Somebody's Going To Pay
President Trump's first full week in office produced an unprecedented flurry of executive actions, designed to show he would do what he said he would do during the campaign. That includes the "Great Wall of Trump" to be built along the Mexican border — the one that Mexico is allegedly going to pay for. Mexican officials have repeatedly said that they will not pay for the wall, in ways varying from cancelled meetings and Twitter wars to outright epithets and hashtags that we won't repeat.
The Trump administration concedes that America will foot the initial bill but insists Mexico will "reimburse" us for these costs. That presumes some form of tariff or tax — but how will this levy be applied and how will it propagate through the economy? It's a good time to review Trump's campaign views on taxes in this context, starting with business impact this week and concluding with consumer impact next week.
Trump: Stay Here Or Be Taxed
Trump's intends to drop the corporate income tax rate from the current 35% to 15% to motivate companies to keep operations within the US. The low rate is expected generally to spur economic growth. It should also bring in more foreign investment capital, but that's where Trump's "America First" attitude and willingness to take on nations and individual companies muddies the water.
Clearly, Trump views tariffs as useful punitive measures to force companies to keep jobs and production within America. Even if basic economics really worked this way, there's a problem: the President doesn't have legal authority to levy tariffs against individual corporations.
So far, this mindset has produced a scattershot of taxation proposals against countries and products without a well-thought-out strategy. The 20% tax on Mexican imports is a classic example, as any tax will be passed on to consumers — thus Americans pay for the wall, and they pay for it in a regressive fashion through an effective consumption tax.
The House: Keep It Domestic
The House of Representatives' corporate tax plan (as outlined by Ways and Means Committee Chairman Kevin Brady) is similar in ways but contains fundamental differences. Taxes and tariffs focused on individual companies or industries are replaced by a system focused on where products are sold.
Under the House plan, corporate income taxes would be lowered to 20%, but the system includes a border adjustment that affects imports but doesn't apply to exports. It works by adjusting the amount of a corporation's taxable income subject to whatever tax rate is applied.
Essentially, businesses that export goods to other countries may subtract income on those goods from their taxable income. On the other side, businesses that import raw materials for production or import finished goods for sale in the US can't deduct those costs from their taxable income (as they currently can under the costs of goods sold). Export-driven industries with mostly domestic suppliers will benefit; those that heavily import will likely have to raise prices for their goods.
In some ways, the House approach is the "carrot" encouraging exports and domestic investment to Trump's "stick". Both approaches could potentially violate rules of the World Trade Organization (WTO), but we suspect neither Trump nor House Republicans are terribly interested in what the WTO thinks. Of course, other countries may return fire with similar adjustments.
Regardless of what happens with the Great Wall of Trump, the Trump administration's decisions on corporate tax policy may affect your pocketbook just as much as their decisions on personal income taxes. Corporate tax policy can indirectly affect how much you pay for goods and services, your ability to get or keep a job, and the wages that job provides.
Trump may have more leverage than most Presidents have enjoyed, considering Republicans enjoy control of both legislative and executive branches, but he still requires some Democratic support to avoid filibuster of Senate legislation. Moreover, his views on many trade and tax issues remain at odds with key House Republicans. Thus, any signed legislation is certain to contain compromises from his campaign platform. Stay in touch with the news and look for the details behind the story to determine how the new tax rules will affect you directly.
Read our analysis of how Trump's plans may affect your personal taxes in Trump and Taxes, Part 2.Calculate your tax bracket.