A Taxing Vexation
Contributed by: Lewis J. Walker, CFP®
Remember Wendy’s advertising catchphrase, “Where’s the beef?” The line now is used to question the substance of an idea, proposal, product, etc. With potential tax reform buoying the stock market, the better question may be, “Where’d the beef come from?”
During the stock market trading week ending 2/10/17, meeting with airline executives, the president in Trumpian style said he would be making an announcement that will be “phenomenal in terms of tax.” Without specifics, the Dow, Nasdaq, and S&P 500 soared to new highs. Mr. Market loves tax reform. But the devil always is in the details. Take beef.
This past November I was in Costa Rica. One evening a group of us dined at a recommended steak house. Imported beef was very expensive compared to locally raised beef. Since the country is lush with plenty of grass to make cattle happy, why the big price difference? Simple. Costa Rica has a Border Adjustment Tax (BAT) ranging from 10% to 13% on imported goods. Duties and taxes are levied on all imports regardless of value. The local beef was delicious, and sans BAT, a superior buy compared to beef imported from, say, Texas.
A BAT is a type of Value Added Tax (VAT), also known as a “goods and services tax” (GST). A VAT is a consumption tax collected on the value added at each stage of production, emerging as a destination-based tax based on the location of the customer. Over 160 countries employ some form of BAT, VAT, or GST. European VATs range from 15% to 25%, a groaner for travelers. China has a 17% VAT on most imported goods; Mexico, 16%.
Costa Rica may not have a slogan, “Costa Rica first!,” but all of the tax schemes referenced benefit the producing country while penalizing American producers. Costa Rica wants to create jobs for local farmers, beef processers, and restaurants that need competitive menu pricing. Given the BAT, local beef has a distinct leg up! Chinese producers of cheap goods have a leg up on imports to America. Ditto for Mexico.
Buried in rhetoric about bringing manufacturing back to America, creating jobs, and cutting taxes, lurks some form of BAT. Mr. Market cheers when the president hints at “huuuggge” corporate tax cuts, a boost to bottom lines. But how do we “pay” for tax cuts and not bust the budget? Static forecasting demands $1 in expense cuts for $1 in tax cuts, or a dollar raised somewhere else to offset the lost tax dollar. Dynamic scoring says “growth will close the gap.” But there’s another way to raise the “lost revenue,” a BAT. The BAT is favored by fiscally-hawkish members of Congress, usually Republicans. Democrats will complain that consumers who buy imported goods will subsidize the tax cut for corporate fat cats! Never mind that anyone who owns a 401(K), IRA, or other retirement plan is likely to benefit from improved stock prices.
For those not schooled in international economics and tax dynamics, arguments based on “sound bites” will be vexing, distressing, and likely confusing! The National Retail Federation slams the BAT as “a trillion-dollar tax break for a few corporations and a $1,700 bill for ordinary household expenses delivered to the address of every hardworking American family.” True, a BAT raises costs on imported goods sold by Walmart, for example, while providing incentive to “buy American.” Conversely, hardworking American families need jobs, and those in fly-over country were tired of seeing jobs exported to Mexico, China, and elsewhere. An avocado grown in California potentially will have an advantage over one from Mexico or elsewhere. Look for a Guacamole Index!
The U.S. tax system subsidizes international importers to America at the expense of domestic producers. It’s ironic that the game Monopoly™ is made by only one company, but note, make one move on the board, someone wins, someone loses. A BAT is a way to level the playing field on the big international trading board in favor of American jobs and producers. As we reduce “Make America Great Again,” to “Where’s the beef?,” pros and cons emerge relative to jobs and end-user prices. Pricewise, it will make a difference as to where the cow was raised, where the grass or grain used to feed the cow was grown, where the cow was slaughtered and the product packed for market, and where the steak was consumed.
Yes, it’s complicated. Tax-reform is not an across the board “gimme.” As the euphoria of tax-reform possibilities fades to detailed probabilities, Mr. Market will divine winners and losers. Expect more volatility and winnowing in the process, a playing field for active equity managers.
Lewis Walker is a financial planning and investment strategist at Capital Insight Group; 770-441-2603. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Capital Insight Group. Past performance is not a guarantee of future financial results.