Industry awaits fallout of potentially big tax and tariff changes under GOP leadership

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Questions of border walls, new tariffs and the volatile nature of the Trump Administration has companies in the dietary supplements industry anxiously reading the tea leaves of tax policy.

The issue of tax reform and how it will affect the dietary supplement industry has gained new momentum with the election of a Republican tothe White House and nominal control by the GOP of both houses of Congress.  While on the campaign stump Trump had many bombastic things to say about major trading partners such as Mexico and China and hinted broadly that big changes were in store. Both countries, China especially, are major players in the international trade in dietary supplement ingredients and finished goods.

Underlying those potential changes, which could include new across-the-board tariffs or new duties on selected categories of goods, is a potentially profound change in how the US organizes its tax policy. The argument from the GOP side of the aisle has been that the US has corporate tax rates that are effectively higher than those of our major competitors and trading partners. This situation, the argument goes, helps drive the yawning trade deficit that has persisted for decades now. And it also spurs the move of corporate headquarters overseas, to relative tax havens such as Ireland, The Netherlands and nations in the Caribbean.

Goal: Simpler and fairer tax policy

The new policy, which would be the most significant change in the tax code since 1986, was put forth by the House Republican leadership last August  in a document called “A Better Way Forward on Tax Reform.” The blueprint for a new tax structure calls for a dramatic lowering of rates starting with the top brackets, cutting the top individual income tax rates to 33% of income, and the top corporate rate to 20%.  The goal of the new code is to come up with a “simpler, fairer and flatter tax code to help all Americans,” in the words of the blueprint itself. The document notes that in the intervening 31 years since the last major overhaul under President Reagan the tax code has grown from 26,000 pages to 70,000 pages.

The new tax plan would also overhaul how taxes are assessed on products that cross borders. It would essentially assess taxes based on where the product is meant to be consumed, rather than where it originates, through what are known as ‘border adjustments.’ At the moment, the authors of the blueprint maintain, products exported from the US under this nation’s current worldwide tax policy have to bear the burden of US income taxes, whereas products imported from a competitor pursuing a territorial tax policy do not.

At least one of the trade organizations in the industry has queried its members on the possible change to see how it could affect member companies. Few, if any, companies in the industry will be untouched by changes in how raw materials and finished goods will be taxed at the border.  But exactly how that will affect companies is not at all clear, and this assumes the tax proposal becomes law in its present form, which is also not at all clear.

Agriculture vs heavy industry

One prominent industry player is not particularly concerned about looming tax implications. George Pontiakos, CEO of BI Nutraceuticals, said in his view new tariffs and tax changes are likely to be category specific, and are unlikely to affect agricultural commodities as heavily as they might manufactured goods.

“All we’ve heard so far is a lot of posturing and conversation. We haven’t seen any change in our business on either side of the border, Pontiakos told NutraIngredients-USA.

“Trump seems to have been focused on automobiles and other heavy industrial products. I can’t imagine them putting a lot of focus on our category of products, on agricultural products. The US is a big exporter of agricultural products and if you go nuclear with tariffs across the board, those type of things tend to get reciprocated, he said.

“The thing Trump did was he focused, and I think rightly so, on heavy industrial areas like Michigan and went in there and said we was committed to helping them. He didn’t take that message to Iowa, where they export a lot of agricultural goods,” Pontiakos said.

Is ideology driving change?

Not all Republican thinkers are on board, however. Phil Gramm, a visiting scholar at the American Enterprise Institute, a former Republican Senator from Texas and one-time chairman of the Senate Banking Committee, said in his opinion the 1986 Reagan reform was highly successful in streamlining the tax code and in stimulating business development. In his view ideological concerns, not economic goals, are driving the current flirtation with border adjustments.

In an op-ed that ran last week in the Wall Street Journal Gramm had this to say: “The 1986 tax reform stripped out deductions and credits—which had distorted resource allocation and sapped economic efficiency—and collected roughly the same amount of taxes with a 28% top individual rate and a 34% corporate rate that had previously been collected with a 50% top individual rate and a 46% corporate rate.

“Today the lesson of 1986 has been almost completely lost in the fixation on lower rates. The House border-adjustment proposal, with its 20% corporate tax rate, is a prime example, he added.

Gramm views the plan essentially as a gimmick and alleges that it amounts to unjustified across-the-board subsidy of exports.  Rather, he urges that Republicans return to the blueprint of 1986.

“If we do the hard work of stripping away subsidies and preferences in the existing tax code while lowering rates, Republicans can follow a proven path by adopting another 1986-type tax reform that would make the tax system more efficient and expand economic growth. Even if the resulting corporate tax rate is substantially above 20%, such a reform would help the economy, and federal revenues, grow, he said.

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