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Border Adjustment Tax

The United States is considering tax reform and one of the proposals is the introduction of a border adjustment tax. If the proposal is implemented, it will have a major impact on the profitability of many corporations and since many retirees are dependent upon investment income, it is important to consider the potential impact of this tax on their investment portfolio.
It is doubtful a border adjustment tax will be implemented in its current form as American politics are polarized and tax reform has been debated for decades. However, it is important to understand the concept and attempt to determine the winners and losers under the reform proposals.
In the most simplistic terms, a border adjustment tax works as follows:

American companies that manufacture and sell their products in the United States

• The rate of tax is reduced from 35% to 20%.
• A tax deduction is allowed for the cost of goods sold, including machinery and equipment.

These companies will be major winners under the border adjustment tax

American companies that import raw materials and finished products

• No income tax deductions are allowed for the cost of imported goods.
• A tax rate of 20% will apply to profits.

American companies that export products

There is no income tax on the profit of exported products.

The tax is not designed to be revenue neutral. Despite a reduction in the tax rate from 35% to 20%, one estimate suggests it will raise an additional trillion dollars in the first ten years of implementation. Other potential issues the impact on currency, plus it is unclear if America’s trading partners will make adjustments to offset the impact of the border adjustment tax. The biggest losers would appear to be large retailers, while exporters are the major beneficiaries. It will simplify the tax code.
Tax reform tends not to get passed, but if this proposal becomes the law of the land, the impact on the stock prices may be significant.

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