February 3, 2017
The imposition of a “border adjustment tax,” a key provision of a pending House tax reform proposal, would end up seriously harming U.S. consumers. NRF analysis indicates that this plan could cost the average family $1,700 in the first year alone if the border adjustment provision is enacted. While economic theory suggests that trade flow of imports and exports would balance out over the long run due to offsetting exchange rate and price adjustments, there is no consensus as to the degree or the timing of these adjustments. In the near term, consumers would be left to pick up the significant tab while hoping that the economic theory proves out.
NRF commissioned Ernst and Young to analyze the extent to which a 20 percent destination-based tax on imports would flow through to the consumer. We also reviewed existing literature and spoke with retailers and manufacturers about the impact of this tax on their businesses. Using these analyses, we arrived at an expected price rise across a range of 12 broad consumer categories based on their import inputs. We then applied these increases to the Bureau of Economic Analysis’s Personal Consumption Expenditure tables to calculate the expected consumer impact. (For some BEA categories, such as pharmaceuticals where the measure is calculated on an economy-wide basis rather than in terms of consumer impact, we substituted data that reflects consumer expenditure.) Our analysis shows that the impacts are profound, particularly for some key product categories. According to the BEA data, consumers could expect to see an increase of over $350 per year for clothing alone.
To understand the impact of the price increases on certain consumer groups, we had to shift our analysis to the Bureau of Labor Statistics’ Consumer Expenditure Survey. Fully accepting that the two types of data are not directly comparable — either in terms of sector definitions or measurement methodology — we felt it was nonetheless a worthwhile exercise to understand who the new tax would impact the most. The figures should be treated as indicative but should also come as no surprise — those hit the hardest are the ones who can least afford it.
Based on our analysis of the data, here are some of the findings:
- For the average family, 27 percent of their savings (income after taxes and expenditures) could evaporate with the cost increases caused by the border tax.
- Unmarried adults without children currently have only $443 left over annually after taxes and expenditures. If the border adjustment tax were enacted, they could see an $836 increase in costs — nearly 200 percent higher than their annual savings.
- One-parent households, which are already in the red, could see an additional $1,000 added to their debt burden as they do what they can to make ends meet. Their apparel and footwear bills would increase by $271 alone.
- The average family (married with children) could see their apparel costs (including shoes) increase by $437 a year.
- Single people could see their annual gasoline bills rise by $189, a whopping 43 percent of their annual average savings.
- Married couples with children could see their annual gasoline bill could increase by over $400.
Tax reform is an important issue for retailers as they have the highest corporate tax rates of any industry. The United States lags most of the developed world in terms of corporate tax reform and retailers welcome almost any effort to reform the system. However, creating a system that shifts the burden onto consumers — particularly the consumers who can least afford it — is likely to do more harm than good.
Written By: Mark Mathews