The border adjustment tax under consideration in Washington would have major implications for the U.S. economy and create an unusually wide set of corporate winners and losers. Investors should pay close attention.
The proposed border adjustment tax, or BAT, would eliminate the deductibility of products imported for use or sale in the U.S., effectively taxing corporate revenue on imported goods at about 20%. Meanwhile, profits on goods or services sold by American businesses overseas would be exempt from income tax. A border adjustment tax is different from border tariffs, whose duties are paid by exporting countries directly to the governments of importing countries. Projected BAT revenues — estimated at up to $1 trillion over the next decade — would presumably be used to fund corporate tax cuts.
Importantly, the border adjustment tax would apply to all imports, not just those from Mexico and China, two countries whose trade policies lie squarely in the crosshairs of the Trump administration. For a cogent summary of the BAT and its economic implications, check out a podcast discussion between Ann Harrison of the Wharton School and Michael Knoll of the Penn Law’s Center for Tax Law and Policy
Though the BAT’s political fate is uncertain, investors are hedging their bets. As the U.S. equity market surged in the aftermath of the November elections, retail stocks mostly struggled to tread water. And with good reason: Many large retail businesses import a significant percentage of their products, and thus stand to be negatively affected by the imposition of what is effectively a tax on goods entering the country. Not surprisingly, the National Retail Federation has come out strongly against the proposed changes.
Of course, there also would be beneficiaries from a BAT. Some large exporting companies could actually see their taxes decline, or even disappear.
Unfortunately for investors, it’s easier to calculate the potential winners at the corporate level than the potential losers. Click on the “World’s Top Exports” site for a listing of the 10 largest industry and company exporters. On the flip side, businesses are not required to list import revenue in any public document, and no database exists to reveal that information.