Why Trump's "Border Tax Proposal" Is The "Most Important Thing Nobody Is Talking About"

Tyler Durden's picture

While the market, and various pundits and economists have been mostly focused on the still to be disclosed details of Trump's infrastructure spending aspects of his fiscal plan, "one of the least talked about but possibly most important tax shifts in the history of the United States" is, according to DB, House Speaker Paul Ryan’s and President-elect Trump’s “border tax adjustment” proposal.

This is part of the “Better Way” reform package and also figures prominently in the writings of senior Trump administration officials.

What is it?

Put simply, the proposal would tax US imports at the corporate income tax rate, while exempting income earned from exports from any taxation. The reform would closely mirror tax border adjustments in economies with consumption-based VAT tax systems. If enacted, the plan will likely be extremely bullish for the US dollar. What’s more, it would have a transformational impact on the US trade relationship with the rest of the world. Consider the below:

  • A “border tax adjustment” would, roughly speaking, be equivalent to a 15% one-off devaluation of the dollar. Imports would be 20% more expensive, because corporates would have to pay the new 20% corporate tax rate on their value. Exports would be roughly 12% “cheaper”, because for every $33 of earnings earned from $100 of exports (we use the 33% gross margin of the S&P), there would be a 12% tax cost ($33 earnings*35% current tax rate) that would no longer be imposed on corporates. Taking the average impact on the prices of exports and imports is equivalent to a 15% drop in the dollar.
  • A border tax adjustment would be very inflationary. The price of exports doesn’t affect the US consumption basket so would have no impact on CPI. However, the cost of imports would go up by 20%, which based on a simple relationship between import PPI and US inflation would be equivalent to a 5% rise in the CPI. Corporates may of course choose to absorb part of the rise in import costs in their profit margins. But either way, the order of magnitude is large.
  • A border tax adjustment would be very positive for the US trade balance. Similarly to the dollar calculations, a border tax adjustment would be equivalent to an across the board import tariff of 20% and an export subsidy of 12%. Keeping all else constant and applying standard trade elasticity impact parameters to an average of the two estimates results in a more than 2% drop in the trade deficit equivalent to more than 400bn USD, or equivalently, an almost complete closing of the US trade deficit.

In other words, should the "border tax proposal" pass, it would not only send inflation soaring, while eliminating the US trade deficit - a long-time pet peeve of Trump  - it would also be the trade-equivalent of a 15% USD devaluation, even as it leads to an offsetting surge in the actual value of the dollar.

To be sure, there are uncertainties related to all estimates above. First, there is a question mark on whether a border tax adjustment based on a territorial corporate tax system (as opposed to VAT) would be allowable under WTO rules. The question is highly complex, but senior Trump advisers have stated they would be willing to take the issue to the WTO.

It is also not clear what types of goods the new tax would cover – the broader the coverage the bigger the impact and vice versa.

Second, the impact on trade highlighted above should be considered an upper bound, as the post-crisis responsiveness of current account balances to relative price shifts has proven to be much lower.

Still, it is hard to argue that such a fundamental shift in tax treatment of US exports and imports would not have a material impact on trade relations and flows with the rest of the world. More importantly, Saravelos argues, the second-order impact of “re-shoring” may be more material given that US corporate activity has been disadvantaged due to the current unfavorable tax treatment of offshore profits.

* * *

Taking all of the above into account, the academic literature is unambiguous in its conclusion that the dollar should rally strongly in the event a “border tax adjustment” is put in place. An appreciating dollar would be a natural response to an improving US trade balance and the competitiveness gains achieved by the shift in the relative prices of exports over imports. In extremis, the dollar would rally by 15% to fully offset the price changes caused by the tax. This analysis is partial however, with the knock-on consequences on the Fed, US corporate off-shoring and global trade relations likely making the impact even more material.

Deutsche Bank concludes that combined with potential changes to the treatment of unrepatriated earnings, "the proposed changes to the US corporate tax code could be one of the most important shifts in US tax and international trade policy in a generation."

We wholeheartedly agree with DB's assessment in this particular case.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Captain Chlamydia's picture

Yeah, I was just about to point out this massively overlooked tax opportunity.

Laddie's picture

Don't think of DEFENDING American workers as a TAX.
When we had tariffs and that sort of protection America's economy was the STRONGEST in the world and our workers lived a GREAT lifestyle.

But the enemy got NAFTA and GATT passed and we have all these Alphabet Visas, such as H1-B, to finish whites off.

I recall Dan Quayle, GHW Bush's VP, saying how wonderful it was that .gov was going to give TAX INCENTIVES for factories to move to 3rd World shitholes such as China, India, Malaysia, etc.

If the government was OUR government they would have FOUGHT to protect US, but instead they have waged WAR against the White Christians who BUILT this country!!!!

The UN Says the Future of Humanity is African. What Could Possibly Go Wrong? Dr. Patrick Slattery December 19, 2016

new game's picture

the paid off schills(most of congress) will fight this tooth and nail. no butter for their reelection campaign from the windfalls of cheap labor. tell the muther fuking, anti american fuks to call the cuntin foundation, i hear they are doaling for just such an alphabet soup trade deal to be kept intact. fuking traitors.

use the tax code to level the playing field. walmart is crying already. waltons coming to dc soon, plus an army of lobbiests.

check with failed unions too, they knew nafta was gonna fuk their dues paying members. what was their payoff again; the union bosses, yea sucking ass and fuking the workers up the ass. i get it, no thanks...

silverthorn's picture

Labor Unions are for pussies.  If one doesn't like management, quit or become management.  Whine Whine Whine is all labor unions members with inferiority complexes do.  

New England Patriot's picture

I guess this fits under Coin of the Realm, but honestly a gold standard with zero barriers to trade should be the goal. 

silverthorn's picture

The problem started in the 70s and 80s with computer chip dumping and steel dumping by exporting countries who used taxes from other industries to target particular U.S. industries.  Tariffs would have stopped it.   What if the U.S. started subsidizing Boeing and Boeing started selling Airliners for 80% off overseas. Airbus and every other manufacter in those countries would lose all sales, their engineers would retire or move on to other fields. Their airline industries would fold until the subsidized imports stopped and they regained a knowledgable workforce and investors willing to take a chance.       That said domestic free trade is good, international free trade terrible. I 've been thinking hard about tariffs ever since the early 80s when I was displaced from a circuit board factory from subsidized foriegn circuit boards.

Abbie Normal's picture

What IF the US subsidized Boeing?  They already do through massive military contracts and the foreign trade bank to loan money to the overseas buyers of Boeing airliners.  And even with all of those subsidies, Boeing still struggles to make a profit.

migra's picture

Go eat a cock you little corporate bitch.

HockeyFool's picture

Let's me guess, union plumber?

silverthorn's picture

Most likely the actor's guild or a displaced autoworker.  Most plumbers are actually men and work for themselves.

silverthorn's picture

I don't believe in corporations at all. All manufactures, ships at dock or bay, and land  property other than roadways and utilities should be individually owned, one owner-one responsible party where the buck stops. that's single individual ownership, or man and wife as one only. No cabal ownership, no joint ownership. No willing estates in joint ownership fashion. Period. End of story.

silverthorn's picture

Enough whining about congress, be a man, and displace them.

Jayda1850's picture

When we had tariffs and that sort of protection America's economy was the STRONGEST in the world and our workers lived a GREAT lifestyle.

Tariffs didn't cause that illusion, debt did.

wet_nurse's picture

Look at the debt levels before and after NAFTA.

Never One Roach's picture

This will force Obama to manufacturer his bust and action figure of himself for Walmart shelves here in the USA instead of China.

True Blue's picture

That's funny: I manufacture a fresh batch of Obama action figures every morning. Perfect little scale models, right down to his fragrant, fly-attracting  cologne. I never thought there would be a market for them, so I just flush them away...

Mustafa Kemal's picture

I need to add the new obama action figure to go along with my Hillary doll with the smirk.

FreshOutaSumfinForNufin's picture

Will Ohummer's action figure be a bobblehead, permanently on its knees?

JRobby's picture

Dan Quayle!!! Haven't heard that joke in a long time. Talk about a triple chrome plated Snap On. Throw them all in a vat of acid.

scoutshonor's picture

My favorite Qualyleism was when he was speaking at a fund raiser for the United Negro College Fund.  He was supposed to deliver their signiture line and instead provided:

"What a terrible thing it is to lose One's mind."

The look on the faces of the board members--think Fred Sanford looking at Lamont.  Sometimes I miss Dan--funny guy.

Archibald Buttle's picture

while that may be a favorite of yours, there are many others to choose from:


i think this guy, who kind of flew under the radar as an idiot, may have just been floating some "crazy ideas" way back in the day when prez bush the first (i think) floated the idea of the "new world order." right out there on teevee. i was still a teenager back then, much more worried about getting laid or a new sack of weed than politics, other than protesting iraq war 1 so i didnt have to be one of the first stooges to go off for an obviously corporate sponsored, yet taxpayer funded, war.

but i digress, what i really meant to say was here's a +1


EDIT: yet another corporate sponsored, taxpayer funded war. as everyone is aware, all wars are banker wars.

silverthorn's picture

It's mainly the Catholic Jesuits trying to finish off Protestants.  Average Catholic MASS attendees are completley oblivious to their cult.  Blacks are becoming more violent and poorer, hardly a win for them.

MEFOBILLS's picture

Tariffs work.

Hudson's book, "America's Protectionist Takeoff  1814-1914," discusses the American system.  Clay and E. Peshine Smith have been written out of economic history.  Why?  The narrative of tariffs and protection doesn't follow neo-liberal or neo-conservative doctrine.

Note that these neo- groups are funded by private (((credit))) emitting banks, and may be counted on to spout propaganda and spread hypnotism at every turn.  When something happens over and over, it is a feature - not an anomoly.  Usury is both a weapon and the funding source for our friends.  Their religious doctrine exhorts them to use it.

E. Peshine Smith went to Japan and went native.  Japan subsequently extracted themselves from ZOG system of Britain by following Smith's advice.

So, it is not just one economy, but TWO that were successful using the American system.

It is almost certain the Frederick List of Kaizer's Germany followed Smith, and that would then be a THIRD economy that was successful.

Hypnotism and False Doctrine spouted from our (((friends))) is a powerful hallucinogen indeed.  The multitude of the free trade libertarian-tards that frequent ZH are a prime example of false doctrines taking root.


f8's picture

Only thing that would defend American workers is a robot/automation tax. Of course, that would be at the cost of productivity. It's all about the supply of goods and the allocation of resources at the end of the day. If we don't make enough of something, there won't be enough. Less efficiency means less stuff.

Trumps idiotic policies won't work for the same reason communism didn't work. You can't force the stupid things to happen in the market without stupid results.

NAFTA, in the whole scheme of things, is a drop in the bucket. It really doesn't matter to us if you repeal it.

It's not Mexican labor vs American labor. It's very very cheap labor vs american automation. Americans don't work for $2/hour, so they get replaced by automated assembly lines. Shutting down imports will hurt Mexico and we'll get a *few* jobs in ever more automated factories, but it's not going to solve the problem of demographics and useless people with obsolete skills weighing down America.

But hey, I'd love for Trump to fix this. It just seems really unlikely given his apparent lack of insight so far.

Archibald Buttle's picture

there is no fix for this. it is complexity running it's course. the sun will rise in the east, and set in the west for billions of years. will anyone be here to see it? hear trees falling in forests? i am shorting the idea that humans will figure out how to balance out complexity/entropy/diminshing returns. hedging with a small but potentially proftable long dumbasses position.

silverthorn's picture

We would get millions of more jobs. dumbass.

Lynx Dogood's picture

Can we have links that point to this? Deutch bank is sited with no links??? Is this prom night on Z Hedge. A border Tax? Where is this sited even in general????


Who is writing for Z Hedge tonight. New Tylers should have a source or two. Or this is all CRAP!

rccalhoun's picture

impose a tarriff so the free shit army can have a $15 minimum wage?  doomed for failure.


silverthorn's picture

We wil  eliminate wage and price controls completely, it is discriminatory and redistributive.  Government should not have the right to discriminate and redistribute, only individuals as guaranteed in the Constitution.

wren's picture

Will this tax be applied to Mexican meth and Afghan heroin?

silverthorn's picture

Dope pushers will be executed in 60 days or less. 25,000 new Judges will be hired with more night court.  No jail time over one year, all high grade felonies,  a fast and speedy Excecution.  Starting with the Bushes, Clintons, an Rockefellers.

Withdrawn Sanction's picture

Yes, by all means, let's have more laws, law enforcers, and judicial tyrrany.  Our problem definitely stems from a lack of rules...not.  

Is freedom too scary?  Suppose we eliminate the drug prohibitions instead?  But, you say, people will destroy themselves.  Maybe, but they're doing that already even with all the existing laws.  

The laws and prohibitions seem instead designed to drive up prices and that benefits, who?  Answer that question, and you'll be on your way to understanding part of what's really going on.   I'll give you a preview:  prohibition isnt designed to benefit or otherwise protect society as such, but to enrich a select few members of that society.

silverthorn's picture

Suppose we allow murder of who ever you want with no law retribution, no prohibition against murder. Is your freedom too Scary then?  Pumping up an impressionable kid with dope  or spiking her food is the same thing as killing them with a gun. Fuck you God damned murderous dopers. I would love to be the executioners of narcotics pushers. Fuck you sons of bitches. I would love to beat some fucking sense into your pea brain. You can meet me at 110 persimmon street Sanderson Tx.

Archibald Buttle's picture

only selectively. meet the clinton foundation.

Lets Buy The Dip's picture

yup and you just hinted in that 1 sentence that 2017 will be an up year on the stock market. 

vix is too low, what you guys think? => http://www.bit.ly/2h9Kyif

called santa clause rally 1 day too soon. but buying bigger dips in 2017 is going to be very very smart. 

It seems trump is going to make USD rally an the stock market. Could be a dip early 2017 but. Hmmm

Urban Redneck's picture

The search for "truth" often leads to "answers" that appear shockingly simplistic at first glance, just the search for "solutions" in the political and financial realm of politics and finance often leads to "answers" that look shockingly like simply manipulations of complex accounting regulations and standards.  It's no different than what I've been writing with regards to infrastructure finance and public contingent liabilities and private tier-1 capital regs.  There's hope for these magnificent deplorable bastards and their suicide mission to overturn the existing world order yet...

nuubee's picture

We know people manipulate their currencies relative to the dollar to suck jobs away. We know this is essentially economic warfare. We've allowed this to go on for 3 decades or more with specific countries...
The only question is what to do about it. It was a problem when Japan did it, it's still a problem. No one has had the guts to fight back with anything that might hurt.

I don't like the idea of tariffs, but it's better than laying down.

silverthorn's picture

Tariffs are great. You don't like the idea because you fell for the globalist speil.

rccalhoun's picture

tariffs are great IF the work force they benefit appreciates them and values a strong work ethic.  tariffs cannot be utilized to

carry the load of the lazy and non-productive.  they are a reward.  i fear many un the USA would view them as an entitlement.

silverthorn's picture

I never said it's a one step plan.  We will eliminate the wage interference at the same time.  Sorry precious snowflakes, no more minimum wage to subsidize you, no more income tax to hamper you, grow up or melt bitches.

MEFOBILLS's picture

Tariffs only stop working when they are used for monopoly.  Monopoly is the taking of rents - a free lunch in the form of high prices.

An industry can agitate for special tariffs, so they can take high prices in their domestic market.  Only in this case are tariffs bad.

Mostly, tariffs are good in that they allow domestic producers to become efficient.  This is especially true for a continental size country that can achieve economy of scale.

No tariffs on imports encourage foreign economies to become good at ONE THING or only a few things.  The objective is to import into large markets like the U.S.

This sort of narrow economy then creates a dependency, such that some countries are even dependent of food imports.   Example, a coffee producing region that only grows coffee, and hence are narrow dependent. 

Being dependent then creates a psychosis.

SilentBull's picture

"No tariffs on imports encourage foreign economies to become good at ONE THING or only a few things."

Is it a problem when an individual becomes good at one thing by picking a career and sticking to it, and then importing everything else he needs from other individuals/businesses? The same applies to countries. This isn't a problem.

Master Toms Dog's picture

Not a problem in theory.  In practice over-specialization creates a more fragile global economy for the sake of marginal efficiency.  Did not junk you.

scoutshonor's picture

You can easily anticipate the reaction if this goes to the WTO: "but wait, we get to do shit like that--not the U.S."

The what else should be decided before the trip to the WTO.  If such a trip takes place--this is the first time I have seen it mentioned.  But it seems that a reasonable approach if the WTO were to say no would be to respond to countries on a case by case basis depending on what kind of crap they were up to.  Yes China, I mean you.

Mass_hysteria's picture
Mass_hysteria (not verified) Dec 20, 2016 6:51 PM

grow the government.......


stronger military


more wars..


more dead patriots..


more fake banker wars.


the muuuuuuuuuuuurican way................

Archibald Buttle's picture

more bankrupt countries/TBTFbanks than dead patriots would be a preferable equation. just sayin'

CunnyFunt's picture


Holy hand grenade of Antioch's picture
Holy hand grenade of Antioch (not verified) Dec 20, 2016 6:55 PM

In other countries, they basically call this a VAT.

Bear's picture

Just another way to avoid doing the right thing and to continue with the bloated U.S. Tax Code

silverthorn's picture

Tariffs are only one step in a twelve part plan. Abolish the IRS. Abolish the Federal Reserve.