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Will the Border Adjustment Tax Live or Die?

Rivet's 2020 Denim Circularity report takes a deep dive into how the global denim industry is plotting its circular future amidst a worldwide pandemic.

When President Trump released a “plan” for tax reform late last month, it omitted the much maligned border adjustment tax. And if policies weren’t so uncertain and subject to sudden change, retailers might have thought it cause to celebrate.

But since then, some have said the border tax is likely to sneak back into the tax plan, while others say it would die a quick death once it reached the Senate.

So which is it?

There’s still no telling yet, but here’s a look at both sides of the argument surrounding the proposal that would tax American companies’ imports at 20 percent and exempt exports.

Senator: Border tax will be “dead on arrival” in Senate

On what’s likely to be considered the more positive side of things for the apparel sector, which fears detrimental ramifications from the costs the border tax could generate in an industry that relies so heavily on imports, one senator said the tax hardly stands a chance.

“Right now, in the Senate anyway, I think the border adjustment tax is dead on arrival,” Sen. David Perdue (R-Ga.) said on an AM 970 radio show. “It’s a tariff, it’s regressive on a low-income consumer and a middle-income consumer. It really is counter to growth.”

A tariff, Perdue continued, is the last thing needed.

Another perspective from the Hill, however, would argue otherwise.

In an interview on CNBC’s Squawk Box, former Federal Reserve Chair Ben Bernanke had favorable things to say about the border adjustment tax, and that it’s just not being sold quite the right way.

“It’s not really about trade. It’s not really about imports and exports. It’s about where revenue’s taxed,” Bernanke told Squawk Box. “The idea is revenues should be taxed where it’s earned.”

Either way, we may not have seen the last of the border tax

Treasury Secretary Steve Mnuchin may have said he doesn’t think the border tax proposal works in its current form, but retailers may not want to count it out yet, and may want to put themselves in position to face it.

“While it’s nice to celebrate, retail companies ignorant to the president’s swift-moving agenda and focus on tax reform could be hit hardest,” Greg Petro, founder of predictive analytics firm First Insight, wrote in a piece for Forbes. “Those who prepare now will likely be able to react quickly, protect their margins, and ensure the future of the company through this presidency and beyond.”

Petro said there are three moves retailers should be making right now to protect themselves.

For one, companies should reconsider methods for manufacturing the right product.

“Paying steep taxes on products that don’t sell will have a catastrophic impact on the bottom line, with the effect of bad inventory inflating the problem even more,” Petro said.

Companies should also be looking into new pricing models on existing business and running multiple scenarios to get a good grasp on the elasticity of demand.

“This could reveal a need for greater discounts, but also opportunities to increase pricing on key items, which can help offset losses,” Petro wrote in Forbes.

Lastly, companies should be evaluating their U.S.-based manufacturing models.

“It is imperative that retail companies take a real look at the cost of manufacturing and producing in the U.S.,” Petro said. “Retailers should also examine partial manufacturing and assembly in the U.S. which could ease the burden of the BAT.”

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