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<span class="articleLocation”>Senior Republicans in the House of
Representatives are pushing a “border adjustment” tax proposal
that favors exports over imports as part of a plan to overhaul
the U.S. tax code.
The proposal is under attack from import-heavy businesses
but it is supported by large exporters, such as manufacturers.
President Donald Trump has not clearly endorsed or opposed
border adjustment, although he spoke favorably about it in a
Reuters interview. He has also called the proposal “too complicated.”
The following are some basic facts about the complexities of
the border adjustment tax proposal:
IMPORT COST DEDUCTIBILITY
Companies pay tax on their taxable income. This is revenue
minus deductible items such as wages, interest, advertising and
depreciation. Also deductible is cost of goods sold, which
includes the expenses of making products and buying them for use
or resale, including imported goods. The proposal would end the
deductibility of import costs.
EXPORT INCOME EXCLUSION
The proposal would let companies exclude from their taxable
income the portion of their revenues derived from outside the
United States. Only revenues derived from sales inside the
United States would be taxable.
BUSINESS TAX CUTS
The top corporate income tax rate, under the House
Republicans’ multi-faceted tax reform plan, would fall to 20
percent from its present, statutory level of 35 percent.
Also, a top 25 percent rate would be set for “pass-through”
businesses, such as sole proprietorships, partnerships and S
corporations. If the top individual tax rate stayed at 39.6
percent, critics say the new pass-through cap would incentive
people to dodge taxes by converting wages to business income.
Companies now must depreciate, or reduce, the value of
machinery and inventories over time for wear and tear. This
occurs over several years, depending on the asset. These
depreciation costs are deductible. The Republican proposal would
allow companies to immediately deduct the full cost of new
capital, instead of writing it down over time.
The deduction for net interest expense on new loans would
end, a change meant to reduce incentives for corporate “inversion” relocations abroad. This is raising concerns among
some financial firms. Wage costs would remain deductible, which
some critics say could violate World Trade Organization rules.
FOREIGN INCOME TAX-FREE
Income, whether domestic or foreign, derived from overseas
sales would not be taxed, a big change from today’s worldwide
Companies would no longer be taxed on foreign income brought
into the United States. About $2.6 trillion in profits now
parked abroad would be repatriated and taxed, at 3.5 percent to
8.75 percent, payable over eight years.
The corporate alternative minimum tax would be eliminated.
Critics of the tax plan say importers would pass on higher
tax costs to consumers by raising prices.
Advocates of the plan say any inflationary effect would be
offset over time by a higher dollar value.
INDIVIDUAL TAX CODE
Republicans also want to change tax law for individuals by
reducing the number of tax brackets; consolidating standard
deductions and exemptions; cutting capital gains and dividend
tax rates; eliminating the estate tax; eliminating most itemized
deductions, except mortgage interest and charitable giving;
killing Obamacare taxes; putting a new limit on tax exclusion
for employer-provided health care.
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