New Thoughts On The Border Tax

Not Such A Bad Idea After All?

We told you yesterday that Barclays is saying President Trump will not be able to achieve his goals on tax reform this year. Boutique investment research firm Bretton Woods Research (Unfortunately, we could not get stock quote BWR this time.) out of Long Valley, NJ said in a note to clients over the weekend that the border adjustment tax proposal of Paul Ryan and Kevin Brady has become increasingly attractive to figures inside the Trump Administration like Commerce Secretary Wilbur Ross, as well as anti-tax Republicans within the Washington think tank community.

Trump trade advisor Peter Navarro recently penned quite the missive in the WSJ over the weekend about the U.S. and its competitive disadvantage due to VAT taxes abroad.

The proposed border tax rate starts at 20%. It is not just targeted at Mexico.

The Ryan-Brady bill will create new winners and losers.  Low-margin importers will be hurt off the bat.  Target (Unfortunately, we could not get stock quote TGT this time.), Wal-Mart (Unfortunately, we could not get stock quote WMT this time.) and Dollar Tree (Unfortunately, we could not get stock quote DLTR this time.) have all been underpeforming the S&P 500 over the last three months and over the last five trading days due to the pro-import tax news.

The concern over the import tax would be offset by the dollar’s appreciation, rendering the issue a “tempest in a teapot,” says Vladimir Signorelli, founder of BWR.  He notes that some of his sources, mainly supply-side economists like Arthur Laffer, actually see the plan as a net positive. They also believe that worries about a tit-for-tat trade war are overblown. This is becoming more of a consensus view at the big New York mutual fund firms as well, especially those with investments in Mexico.

There have been a few important clues about tax reform prospects over the last week. On CNBC last Friday, Ross left the door open on the Ryan-Brady border tax plan, noting it is one way to pay for the reduction in corporate and pass-through tax rates that the Trump Administration would like to enact.  Keep in mind that the “revenue-neutral” Republicans are not gung-ho on reducing the C-corp rate unless they can find money elsewhere. That means tax revenue from another source, or massive slashing and burning of federal agencies.

BWR is looking at overall corporate tax reductions not to be felt until late 2018 or early 2019. Take this as a clue that investors have gotten way ahead of the legislative agenda. A pullback is long overdue.

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