WASHINGTON: A radical corporate tax overhaul that Republicans are trying to sell to Donald Trump involving tariff-like tax penalties on imports could push the US dollar up by as much as 25 per cent, economists say.
If the proposed so-called “border adjustment cash flow tax” overcomes lobbying resistance in Washington, Goldman Sachs said currency markets and international capital flows would face an “abrupt” adjustment.
Pro-business Republican leaders in the House of Representatives have outlined a revolutionary tax blueprint aimed at making US firms more internationally competitive, stimulating domestic investment and simplifying the archaic American system.
The US federal corporate tax rate of 35 per cent is the highest in the developed world. Donald Trump and House Speaker Paul Ryan, who is advocating the border-adjusted cash flow tax.
Donald Trump and House Speaker Paul Ryan, who is advocating the border-adjusted cash flow tax. The government currently taxes US firms on their domestic profits and, unusually, on foreign earnings when they are repatriated home.
The universally criticised system has encouraged US multinationals such as Apple and Google to stash up to $US2.6 trillion offshore, engage in complex transfer pricing with foreign subsidiaries and relocate overseas.
House Republicans propose slashing the rate to 20 per cent, slightly above the 15 per cent proposed by Mr Trump during the election campaign. Capital investment in the US could be written off immediately, rather than depreciated over many years, to encourage business investment. This has been lacklustre in the US and around the world since the 2008 financial crisis.
But net interest expenses would no longer be deductible, eliminating the tax bias that favours debt. Heavily-indebted companies such as real estate developers, including the Trump Organization, would suffer.
More controversially, House speaker Paul Ryan and majority leader Kevin McCarthy want to tax domestic production less and foreign production more, an unprecedented framework which has not been implemented anywhere in the world.
Under such a reform, domestic business expenses such as wages and production costs would be tax deductable. Costs incurred outside the US, such as in overseas manufacturing by US retailers and technology firms, would miss out on tax write-offs.The border adjustment plan has been attacked by a coalition of American retailers as a protectionist policy that would “result in reductions in employment, reduced capital investments and higher prices for consumers”.
The blueprint is in line with Mr Trump’s policy of restoring American manufacturing and his December call for a 35 per cent border tax for businesses that ship jobs offshore to cheaper locations such as Mexico.
