad Bown, a senior fellow at the Peterson Institute for International Economics who has held top economist positions at the White House and World Bank, said that the border tax adjustment and the repeal and replacement of the Affordable Care Act (ACA) appear to be tied together politically. He said the unexpected nature of Trump’s election win has delayed filling execution-branch positions, leading many to believe “pent up” Republican legislation could dominate early on. Trump has emphasized dealing with the ACA, one of his top campaign promises, and before his inauguration downplayed the border adjustment issue, saying it was too complicated to deal with initially.
“We get the sense here that those two things in particular are going hand in hand,” Mr. Bown said, adding that the House leaders appear to have put pressure on the administration, saying it shouldn’t delay tax-reform consideration if it wants cooperation on the ACA issue.
Nevertheless, Mr. Bown said, corporate tax reform is very much expected to be first in line, and although rumors have circulated that the Trump administration’s proposal will be released imminently, that has yet to happen. He added that the border-adjustment tax, and whether President Trump supports it, will be a key element because it is a revenue source for the overall tax package.
“If it turns out to be too politically controversial for either him or the Senate, and it gets taken off the table, it will make it much more difficult to score the overall proposal to be revenue neutral,” Mr. Bown said, “They would have to get creative, and while they could still do it, it would be a different plan.”
Politically, such a tax could indeed by controversial, since it’s essentially shifting taxes onto the consumer. Mr. Bown said the consumption tax is a reasonable economic argument, because consumers are less mobile than businesses, and so less able to move to more favorable jurisdictions. In addition, a consumption tax such as this one, similar to value-added taxes that are already common in other developed countries, are favored by economists because they remove distortions resulting from businesses making decisions based on tax policies.
“What’s nice about the border adjustment tax is that it closes the system and helps address other problems, especially in terms of multinationals’ production, where today they have incentives to engage in corporate inversions and do strange things with transfer pricing, to avoid getting taxed in higher rate jurisdictions,” Mr. Bown said. “All of that goes away with border tax adjustment.”
Nevertheless, instituting such as tax faces big hurdles that could take time to overcome. Corporates that rely heavily on imports, such as retailers, are firmly opposed to the measure, while big exporting companies, such as GE, Caterpillar and pharmaceuticals, are in favor.
“So you have this interesting outcome, where companies that typically have aligned with each other, because they’re very involved in trade, whether exporting or importing, are coming down on different sides of this issue,” Mr. Bown said.
In addition, a consumption tax is regressive, since poorer people spend much more of their budgets on household goods. Such a tax might therefore be accompanied by changes to the US redistribution policies, such as cuts in income or payroll taxes for lower income taxpayers, to make it more politically palatable.
“But there’s nothing on the table to do that,” Mr. Bown said.