The tail wags the dog
Charleston, South Carolina is well known for a particular architectural style known as the “Charleston Single House.” Built in the 1700s, the houses are only one room wide but very long. Legend has it that the style was designed to minimize property taxes, which were based on street frontage.
For a modern day version of this same theory, look no further than the street outside your door. Tax depreciation rules favor the purchase of “heavy” SUVs and trucks for use in business. As a result, many businesses purchase Hummers or other large SUVs even though a smaller vehicle would suit their needs.
Examples like these are why it’s important to consider unintended consequences when tax reform proposals are discussed. Consider the House Republican proposed “Border Adjustment Tax.” If things work as planned, it could be great, but when you consider potential challenges such as treaty and WTO issues, there could be some interesting side effects.
The Border Tax Adjustment is expected to raise the value of the dollar, which would increase the cost of U.S. exports for foreign customers. And those still trying to import into the U.S. (those expected to offset the confiscatory U.S. tax with a more valuable revenue stream) will have higher energy and input costs, as petroleum markets are U.S. dollar denominated.
It’s also said the tax will lead to higher demand for U.S. manufactures, but a booming manufacturing sector in the U.S. will require more employees –– lots of them. The current U.S. unemployment rate is at 4.7 percent, which most economists consider to be full employment. Creating more demand in an already scarce market isn’t going to help create the skilled workers companies need. Nor will a restrictive immigration policy.
There isn’t a simple tax policy change that can single-handedly fix what ails U.S. and global business. More often than not, using tax law as a policy lever can result in significant economic distortions. As charming as a Charleston Single House may be, a wiser tax policy doesn’t influence architecture (or business investments).