Photographer: Hannelore Foerster/Bloomberg

Bourse Investors Join Avocado Lovers in Potential Border-Tax Hit

  • Stocks and bonds held in foreign currencies could be affected
  • Dollar is expected to strengthen under tax on imported goods

Wal-Mart shoppers aren’t the only ones who could suffer under a tax plan that President Donald Trump is warming up to -- U.S. investors who trade on the London Stock Exchange, the Deutsche Boerse and Euronext might also take a hit.

Stocks and bonds denominated in foreign currencies might lose as much as 15 percent of their value when their U.S. holders convert them into dollars -- one of the effects of a so-called border-adjusted tax, according to Paul Christopher, an economist at Wells Fargo & Co. That’s because economists expect that the dollar would strengthen under the tax proposal, which would replace the U.S. corporate income tax with a levy on U.S. companies’ domestic sales and imports, while exempting their exports from taxable income.

Retailers have railed against the proposal saying they’d suffer under the tax because they rely heavily on imported materials. Other industries that import goods, including automakers, oil refiners and restaurants, have also said the tax could lead to higher prices for consumers.

The tax proposal’s supporters, including House Speaker Paul Ryan and House Ways and Means Committee Chairman Kevin Brady, argue that macroeconomic factors would lead to a stronger dollar -- reducing the cost of imports -- and even out any effects on consumers over time.

Trump’s aides last week signaled that the president is leaning toward the border-adjustment plan --  which Press Secretary Sean Spicer mentioned as a way to help pay for a wall along the Mexican border. Mexico is the U.S.’s largest source of agricultural imports, including Haas avocados.

A senior White House official described the border-adjusted tax, which would apply to imports from all foreign countries, as the “most nationalist” way for the U.S. to tax its companies.

This week, a broad coalition of lobbyists for retailers including Wal-Mart Stores Inc., energy companies and the auto industry launched a lobbying counter-offensive against the proposal.

Less attention has been paid to how the border tax would affect Americans who held $9.4 trillion of foreign assets as of Dec. 31, 2015, according to estimates by the U.S. Treasury Department.

Revenue Generator

“It’s not really on people’s radar yet,” said Christopher, head global market strategist for Wells Fargo Investment Institute, the bank’s registered investment adviser, said in an interview. If border adjustment is included in a tax overhaul, “the international portion of a portfolio could come to lose 10 to 15 percent,” he said.

“Investors may be in for a rude shock," said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics and a former senior economist and associate director at the U.S. Federal Reserve Board.

Border adjustability is key to Ryan’s plan for the most ambitious overhaul of the U.S. tax code in three decades because it’s estimated to generate about $1.1 trillion in revenue over a decade, according to an independent analysis by the conservative Tax Foundation, a Washington policy group. That increase would help to offset corporate and income tax cuts. Keeping tax reform deficit neutral is a prerequisite for passing a tax bill through the Senate without Democratic votes.

AshLee Strong, a spokeswoman for Ryan, didn’t respond to an e-mailed request for comment about how border adjustments would affect U.S. investors who hold foreign assets.

Proponents of the border-adjustment measure say the dollar would strengthen because taxing imports would reduce domestic demand for them, which means fewer dollars would end up overseas. That relative scarcity would push the dollar’s value up compared to other currencies.

At the same time, exempting companies’ exports from taxation would allow U.S. producers to lower their prices overseas. Lower prices would attract more foreign buyers, who’d need more U.S. dollars to make purchases. Their increased demand for the dollar would also push its value up.

Euro Dividends

So even though importers would pay higher taxes, their after-tax income -- and consumer prices -- wouldn’t be affected, because a stronger dollar would lower the cost of their imported materials, said Alan Auerbach, an economist at the University of California Berkeley, who supports the border-adjustment plan. He expects the stronger dollar would largely even out the cost of the import tax, he said -- meaning there’d ultimately be no real cost increase for businesses to pass along to consumers.

Auerbach said he expects the dollar to rise in value by 25 percent if the border tax is implemented, and he acknowledged there would be consequences for U.S. investors who hold foreign assets.

For example, if a foreign stock pays dividends in euros, and an investor wants to convert those euros to dollars, the investor would get fewer dollars as the U.S. currency strengthens.

Foreigners Gain

"I’ve been getting calls from guys all over Wall Street asking how it would work,” Auerbach said. He declined to quantify the portfolio losses investors could face on the conversions, but said some foreign assets wouldn’t be affected since they’re denominated in U.S. dollars already.

Critics say the expectation that the dollar will rise exactly in line with the cost of higher prices for imported goods doesn’t account for other factors that can influence currency exchange rates, including interest rates and political shifts. Currency fluctuations are “a jigsaw puzzle” that can’t be easily modeled, said Henrietta Treyz, a macroeconomic policy analyst at Height Securities LLC.

A stronger dollar might prompt emerging-market countries to raise their interest rates, making it more expensive still for U.S. investors to swap foreign-denominated assets into dollars, said Ben Emons, the chief economist at wealth management firm Intellectus Partners and a former portfolio manager at Pacific Investment Management Co. Some markets might already be anticipating those higher costs, he said.

Export-heavy companies would benefit from a border-adjusted tax -- but so might another group: foreigners who hold U.S. assets. For them, the stronger dollar would yield more of their own nation’s currency when they convert income from their U.S. assets, economists say.

People in foreign countries held $17.1 trillion of U.S. assets as of June 30, 2015, according to Treasury data.

Border adjustments would produce a wealth transfer to them -- courtesy of American holders of foreign assets, said Alan Viard, a resident scholar at the American Enterprise Institute and a former senior economist at the Federal Reserve Bank of Dallas. Viard had supported the proposal, but now says he’s on the fence.

"It’s almost like a foreign aid program, a giveaway of wealth to foreigners," said Viard.

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