Power Sheet - January 31, 2017

By Geoff Colvin and Ryan Derousseau
January 31, 2017

Now that White House press secretary Sean Spicer has inadvertently ignited a firestorm by suggesting that President Trump wants to pay for a border wall by imposing a 20% border tax on Mexican imports, and cable news hosts are gravely discussing the impact of such a tax on the price of guacamole, and the Koch brothers are waging war against the tax – in short, now that the topic has become an incomprehensible mess – it’s time to step back, breathe deeply, and come to grips with it.

What everyone is talking about, whether they know it or not, is the House Republicans’ proposed corporate tax reform, announced last June. It says absolutely nothing about imposing a 20% border tax. Here’s what it does say, and why it’s being regarded as a border tax, and why that’s a highly incomplete view of it.

One of the plan’s features is that it’s “destination based” with “border adjustment,” meaning that it taxes only economic activity in the United States. So when a U.S. company sells goods or services overseas, that revenue is ignored – not subject to U.S. tax at all. By the same token, when a U.S. company buys goods or services overseas, that expenditure is also ignored – and is therefore not a deductible expense for U.S. tax purposes. Now combine that feature with another part of the House GOP plan, which lowers the corporate tax rate from 35% to 20%. The result is that when a U.S. company buys avocados from Mexico, or anything from anyplace outside the U.S., it can’t deduct the expense on its U.S. tax return, but a company buying the same thing within the U.S. can deduct the expense; so the first firm effectively pays 20% more than the second. That’s where all the talk about a 20% border tax comes from, and why so many talking heads are saying it would help exporters and hurt importers.

But that’s only half the story, and the second half is generally skipped, especially on TV. Economists argue that under such a tax regime, the value of the dollar would immediately rise – foreigners would stampede to buy dollars in order to snap up U.S. exports, which would momentarily drop in price – until the dollar’s rise offset the new tax effects. Importers would be no worse off because the dollar’s greater buying power would just balance their new tax disadvantage, so – if you believe the economists’ models – your imported avocados (or anything else) wouldn’t cost any more at all. For exporters, the stronger dollar would likewise nullify their new tax advantage, so they’d be no better off. Bottom line: The so-called 20% border tax would not do what most of the TV commentators say it would.

Sound complicated? It does to most people, especially since the treatment of imports and exports is just part of the GOP’s proposed corporate tax reform; the other main part concerns the tax treatment of investment and borrowing. But it seems bewildering only because it’s so radically different from the current regime. As a whole, it’s dramatically simpler. For a compact explanation, see this from the nonpartisan Tax Foundation, or this column yesterday by Harvard economist Martin Feldstein. And if you really want to understand what motivates these ideas in the first place, read this paper by U.C. Berkley professor Alan J. Auerbach, who inspired the GOP plan with his proposal a few years ago .

That’s a lot of reading about tax policy. But it’s the only way to understand a potential once-a-generation tax reform that you’ll be hearing much more about.

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What We're Reading Today

Reactions to Yates firing
President Trump fired acting U.S. Attorney General Sally Yates after she told Justice lawyers not to enforce his immigration ban. Some say Yates should have just resigned and then explained her reasons, rather than opposing the order. Dana Boente replaces Yates and says he will enforce the ban while Jeff Sessions awaits confirmation as Attorney General, which could happen as early as today. Fortune

Pharma CEOs to meet with Trump
Novartis chief Joe Jimenez and other pharmaceutical CEOs will meet with Trump to discuss drug pricing and alternatives to Obamacare. The meeting comes a few weeks after Trump said pharmaceutical companies get “away with murder” on drug prices. Reuters

Investors urge Arconic to oust its CEO
A number of large investors are reportedly pushing for the removal of Klaus Kleinfeld as CEO. Alcoa split into two companies three months ago, with Arconic focused on aerospace, auto parts, and high-tech products. The investors’ dissatisfaction reportedly dates from before the split. The Street

Facebook’s troubles in China
Despite efforts to court Chinese officials, promote CEO Mark Zuckerberg in the country, and create content-blocking technology, Facebook has made little headway in persuading China to lift its 2009 ban. As Chinese social sites grow, Facebook’s chances of ever becoming a significant player decline. WSJ


Building Better Leaders

To adopt new technology more successfully…
…become better at determining which trends are viable. If an innovation is easy to adopt and you see value in the results, then sell it to your firm. Inc.

CEOs’ No. 1 concern…
…is a global recession, says a new Conference Board survey conducted before President Trump‘s election.  Fortune

Could Takata’s air bag problems…
…have been compounded by the composition of its board, which is 100% Japanese men? Lack of diversity on any board creates blind spots, and domination by one culture could hurt the business through norms that avoid conflict.  Bloomberg


Companies Fight Back

Jeff Bezos opposes immigration ban
Amazon will support a lawsuit by the Washington state attorney general calling President Trump‘s travel ban unconstitutional. In a letter to employees, Bezos said he will also use Amazon’s lobbying resources to fight the executive order. Re/code

Silicon Valley leaders may meet Tuesday
Chris Wanstrath‘s Github is calling for Silicon Valley leaders to meet today to discuss filing an amicus brief in support of a lawsuit fighting Trump‘s immigration ban. Google, Netflix, and Airbnb have been invited, but it’s unclear if representatives of the companies will attend. Fortune

Toyota, Target, Best Buy fight border tax proposal
Akio Toyoda‘s company urged its 1,500 U.S. dealers to tell their  representatives they oppose a border tax on imports. Target CEO Brian Cornell has told representatives the import tax could make goods unaffordable to constituents; Hubert Joly‘s Best Buy is arguing such a tax could turn its $1-billion profit into a $2-billion loss. Reuters


Fortune Reads and Videos

Walmart ends its Amazon Prime competitor
Giving up on a membership program, it will instead offer free two-day shipping on purchases of $35 or more. Fortune

Tesla cut the ribbon on…
…the world’s largest battery storage facility yesterday. Fortune 

Renewable energy is creating jobs 12 times faster…
…than the rest of the economy. Solar and wind jobs have grown 20% annually over the past few years. Fortune

Trump’s trade adviser accuses Germany…
…of using an artificially cheap euro to gain trade advantages over the U.S. Fortune


Quote of the Day

“This country was brave and welcoming and I wouldn’t be where I am today or have any kind of the life that I have today if this was not a brave country that really stood out and spoke for liberty…I think it’s important to not frame this debate as being ‘liberal’ versus ‘Republican’ and so forth. There are many rational, thoughtful people out there, who maybe they vote Republican, or Democrat or independent, or whatever, but are outraged by these kinds of actions, and it’s important to be welcoming and reach out to them.” — Google co-founder Sergey Brin, discussing the immigration ban. Fortune

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