Today Trump’s press secretary announced a border tax in the form of a destination tax. The administration did this as a response to Mexico’s stance against paying for the Wall. The implications of this policy are huge and they are routed in long standing Republican policy. There is no indication that any tax would be restricted to one country, in all likelihood it would be part of corporate tax reform on all imports.
So exactly what is the Destination Cash Flow Tax ?
It is important to note that it originates in the Ryan Tax Reform Plan known as The Better Way. Essentially it eliminates the ability to expense the cost of goods that are imported. For a company like us that means that our tax liability would increase by around $500,000 per year as all our goods are imported we would have no cost of goods on our profit and loss. While it is also likely that tax rates will come down — currently Trump talks about a 20% corporate tax rate — this would still triple our annual tax bill. Most small companies including Global Crafts are not C Corps, we are an S Corp. This means profits roll to the owners personal taxes. The Ryan plan talks about limiting Pass Through income to a 25% tax rate. In our case this would effectively increase our tax bill by 25% of $500k or $125,000, which clearly we do not have.
It is also important to note that as this tax is implemented via the corporate tax mechanism and not via a duty, non-profit organizations would be exempt from the tax.
Outside of how disastrous this would be for us, let’s look at the bigger picture. Who is going to pay for this tax? Consumers of course. If we have to find $150,000 a year to pay taxes there is only one place we can find it — by increasing prices. The same applies to the large retailers. Large big box retailers have relatively small margins, which is part of how they keep pricing low. Imagine if your $100 product was 80% cost of goods, and faced a 20% destination tax. This would add around $18 to your products.
The only other way importers can recover the tax is by pushing back on overseas producers and putting even more pressure on producers to lower wages and working conditions. Trump talks about Fair Trade but this is not the Fair Trade that we practice or support.