President Donald Trump’s moves to undo and redo the trade deals that the U.S. has forged with other countries has been a cause for concern for many American businesses.
Trump’s specific proposal to encourage more production in the U.S. by implementing a border-adjusted tax on imports has stirred trepidation among retailers and small businesses that rely on imported goods to be competitive.
“I am expecting disaster if they actually implement this plan,” Richard Woldenberg, CEO of Learning Resources, told The Wall Street Journal. Learning Resources is a company with 150 employees, which sells educational toys, most of which are made in China.
Woldenburg told The Journal that even with a lower corporate tax rate, which has been proposed alongside the tax, the new cost of imports would increase his tax bill by four or five times. Under the proposal, businesses would not be allowed to deduct the cost of imports, while exported goods would be exempt.
“Under a border-adjusted tax, a company that imported $200,000 of foreign made toys, spent $100,000 on domestic costs and sold the toys for $350,000, would only be able to deduct the $100,000 in local costs,” The Wall Street Journal reported. “It would then pay taxes – at a proposed lower tax rate of 20% – on $250,000. So its tax bill would be about $50,000. The same company could currently deduct the costs of imports as well as local expenses, and then pay 35% in taxes on $50,000. That results in a tax bill of about $17,500.”
However, proponents of the plan have argued that a strengthening U.S. dollar would compensate for changing tax bills, as a stronger dollar would mean that companies paid less to import goods. At the same time, if that strengthening fails to happen or doesn’t happen quickly enough, large companies that rely on foreign inputs would suffer, as would smaller businesses that typically have less power to negotiate deals or otherwise adjust to cost changes.
According to standards set out by the U.S. Small Business Association, companies in the wholesale or retail trade count as small businesses if they have 250 or fewer employees. According to 2014 Census data, over 95% of U.S. importers have fewer than 250 employees.
It’s a complex situation. Some small businesses see a higher barrier for imports as a welcome change, because it would make their products more competitive against imported goods, while the proposal is a cause for concern for others.
“We do not have the cash cushion to absorb this kind of tax,” Katherine Gold, whose company, Goldbug Inc., employs over 100 people distributing accessories like children’s shoes, told The Journal. “It would put us out of business if we can’t pass it on immediately.”