Tuesday, January 10, 2017

Border Adjustment Tax Math Explained (It's a Start!)

Welcome to my blog on the Border Adjustment Tax proposal pending in front of the House Ways and Means Committee. This proposal will remove the right of importers to deduct their costs of goods sold (COGS) on their Federal tax returns.  For most importers, this change in tax code will be devastating.

How devastating?  Well, in the world's most competitive marketplace, margins are low so the loss of a COGS deduction can cause the tax to go well over a company's economic profit.  How is this possible?  The new tax proposal is essentially a tax on the economic profit of a company PLUS a surcharge on imports at the same Federal rate.  For our company, we estimate that the new proposed law will cause our Federal rate to go from a hefty 39.6% to a staggering 165%. And this is at the new low, low rate of 25% for "S" Corps. 

The math for a hypothetical company:

Current Tax Law:

Revenue:                  $ 100.00

COGS:                     ($   60.00)

SG&A:                      ($  30.00)

Profit:                        $   10.00

Federal tax:             ($     3.96)    [39.6% rate]

New Law with Border Adjustment Tax:

Revenue:                     $ 100.00

COGS:                       ($   60.00)

SG&A:                         ($  30.00)

Profit:                           $   10.00

Add back COGS          $    60.00

New Taxable Income:  $     70.00

Federal tax:                 ($    17.50)    [25% rate]

Yes, you read that right.  The tax goes from $3.96 to $17.50 for the same activity.  In addition, the tax was $3.96 on a profit of $10,00, but now is a tax of $17.50 on the same profit of $10.00.  $17.50 is more than $10.00.  Hello?

The $17.50 tax bill is actually equal to 25% (new tax rate) of the economic profit of $10,00 PLUS 25% of the COGS (25% times $60 = $15).  This is a tariff that's not called a tariff.

The Border Adjustment Tax has one purpose and one only - it is supposed to pay for the reduction of the tax rates on everyone else.  All of the justifications are a smoke screen. The House Republicans want to stick my company with their bill for the new tax law.  They are picking losers here, and we're the losers.

In a future blogpost, I will explain the misconceptions (lies?) that are being flung about to justify this approach to taxation.  

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