Fed chief Dudley: Border adjustment tax could have 'unintended consequences'

Dive Brief:

In a keynote session at the National Retail Federation's Big Show 2017 on Tuesday, Federal Reserve Bank of New York President and CEO William Dudley warned retailers that a proposed border adjustment tax could have “unintended consequences” for consumers.
The border provision, outlined in the “Better Way” tax reform plan proposed by House Speaker Paul Ryan (R-WI) and Ways and Means Committee Chairman Kevin Brady (R-TX), would create a border tax on imported goods by ending retailers’ ability to deduct the cost of imported merchandise. That could effectively spur price increases of up to 15% for retailers to retain profitability, the NRF estimates.
“That type of adjustment proposal in the House, it’s a pretty dramatic change,” Dudley said. “I think that it will probably lead to a lot of changes in the value of the dollar, the prices of imported goods in the U.S. I’m not sure that that would all happen very smoothly and I also think there could be lots of unintended consequences.”

Dive Insight:

The NRF rallied behind Dudley’s remarks, agreeing that the plan would have detrimental effects on the retail industry and, in turn, American consumers.

“Mr. Dudley and retailers are in agreement: a border adjustment scheme would be a risky experiment for the American economy,” NRF Senior Vice President for Government Relations David French said in a statement. “Economic theorists are playing with fire, and it’s the consumer who ultimately will lose.”

In a press conference panel at NRF, economists and advisory groups discussed the economic state of retail and the implications of such a border tax, which they clarified really wouldn’t have an impact until 2018.

“What’s interesting is [president-elect Donald] Trump wants the same thing as Republicans, he just doesn’t want the tax. He thinks it’s easier to slap a tariff on something instead of a border tax. I think Congress wants the border tax because it’s not directly slamming the importing country we’re doing business with — it’s a little more subtle,” Joel Feldman, senior managing director and the assistant director of research at Tesley Advisory Group, said during the press conference. “But some of it is semantics, and it’s going to take time to see how this is flowing in. But, clearly when we talk to the retailers, they don’t know. They don’t even want to model it out. We ask, ‘What’s the impact of border taxes on your business?’ and they won’t say. They all generally say it’s bad.”

Overall, the economists forecasted a strong year for U.S. business, with steady retail growth, yet with only a few days remaining before Trump is inaugurated, they acknowledged that retailers are feeling extremely uncertain about the tax environment under the new administration, given that little specific policy has been formally laid out.

“It will be very interesting to see the laundry list of legislation and policies come forward,” Jack Kleinhenz, NRF’s chief economist, said during the panel. “My outlook is based on the current conditions and today, and we’ll have to imagine a different economy with a different type of policy later on. We’ll have to wait for the details. The devil is in the details.”