Wednesday, April 26, 2017

WSJ Reports This Morning that Mnuchin Says No BAT in Trump Plan

We're getting closer.  In a just released article in the WSJ, Treasury Secretary Steve Mnuchin says the BAT will not be part of the Trump tax plan:

"Mr. Mnuchin said at an event Wednesday morning that the administration wants permanent policy changes but temporary cuts could be considered too.  'This is going to be the biggest tax cut and the largest tax reform in the history of our country,' he said at a conference in Washington. . . . Mr. Mnuchin said the administration’s proposal won’t endorse the border adjustment feature that is central to the House GOP plan. The provision attempts to raise revenue by taxing imports, but not exports. Mr. Mnuchin said the administration wasn’t opposed to the provision in concept and that he liked aspects of it. But he said, 'We don’t think it works in its current form.'

The WSJ goes on to comment on Speaker Paul Ryan's position:

"Mr. Ryan hasn’t backed down on the border adjustment idea, but he said Wednesday that he knows the proposal needs modifications in response to criticism from retailers and others. 'We don’t want to have severe disruptions,' Mr. Ryan said."

This is the closest to a concession that I have seen Ryan make on the BAT.

As noted in my last post, we should not assume that the BAT is dead yet.  The Republicans need cash to make this plan work.  Unless and until they realize that real costs must be reduced, they are likely to continue to rely on reallocation, which is the appeal of the BAT (to certain people).

An interesting notion is that a massive tax reduction is the perfect opportunity to slash entitlements. After all, if you are actually going to pay far less in taxes, a future financial need like retirement or retirement health care can be financed with those saved dollars.  Why leave the money in the inefficient hands of the government?  So, for instance, the government could shift the burden of current entitlements on Americans based on age and ability to pay (income).  This would not have to pull the rug out from under anyone, but would sharply reduce the size of government and the size of the budget deficit.  It's a way out, but would require political courage, political collective action and thoughtful design.  No one need be roadkill to get this done.

In any event, the BAT is getting closer to its just demise.  We fight on until it's dead and gone.

Trump Tax Plan - What Does It Mean? And Other News

Today's buzz is the pre-announcement of the Trump tax plan.  Let's call it "Candy for Everyone". Federal corporate rates for C Corps and S Corps alike (and other pass through entities) would be reduced to 15%.  Each percentage reduction in the corporate rate supposedly costs the Federal government $100 Billion in revenue over ten years.  This kind of chop is thus expected to create HUGE deficits for as far as the eye can see.

The Trump White House response to this is the Laffer Curve, namely the lower rates are paid for with growth.  So nothing to worry about.  Yup.

The presence of the BAT in this proposal is in dispute. The New York Times says "no", while CNBC says "yes" as a placeholder, whatever that means.  Actually, the placeholder concept is an acknowledgement that they will need to raise revenue to make this work.

So much of this makes no sense to me.  First of all, tax reductions on this scale must be matched not by reallocation of tax burden (the revenue loss is too massive to recoup simply by shifting burden from one group of taxpayers to another) but instead by spending cuts.  This Congress and today's American public is not prepared to ignore the deficit and risk ruining America's future to throw a really great party right now.  But no one seems prepared to cut spending or meaningfully reduce the size of government. The Freedom Caucus won't support a massive expansion of the deficit (or allow borrowings to support it), and many other more moderate Republicans will also oppose it as fiscal conservatives.  One wonders where Mick Mulvaney is on the plan.  Democrats will never support it.

Trump's gambit seems to be a form of bribery - make the tax reduction so ridiculously large that no one will oppose it.  Pure greed will create the necessary support, by this reasoning.  I cannot see this working, as nice as a massive tax reduction might be.  Such massive deficit generation is irresponsible and not called for at a time of peacetime high employment.

Second, the process to get a bill passed without Democrat support (a given, in my book) is via reconciliation.  The "candy" proposal seems particularly ill-suited to this approach, if not utterly impossible.

IF something like the Trump plan gets any traction, the need to find revenue will be overwhelming. No one apparently wants to face the music on entitlements so that means tax increases somewhere must be included to offset the tax reductions (this is reallocation, not a reduction in tax revenue).  I would like to think this is an impossible scenario but there is no indication yet that anyone plans to make it impossible.  So IF this happens, the BAT comes back to the table.  In this chess game, it again seems like checkmate for Ryan and Trump.  The Senate is still not likely to go along with the BAT. In the House, the recent opposition by Rep. Marsha Blackburn (of Freedom Caucus and Trump Transition Team fame) suggests that Ryan needs to anticipate a fatal challenge to 216 Republican votes for a BAT plan.

So what on Earth are Trump, Ryan and Brady thinking?  I would love to say "nothing" but no one knows.  This is just more Trump-era chaos in my book.  His zigzagging and belligerence with Canada this week is a harsh reminder of how unpredictable his policies are and the great difficulty in predicting his next move on . . . anything.

We will all have to stay tuned.

And in other BAT news, the House Ways and Means Tax Policy subcommittee hearing on the BAT scheduled for Thursday of this week has been postponed, perhaps to May 3rd.  In light of the Trump plan announcement scheduled for tomorrow, the timing and nature of the hearing may change yet again.

Monday, April 17, 2017


The gossip about the BAT is swirling.  We have already covered that chaos in the White House makes the situation all the more opaque.  IMHO, the White House may ultimately be influential on taxes (duh) but does not have the political power to overcome the very negative perception of the BAT in the Senate.  No one can assure agricultural state Senators that retaliation will not be aimed at American farmers (most are Small Businesses, btw).  No one wants a trade war affecting American grains, period.  As a consequence, the White House can only be an impact player if it steers the process away from the BAT.

As such, Ryan and Brady remain at high risk.  It seems incumbent on them to blink first.  Since there is no realistic path for the BAT to become law, and if they choose to continue to push on that rope, they not only take their political careers in their hands but also squander whatever advantage comes with the White House at their back, Ryan and Brady would be well-served to have an epiphany and switch horses midstream.  I see this as their possible political salvation. This aspect of the Blueprint didn't work. Time to move on.  Guys, remember the "Sunk Cost Effect"?

Today, as if to make the point that the BAT has hopeless optics (reflecting hopeless policy and economics), Five Below and Dollar Tree warned of its ill effects.  Dollar stores are a critical part of the economy serving lower income Americans.  A "dollar" store becomes hard to imagine under the BAT.  Think of the range of voters affected. This is pretty obvious. The BAT is a regressive tax on all Americans.  This is BAD politics.

Axios reports that Ryan and Brady are now considering what they call the "candy option" (all the good stuff, but none of the costs).  In other words, a Reagan-style cut in rates with deficit spending. It's the Laffer Curve.  I don't see this as realistic in this environment.  Has no one noticed the Freedom Caucus?  Those folks won't deficit spend, so this seems like another dead letter to me.

At some point, Congress will wake up to the long suggested idea of cutting spending to go along with an adjustment in rates.  This is an old idea espoused by many, including in this space, and offers the best and most realistic chance to deliver on lower rates.  The high rates in this country are the root cause of dissatisfaction (and inversions).  So far, leadership cannot bring themselves to rally around this kind of realistic plan.

With midterms increasingly on everyone's mind, progress on such divisive and electorally explosive issues seems unlikely.  A coalition across the aisle seems inconceivable, and in the leadership vacuum that is the Republican Party today, even a Republican coalition seems out of the question.  So what's next?

Brady and Ryan seem intent to maintain the appearance of a functioning government so rumors swirl about pending Tax Policy subcommittee hearings, possibly in the next two weeks.  Everyone is vying to get a microphone.  Discussing these issues in the light of day would do some good. We are, after all, neighbors and no one has moral superiority in wanting a better outcome for America than anyone else.  We all want the home team to win.  Getting tax reform done right is important to all of us.  The employees, customers and suppliers of our company, Learning Resources, have a strong interest in it, too.  We are not simply "against" novel initiatives.  We are prepared to contribute to solutions - but the politicians must be willing to listen and to move in a more responsible and realistic direction.

Stay tuned!

Saturday, April 15, 2017

Chaos at the Top - Wither the BAT?

Actual news on the Border Adjustment Tax has slowed down, but media attention has not diminished.  How is this possible, and why is it happening?

It's possible because there is just no clear direction in Congress, or more generally in Washington, on how to proceed on taxes.  The confusion frankly runs in every direction. Among the problems is a real absence of leadership.  Paul Ryan says that the House, the Senate and the White House are all on different pages.  And, of course, the White House is on a different page every day.  Consider, for instance, that Mick Mulvaney, the OMB Director said the following on March 24th:  

"Standing on the White House lawn Friday morning, Mulvaney told CNBC that President Trump decided to stop negotiating with lawmakers over the healthcare bill because he 'has other things he wants to do. He wants to get tax reform done. He wants an infrastructure bill approved. He’s got other jobs programs moving through the White House,' Mulvaney said.

That seems clear, right?  Today, the WSJ says it's the exact opposite:  

"After losing a fight to revamp the health-care system, President Donald Trump said last month he was prepared to put the setback behind him and move on to the next challenge, rewriting the tax code. Three weeks later, he said he is determined to resurrect the health-care bill even if it means delaying the tax overhaul, telling The Wall Street Journal in an interview: 'I want to get health care done… I think I will get it done.'  The tax overhaul, he said, would have to wait."

And so why is the media continuing to pour resources into covering the BAT?  Simple, the leadership continues to plug it like nothing's changed. The threat hasn't lifted and as House Republican leaders cling to the BAT despite the bad odds, one must either regard it as a last gasp by fading leadership or that the odds are growing that bad policy could be become bad law at some point.

As if to make the point that anything could happen and that chaos is reigning, consider these WSJ articles published on the SAME day this week:  Trump Threatens to Withhold Payments to Insurers to Press Democrats on Health Bill and Trump Administration Takes Steps to Stabilize Health-Insurance Market.  The threats are wild, inconsisten and vary by the day.  Or by the hour.

Nutty events are reported daily. This may be my favorite recent BAT story, from the Washington Post on April 11th:  

"In recent weeks, the president has held meetings with his counterparts from other countries. But in some cases, those sessions have only heightened doubts that Trump has a clear sense of what direction he intends to take U.S. foreign policy. Few if any world leaders, for example, have had as much experience in dealing with U.S. presidents as German Chancellor Angela Merkel, who is on her third. During their White House meeting last month, Merkel tried to pin down Trump on one of the top concerns of U.S. trading partners: a proposed “border adjustment tax” to be imposed on imported goods. Publicly, Trump has signaled an openness to the idea, but he also said it has drawbacks."

"'Don’t worry,' Trump told Merkel, holding his thumb and forefinger close together. 'It will only be a little bit.' Trump’s breezy answer — and Merkel’s exasperation — has been the talk of diplomatic circles in Washington and Europe. 'So all the chancellor of Germany knows is that, ‘It will only be a little bit,’' said a senior European diplomat in Washington, holding up his fingers as Trump did, and repeating an account confirmed by others in anxious embassies in Washington. 'It’s very puzzling.' The White House did not reply to a request for information about the exchange between Trump and Merkel."

Given all of this nonsense and noise, whatever rational argument is being made to declare the impending death of the BAT, it lives on and continues to get coverage.

We are in a dangerous phase. The BAT remains a threat.  Too many people have written it off, but with this kind of volatility and a terrible leadership vacuum, it could come roaring back.  Please note that this is all politics, not policy.  In Washington, politics and policy are from different planets.  Bad policy, regrettably, does not disqualify legislation.  In some circumstances, it even makes it more attractive (for political reasons). Politics is the real driving force here.  And the BAT may make good politics for some people at some point.  

I still think the BAT will die, but am not comfortable with the present situation.  One would think that if Trump were going to support the BAT, he would have hitched his wagon already. Trump has an uneasy alliance with Ryan (and vice versa) which may become politically toxic to both of them at some point, in which case the BAT dies for sure.  However, politics makes strange bedfellows.  We must remain vigilant until Paul Ryan concedes.  

Tuesday, April 11, 2017

Fake News . . . or Fake Congressman?

Late last week, Americans for Prosperity and Freedom Partners published a new study  on the economic impact of the Border Adjustment Tax, and Kevin Brady immediately labeled it a "so-called study" and "fake news".  I happen to be mentioned in the study, and it's an honor to be called "fake news" by the illustrious Mr. Brady.  After all, he's a so-called Congressman!

Let me help you with this use of the term "fake news".  In a Kevin Brady context, "fake news" is an inconvenient fact that appears in the media.  It is deemed especially "fake" if it is associated with an opponent of whatever ridiculous position Brady is pushing at that particular moment.

This is not entirely different than our President's practice of citing flagrantly ridiculous reporting on Fox News (e.g., Andrew Napolitano's assertions about Obama wiretapping) while at the same time pointing the finger at the "failing New York Times" or CNN as a source of "fake news". I guess, "fake" depends on where you sit these days.  Some people also call this a validation bias, or just plain old delusional behavior.  Take your pick.

So what did this "fake" study show?  Well, among other things, it drew from data I have previously highlighted in this space, namely the "fake news" promulgated by the U.S. Census Bureau (fake!) about 2014 import totals.  State totals are actually now available for 2015, as well as a range of other updated information.  The data is similar between 2014 and 2015, so the conclusions don't change.

And the "fake" news being flogged by the always suspect U.S. Census Bureau (practically the National Enquirer of the U.S. Government, as you know) is state import totals.  The links are above, check them out for yourself.  The Freedom Partner report performs some simple fourth grade math on the Census Bureau data and observes that regional patterns of trade will punish certain states more than others.  You probably could have guessed that.  Consider that Rep. Erik Paulsen represents the home district of Best Buy and Target but spinelessly stands strong behind the BAT.  Yup, some places will get hammered. The study shows that, and dares to publish a ranking.

Like most "fake news", the study provides copious citations, presumably to other sources of fake news.  Who knows.

The state most sensitive to the BAT using this data is actually Michigan.  Michigan is a seat of the auto industry.  My home state of Illinois, that great state, is seventh on the list.  We also feed the auto industry.  Have you ever heard of global supply chains?  Most of the top adversely-affected states have heavy exposure to auto manufacturing.  Again, the report correlates this data and makes it digestible.  Unlike the coarse and baseless remarks of Mr. Brady.  [The study does similar correlation work on retail jobs by state.]

If there is anything "fake" here, it's the kindly assumption on page six that the impact of exchange rate movements will cover half of the burden of the BAT.  I strongly doubt that, myself.  Okay, it's not "fake" just because I disagree with it but, frankly, it's kinda fun calling it "fake news". Try it, you'll like the sense of power and condescension calling news "fake".  Am I right??

To  make matters more unpleasant for Congressmen with a penchant for stretching the truth, Americans for Prosperity released this commercial to run on cable stations this week:

It's a real shame that House Republican leaders cannot deal with the truth, and have a career-threatening compulsion to push bad policy with even worse politics.  That's not our fault. We will push back hard and since they are on some sort of kamikaze mission, they may pay the ultimate political price for their insistence on this terrible policy initiative.

And in the meantime, we can savor our "fake news"!

Wednesday, April 5, 2017

Why You Should Care about the Gorsuch Confirmation

I am sure you, like me, are watching the Neil Gorsuch Supreme Court nomination drama with ghoulish fascination.  As you probably know, the Republicans are threatening to go "nuclear" by reinterpreting Senate rules (changing procedure) to allow a majority vote to end debate. This would allow the Republicans to end the Democrats' filibuster going on right now, and effectively make it possible for a majority vote to decide a Supreme Court nomination.

This controversy seems like a Hatfield-McCoy dispute.  Tit-for-tat, a never ending escalation, dating back to who-knows-when.  The last "nuclear" trigger was pulled by Harry Reid to allow majority vote to end debate on judicial nominations short of the Supreme Court.  Didn't take long for the Republicans to go the next step, prompted by lingering Democrat rage over McConnell's plan to not consider the nomination of Merrick Garland last year and their intent to retaliate against Gorsuch.  Notably, McConnell's idea was first made by Joe Biden in the 90's.

Don't assign black hats and white hats here.  You can see that this is an oscillating drama with no good guys, just viciousness and no consideration for us.  You know, the public.

The WSJ recaps the sorry descent into hell:

"The rise in partisanship has fed an escalating feud between the parties over how to use the Senate’s procedural tools to keep the other side in check. Democrats, when in the Senate minority during President George W. Bush’s presidency, sought to block a set of Mr. Bush’s judicial nominees before the Gang of 14 agreement defused the tension. The parliamentary arms race between the parties has just continued since 2005,” said Sarah Binder, a senior fellow specializing in Congress at the Brookings Institution. “Minorities exploit the rules and majorities find new ways to restrict those new avenues. Later, when Republicans were in the minority, their opposition to some of then-President Barack Obama’s judicial and executive nominees helped push Democrats, led by former Sen. Harry Reid of Nevada, to change the chamber’s rules in 2013. That change enabled the Senate to approve lower-court and executive nominees with just a simple majority. Then last year, Republicans, back in control of the Senate, refused to hold a hearing for Merrick Garland , Mr. Obama’s nominee to the Supreme Court after Justice Antonin Scalia died in February. That stoked anger among liberal voters, who pressed Democratic senators this year to oppose Mr. Gorsuch. The pressure from Democratic voters also was driven by resistance to Mr. Trump’s inflammatory comments and early actions in office. This is like a troubled relationship where everybody has a grievance and everybody has a little bit of a reason to be angry, but the question becomes, what do we do next?” said Sen. Schatz of Hawaii."

Sadly and dangerously, the WSJ notes that we can still fall deeper down this hole:

"However, lawmakers from both parties say there is no appetite now for changing the 60-vote threshold for procedural hurdles on most legislation. GOP lawmakers have said Mr. Reid’s decision to change the rules in 2013 paved the road for their alteration later this week. The consequences of the 2013 rules change became evident this year, when Mr. Trump’s nominees, many of whom were contentious, cleared the Senate often along largely partisan lines."

This is the threat you should be worried about, a lot. The Senate's procedural rules are a valuable check-and-balance against "Majoritarianism". The concept that we should always do what the Majority wants is extremely dangerous. The issues that arise are very threatening to all of us.  As a minority, I am particularly averse to Majoritarianism.  Issues of personal liberty and individual rights are directly threatened by this, and not to be melodramatic, but those are critical issues that define what makes America great. The inconvenient roadblocks in the Senate protect us all. Stripping them away in a Hatfield-McCoy style dispute injures us all, considerably.

As it relates to the Border Adjustment Tax, consider what makes this terrible proposal hard to translate into legislation and law. The Republicans are only able to push tax reform through as part of reconciliation, a Senate procedure that severely constrains the terms in the law. Reconciliation is valuable because debate can be terminated with a majority vote. Connecting the dots yet?  

If debate on legislation can be ended by majority vote, this rule can easily change - right now.  A block of cooperating Republicans in the House and Senate, backed by the White House, can do whatever they like, with no obstacles. This makes Trump a King, not a President. Democrats in Congress would have no role until their power can be restored by the voters, then they would set about doing what the Republicans are doing right now, namely tearing down what the last guy did.

Yoyo-ing laws and regulations will come at a terrible cost to all of us.  We should care, a LOT, about this pending change in rules in the Senate.  There's no point in my calling my Illinois Senators, they are both Democrats so we know where they stand.  If you live in a state with a Republican Senator or Senators, I suggest you write them and call them today to protest this change in rule.  I also suggest you organize groups of people, large groups of people, to also do this today. We can only stop this by group action as voters.

This is serious.  Your actions can make a difference.

Tuesday, April 4, 2017

Border Adjustment News Clips (April 4, 2017)

More clips for you!

Weekly Standard: Weekly Standard: Simplify, Simplify, Simplify 4-10-17

Washington Post: White House explores two new tax ideas — a value-added tax and carbon tax — as leading proposal to raise revenue falters 4-4-17

CNBC: White House reportedly looks at two new tax options to replace divisive border adjustment 4-4-17

McClatchy DC: A tax at the border could be the next big Republican disagreement in Congress 4-3-17

Pulse News: Korean firms’ tax levy likely to shoot up under border adjustment tax 4-3-17

The Citizen’s Voice: Hoping Toomey votes against proposed border adjustment tax 4-3-17

WSJ: A New Tribalism Spreads in Donald Trump’s Washington 4-3-17

The Advocate: Letters: Business taxes passed to consumers 4-2-17

News Leader: Pay attention to unfair federal income tax codes 4-2-17

WSJ: How to Make Tax Reform Bipartisan 4-2-17

McLaughlin & Associates: March National Poll Results – Border Adjustment Tax (BAT) 3-31-17

The Tax Times: Possible Phase In Of Any Potential Border Tax Plan 3-31-17

CNBC: Trump still hasn't made up his mind on House border tax, Commerce's Wilbur Ross says 3-31-17

Financial Post: “Very little support” for border adjustment tax in Washington: Carr” 3-30-17

NY Times: Why I Support a Border-Adjustment Tax 3-30-17

Bloomberg: Congress Weighs Options to Soften Controversial Centerpiece of GOP Tax Plan 3-30-17

CNBC: John Deere Co. CEO: "Very Concerned" for farmer customers 3-30-17

Washington Examiner: Conservatives Can’t Afford To Let A Border Adjustment Tax Derail Tax Reform 3-29-17

CNBC: Congress’ Border Adjustment Tax: Senator Portman: GOP Should Pursue “More Traditional” Approach 3-29-17

Fox Business: Tax reform will be done this year: Rep. Kevin Brady 3-29-17

New York Magazine: 9 Big Questions About GOP Tax Reform 3-29-17 Border adjustment tax bad news for Pa. 3-29-17

CNBC: An influential GOP senator throws cold water on the polarizing House border tax provision 3-29-17

Mic: The Biggest Threat to Trump’s promise of job creation might just be Senate Republicans 3-28-17

The Daily Caller: Godfather Of Republican Border Adjustment Tax Plan Was A John Kerry Adviser 3-28-17

CNBC: Former U.S. Senate Budget Committee Chairman And Ways & Means Committee Chairman Judd Gregg 3-28-17

The Detroit News: Trump Should Ditch Border Tax 3-28-17

The Hill: Trump puts foreign investors first by supporting the Republican tax plan 3-28-17

ABC News: What we know (and don't) about Trump's tax reform plan 3-28-17 Import tax talk casts shadow on Walmart hoopla in Mobile 3-28-17

The Times of India: Tax plan pivot may leave discretionaries vulnerable 3-28-17

Bloomberg: The Job Killer for the Retail Industry 3-28-17

WSJ: Republicans’ Tough Call on Taxes: Quick, Short Yardage or Hail Mary? 3-28-17

Fox Business: Congress’ Border Adjustment Tax: Ways & Means Member Kelly: “No” 3-27-17

CNBC: Border Adjustment Tax Something That Is “Very Convoluted” 3-27-17

Bloomberg: Kevin Cirilli: Border Adjustment Tax Has Divided GOP In Ways Similar To Health Care 3-27-17

Fox Business: At This Point The Border Adjustment Tax Is The Divide Within The Republican Party, Which Is Putting The Whole Tax Reform Effort In Jeopardy 3-27-17

CNBC: Border Adjustment Tax Is Opposed By U.S. House Freedom Caucus Leader & “The Number Of Senators Who Are Skeptical Of It Keeps Growing 3-27-17

WSJ: Congress Gears Up for Fight Over Spending After Failure of Health-Care Bill 3-27-17

The Hill: Retailers get aggressive in fight over GOP tax plan 3-27-17

NY Times: Trump’s Take on Corporate Tax Rate Could Look Very Much Like Obama’s 3-27-17

Fox News: Border Adjustment Tax “Even More Complicated Than Health Care Reform” 3-26-17

Fox News: Rep. Brady: We're full steam ahead on tax reform 3-26-17

The Hill: Vulnerable Senate Dem: Border tax concerning for agriculture 3-23-17

Monday, April 3, 2017

Brady Talks Transition, Which Won't Work, but the BAT's Political Reality is Grimmer than Ever.

Rep. Kevin Brady on Sunday March 26th repeated some of his tall tales about the Border Adjustment Tax on Fox News, but added a promise to phase it in.  Should we rejoice?

Not in my book.  Brady, by repeating falsehoods to sell a failed tax plan, lowers the bar for the already sinking Republican brand, and likewise makes clear that he and Paul Ryan are stubbornly deaf to criticism.  Don't take their "promise" to listen in any way seriously.  They want us to listen to them, and turn off our brains while we're at it.

One wonders if this is like a Roadrunner cartoon when an anvil falls out of the sky onto the head of a cartoon character.  Just like Wile E. Coyote, it seems to have no effect.

On the subject of "phase in", let me state (repeat is more like it) that a phase in is NOT a solution to the issues caused by the BAT.  If you hated the BAT without a phase in, you will hate it just as much with a phase in.  The issues are:

1.    A phase in does not alter the fact that tax rates will rise sharply for importers who will be forced to raise prices on consumers.  Cost recovery won't improve and the ability to move manufacturing back to America to avoid taxes will not improve either. The pain will just be longer and more persistent.

2.    A phase in does not address the inability of exchange rates to cover increased tax burdens on importers.  The purported means by which Brady and Ryan claimed importers would never pay an extra dime in taxes is almost entirely mooted in any phase in.  It wouldn't have worked anyhow, but stretched over years becomes even more farfetched.

3.    Since a phased approach is intended to facilitate transitions, it is important to ask which multi-year transitions are expected to result.  The economics of manufacturing here is going to be driven by the availability of lower cost automation.  The imbalance of costs facing the importer will mainly result in a longer period of persistent inflation and longer weakness as the government adds to the load year after year.

Spreading the impact is supposed to allow time to adjust, but unfortunately, time is not what's missing here.  What's missing is political common sense, and there is no transition possible there, I guess.

Perhaps more amazing about this approach is that it ignores the political reality facing Ryan and Brady.  There is only so far that denial can take you.  Brady's political problems are many:

a.  He is losing House Republicans.  As previously noted, Mike Kelly on Ways and Means has been openly and impolitely scornful of the proposal on camera.  No hiding.  He's not alone. The media reports of shrinking support are mounting.  It's reminiscent of the healthcare legislation.

And how did that turn out?

b.   Trump's erratic and impetuous approach to dealmaking is destroying any possibility of a Republican coalition.  Is he for you, or against you, or for you and against you, or against you without telling you?  It's not a pretty picture, so why would anyone trust him with their vote?  After the healthcare debacle and the pending Gorsuch catastrophe in the Senate, don't count on Democrats choosing to rescue tax reform. That's just pure fantasy, sorry.

c.   The Senate is dead set against the BAT.  Among the many reasons, and there are many, Senators from agricultural states are worried that retaliation against American grains will follow implementation of the BAT.

How do Ryan and Brady plan to get House Republicans to pull the lever for this tax increase aimed at small businesses and hundreds of thousands of good American businesses, all the while knowing that the bill will crash and burn in the Senate?  This is political hara-kari - not a good seller on the Hill.  I am surprised this is credible to anyone at this point.

In other words, it's healthcare all over again.  You really have to scratch your head at the stubbornness, the hopeless obliviousness of Brady and Ryan.  Go down the ship, why don't you?

Trump, for all his randomness, seems to have no intention of going down with the ship. According to Politico and Breitbart, he has decided to go his own way, dumping Ryan's plan and putting out his own tax proposal sans BAT.  This is both sweet revenge for healthcare (given Ryan's effort to do Trump's bidding, will anyone want to trust Trump now?) and a cold political assessment that the BAT is kaput.  It's fascinating that Trump would dump the BAT first.  The reasons to move away from that toxic plan have been obvious for a long time, but only the brain dead couldn't see it after the healthcare debacle.

And, apparently, Brady and Ryan are among the brain dead.

Count the days.  We will see the BAT crash and burn very, very soon.  We're almost there now.

Thursday, March 30, 2017

Is It Surprising that Dogs Think They Could Support a Cat Tax?

In today's New York Times, William T. Jones, Chairman and CEO of family-controlled Cummins Allison, explains why he supports the BAT.  I don't know him but believe he is stating his views candidly and clearly.  The problem is that he's wrong in several important respects.  He repeats the urban myths and simple nonsense of Kevin Brady and Paul Ryan. Given the size and scale of his business empire, Mr. Jones has no excuse for his failure to know what he's talking about.

Urban Myth No. 1:  "In general, it’s a good idea to shift the United States tax system toward consumption as opposed to production, which a border-adjustment tax would do. More than 150 of America’s trading partners currently impose consumption taxes, or “value added” taxes, of up to 25 percent on American exports. This means that American-made exported goods are burdened with the costs of American taxes as well as those of foreign taxes. Our foreign competitors face no such consumption tax when entering the American market, but they enjoy value-added rebates from their home countries, which help lower their prices in our market."

Three ideas are expressed here.  First, America's trading partners impose VAT on American exports.  That is true, but they apply VAT to ALL products, not just imported products.  If Cummins-Allison is competing against a local product, both the imported and domestic products are assessed VAT.  This tax is neutral to everyone for this reason.  

Second, Jones asserts that our products are bearing the burden of American taxes as well as foreign taxes.  Again, no prejudice against American products here. He is referring to American corporate taxes as the "American taxes".  Corporate taxes are assessed in VAT jurisdictions typically, so this burden is felt everywhere. As noted above, American products do not bear a special VAT burden not felt by other products in VAT jurisdictions.

Notably, American corporate taxes are very high.  That's our own fault.  It is not a structural problems in our system of taxation.

Third and finally, Jones asserts that border adjustment in VAT jurisdiction is some sort of subsidy.  I have debunked this numerous times. See these articles for details:  January 12, January 15January 18, and February 16,  This is an urban myth and is just not true.

Urban Myth No. 2:  "Although my costs would rise somewhat because I have to import certain components that are no longer made domestically, the border tax would compensate for that loss by canceling out the tax-rebate advantage currently enjoyed by my foreign competitors."

As noted, the so-called "tax-rebate advantage" does not exist.  If it did, my company would be receiving it, and it is nowhere to be found on our books. We have a UK affiliate which exports out of the EU.  If the tax rebate (border adjustment) in VAT jurisdictions is some kind of subsidy, we would have at least 20 years of accumulated subsidy in our bank account and on our audited financial statements. We don't. This is an urban myth and Mr. Jones doesn't know what he's talking about.

Simple Nonsense No. 1;  "Those who object to the border-adjustment proposal — chiefly retailers who sell imported goods — claim that there will be exorbitant price increases for consumers. But there is reason to think any such increases would be smaller than critics suggest, as the tax would be applied only to the (lower) wholesale price at the border, not to the (higher) retail price in their stores."  

This is ridiculous because Mr. Jones apparently believes that the Border Adjustment Tax will have to be passed along to consumers, but fails to recognize that the price charged for the heavily taxed imported products will be marked up at each level of distribution, just like a VAT.  The math dictates that the price increase will be as large as the terrified importers can steel themselves to impose, converging on the 20-25% increase in costs that they experience.

Urban Myth No. 3:  " . . . perhaps those higher prices could be mitigated for lower-income Americans by a tax credit phased out over, say, three years — during which time retailers should be able to find or help establish American suppliers to meet their needs at lower cost."

We have not been able to find a single factory able to produce any of our products at a competitive cost since we began trying in 2013.  Bananas aren't grown in this country, Bordeaux wine comes from France, Corona beer from Mexico, and cut-and-sew products like shoes and apparel are never going to come back to a high value-added manufacturing economy like ours. As I have pointed out in prior blogposts, if manufacturing does come back, it will be robotic.  Car manufacturing by people is an outmoded idea.  Mr. Jones' assertion is a myth.  

Simple Nonsense No. 2:  "If the W.T.O. — principally a bureaucratic collaboration of America’s competitors — were to reject an American border-adjustment tax, it might well be time for the United States to re-evaluate its relationship with that organization."

Maybe we should move away from the WTO and maybe we shouldn't, but that's sort of irrelevant here.  If we breach these contracts and treaties, we will likely start a trade war. The WTO may be a sideshow.  Time to wake up and smell the coffee!

Mr. Jones caps his analysis off with a summary of the Ryan/Brady fictions and mythology: "Theoretically, tax systems should collect revenue efficiently and distort markets as little as possible. But in an age of large-scale market distortion driven in part by the consumption taxes of our foreign competitors, why should American companies like mine be unilaterally disadvantaged because of misplaced fealty to an idealized tax system?"

The notion that "large-scale market distortion" is being driven by VAT systems is unsupported and unsupportable.  Job losses in this country are not being driven by taxes. Jobs move off-shore as companies seek more efficient manufacturing, allowing their products to sell at lower prices. The constant shifting of resources in an economy creates opportunity.  It's not a one-way street.  By lowering the cost to produce, companies open up new markets previously unreachable at the old, higher costs. New jobs are created as a result.  Very often, these jobs pay much more than the low-skill jobs that were displaced.

We have to move away from a fear-based view of the economy.  We must embrace the vibrancy of an economy where capital can flow across borders and where the rules encourage efficiency for everyone's benefits.  Jobs may shift as a result, but that does not mean that we will stop creating jobs for Americans.  We have an enviably strong economy.  If things were so bad, how would that be possible?

Let's hope Congress sees through this smoke screen.

Trump Shows Why His Influence Will Not Push the BAT Through the House or the Senate

Bargaining, among other things, requires some form of trust.  Whether it's an uneasy trust (Reagan's "Trust but Verify") or a trust based solely on negative incentives, fundamentally bargaining requires confidence.  What happens to you if you choose to cooperate - are you subject to betrayal?

Paul Ryan, what do you say?

Trump has proven again and again that he is impatient, impetuous, temperamental and vindictive. While that may be what the voters knew they were getting, "drain the swamp" or whatever, it is not the makings of a great bargaining position with Members of Congress incentivized to do their own thing.

Trump doesn't start from a position of strength.  He is in the midst of a historic popularity plunge and has no credible plan to reverse it.  He was elected by a newly-formed conservative alliance, a group with no record of exercise of political power, but can't gain the support of Congressional conservatives. In desperation, he is now attempting to cultivate Democrats. Without the coercive force of a reliable coalition, Trump is naked and alone.  And finally, Trump continues to make outlandish claims that strain credibility or resorts to outright lies, all with apparent impunity. How long will the free pass last?

Under these circumstances, who would trust Trump with his/her vote in exchange for a promise?

If you continue to believe in the myth of Trump's political power, consider today's "threat" made against the Freedom Caucus.  He tweeted out a promise to campaign against them today:

Over a period of only a few days, Trump swung from one extreme to another with the Freedom Caucus. Before the healthcare vote, he threatened: "President Donald Trump was 'having fun' when he told the leader of the House Freedom Caucus that he would come after him for not supporting the Obamacare replacement plan, White House press secretary Sean Spicer said Tuesday. 'Mark Meadows is a longtime, early supporter of the president,' Spicer told reporters at Tuesday’s briefing. 'He had some fun at his expense this morning during the conference meeting.' . . .  'But he has made it very clear that he was having fun with him,' Spicer claimed. 'The president’s committed to making sure that this gets passed.'

Earlier in March he coo'ed:  "When we spoke on the morning of March 7, Trump assured me that he would not bully the Obamacare-replacement bill’s loudest Republican critics, like the Freedom Caucus chairman, Representative Mark Meadows, on Twitter: 'No, I don’t think I’ll have to,' he said. 'Mark Meadows is a great guy and a friend of mine. I don’t think he’d ever disappoint me, or the party. I think he’s great. No, I would never call him out on Twitter. Some of the others, too. I don’t think we’ll need to. Now, they’re fighting for their turf, but I don’t think they’re going to be obstructionists. I spoke to Mark. He’s got some ideas. I think they’re very positive.'"

So what is it - friend or foe?  Maybe that's not even the right question. A better and more interesting question is whether Trump is a worthy trading partner.  Presumably, his erratic and passive-aggressive behavior has triggers that go beyond an individual transaction.  In other words, pleasing him now is no guarantee that you will enjoy his loyalty or support at any given point in the future.  If so, why trade with him? Why take his threats particularly seriously?  You were probably subject to the same threat already.  Given his impetuous and judgmental behavior, you have no way to insulate against his threats. Why bother trying?

Under these circumstances, his threats seem hollow, and his influence waning.  This is apparent to more people that just 535 Members of Congress. Notably, the electorate is watching and paying closer attention than in recent memory.

Trump will not be able to bring back the "opt-outs" on the Ryan/Brady tax reform plan.  They need a Plan B before their record of failure makes any further progress impossible and careers become endangered.

Tuesday, March 28, 2017

Anti-BAT Coalition Publishes Video about the Impact of Proposed Tax Reform on Learning Resources, Inc.

I was featured in Politico today in an article about the BAT.  The video mentioned is embedded below.

"NO, WE DIDN’T FORGET ABOUT BORDER ADJUSTABILITY: The border adjustment tax in the House GOP’s blueprint remains the most controversial part of the tax reform debate right now, and there are signs that the framework is still struggling to gain traction. The latest: Rep. Mike Kelly (R-Pa.), a Ways and Means member who’s been publicly skeptical about border adjustability because of his history as a car dealer, flat out said he was opposed to the idea on Fox Business on Monday. (Full disclosure: Kelly was asked specifically about a border tax, but the conversation seems to be about border adjustability.) Americans for Affordable Products, the coalition opposing the border adjustment, also has a new video featuring Rick Woldenberg, the chief executive for an Illinois toy maker called Learning Resources. Woldenberg, who’s been a rather vocal opponent of the House plan, says that a border adjustment would make his business unprofitable."

Putting aside my fifteen minutes of fame, the part of Mike Kelly is really interesting.  As has been reported in this space, Republicans on the Ways and Means Committee have apparently been threatened by losing their seat on this powerful committee if they stop supporting the BAT.  Devin Nunes clearly has been very cooperative on this score . . . .  Kelly is a car dealer from Pennsylvania and is a Republican member of Ways and Means.  He has long been rumored to be against the bill, but now he's out in public and telling people on camera:

Yes, you heard that right.    When asked if he was "for a border tax", Kelly replied:

No, I’m not because you know what, I am a bill guy, Maroney Label, which I’ve watched for years on the side of a car, shows not only the equipment on a car and price of a car, but it also shows parts content. And when you look at global parts supplies, you know they come from all over the world. Sometimes little things built in one part of the world go in to big things built in Detroit and everything else. So, I always look at how it’s constructed. Don’t go flying off the handle. It’s not made here. I’m not buying it. You know what? If that’s the truth, you’re not going to buy very many things anymore because it takes the whole world now with that global supply chain to build the finished product. So, it’s incredibly important we understand how things are made as opposed to just making statements and then going back later on and saying, oh, I didn’t really understand that. You know what? Get your head out of that place where it’s so hard to breathe and look at things. Look at it.”  [Emphasis added]

Whoa.  He really said that.  So WHY did he say that?  Two theories:  First, he senses disarray and weakness in House Republican leadership (you know who I mean) and is playing the chess game out a few moves. He's getting out there first so he can claim the higher ground.

A second, perhaps more compelling theory:  He was TOLD to do this.  He's floating a trial balloon for Ryan and Brady.  If so, this is the leading edge of the death of the BAT.

Be still, my heart.

And there's other reason to believe it's cratering.  Look at this outpouring of negative press:

Chris Wallace:  "You've also have a big split in the Republican Party because Speaker Ryan wants this Border Adjustment Tax which would tax imports, not exports, and there are a lot of Republicans who say 'no way'".

Jim Crmaer:  "But you know what, if they're going to make the debate the border tax then we're going to be talking about this thing for a long time, it’s not going to work.

Bloomberg's Kevin Cirilli:  "But then you talk to members of the House Freedom Caucus, you talk to other conservatives in the Senate who feel that the Border Adjustment Tax is a non-starter issue. So, all of this of course comes on the backdrop as Russia hearings in the Senate and the House are going to continue and Republicans on those committees continue to raise questions. That of course could weaken this administration’s political capital as it looks to pivot to tax reform after a devastating loss on health care.

FOX Business Network’s Stuart Varney: “At this point, the Border Adjustment Tax Is the divide within the Republican Party, which Is putting the whole tax reform effort In jeopardy.

And as if that's not bad enough, there's this -

CNBC’s Ylan Mui:  “One source tells me that fiefdoms within the administration have been working on pieces of a tax plan, but there’s no cohesion yet, and there are three big questions that still need answers. The first one is border adjustment. The head of the House Freedom Caucus, and that’s the group that just took down health care, he doesn’t want it to be part of tax reform. Meanwhile, the number of Senators who are skeptical of it keeps growing. Second is whether corporations should be able to deduct interest payments, getting rid of that benefit is critical to financing the cut of the top line corporate tax rate from 35 to 20 percent, so the existential issue here is whether tax reform needs to be revenue neutral. Do any tax cuts need to be offset with revenue from somewhere else? Guys, mark your calendar, April 28th is the new date to watch. That's the deadline to pass a bill that would keep the government running through the end of this fiscal year, and that will give us clues about whether or not Republicans can actually work together.”  [Emphasis added]

So you have to wonder why Mike Kelly chose today to come out against the BAT.  To my knowledge, he is the first Republican on Ways and Means to take this stance directly in contravention of Kevin Brady (aww!).  What does it mean?  Stay tuned!

Okay, Everyone Line Up Behind Kevin Brady for the BAT . . . Guys? Guys? Where is Everyone???

So what happened last week, and how does the crushing defeat in healthcare reform legislation affect the BAT?

Last week. we witnessed what happens in a political vacuum where the leaders are weakened, and the governing coalition (so to speak) has little incentive to bargain or cooperate.  And in this case, the legislation was poorly-conceived and unpopular.  It's really that simple, and you saw the predicted fracturing of the House Republicans.  The implications for the anti-BAT folks are excellent.

The failure of the Republicans to even take a vote on the TrumpCare legislation tells you a lot.  I do not believe the modest projected shortfall in votes.  The media says there were about 30-odd holdouts, but I think without a vote, we will never know.  I personally believe that it would have been very hard for rank-and-file moderates to vote for this legislation, or anyone for that matter. Even committee votes are now fodder for midterm campaigns.  Who would want to put their name on a bill that removes insurance from a staggering 24 million people?

This speaks to the amazing political miscalculations made by Paul Ryan and presumably his sidekick, the estimable Kevin Brady.  They seemed to believe that by shamelessly cozying up to Mr. Trump, they would achieve two things:  (a) benefit from his political pull based on his November election victory and (b) neutralize the effort by conservatives to oppose the bill.  They must have believed that the conservatives would never dare vote against something supported by  Trump.


So why did the conservatives take this hard stance against the conservative Mr. Trump?  I personally think it was a power grab.  Now they can call the shots in future battles by staying united.  Of course, you also have to consider that Mr. Trump has managed to achieve a lower approval rating in 64 days than Obama did in eight years as President. Trump is sinking deeper into the abyss by the day.

Trump clearly had no idea how to build a coalition or hold one together, and it turns out that bullying is not the winning approach.  Why?  Two reasons:  first, Trump's bargaining position was contingent on being able to deliver something in exchange for votes.  Clearly, he cannot do that, so why would anyone trade with him?  If Trump can't keep his promises because he has no way to deliver, he loses all bargaining authority.  Second, Trump is not trustworthy.  He clearly coaxed Paul Ryan to come to his side and ally with him, and then when it didn't work out, he threw him under the bus. So who will trust him when you know this is possible?

No one.

This leaves Paul Ryan wounded.  He looks like a policy wonk who isn't accountable for delivering votes.  His legislative strategy was paper thin and poorly conceived, putting his Republican colleagues at tremendous risk.  He said he was excited about the CBO report.  Need I say more?

Trump and Ryan need a big win now to encourage folks to believe they can lead and deliver results. Given the above, it's hard to believe anyone will follow them if any risk is involved.

The Border Adjustment Tax proposal has everything going against it now.  The law favors massive companies over family businesses, and is highly inflationary.  It also constitutes a massive tax hike (face it), and involves a big gamble on macro economics that have never been tried before. Anywhere. No one knows if it will work.  The arguments made to support the BAT involved obvious mischaracterizations and at times, outright lies.  Ryan and Brady haven't fooled anyone.  And finally, the proposal has been highly controversial and risky from day one, having split the business community down the middle.

Ryan and Brady blew healthcare in part because they spent so much political capital on this loser idea.  They were on TV endlessly for two months straight plugging this terrible idea and brushing off complaints all the while saying that they were listening.  As recently as last week, Brady robotically reaffirmed on TV that it was a "given" that the BAT would be part of the tax reform bill. He knows perfectly well that the BAT won't get through the Senate and yet he remains committed to insisting that his Republican colleagues take HUGE political risks in voting for this very unpopular proposal.

Either Ryan and Brady have a learning disability, or they must be considering alternatives.  In the wake of the healthcare debacle, they can't take risks, and will NEVER be able to sell a bill of goods again.  The dull thud of the healthcare failure is a sound no one will listen to again.

The Republicans have a strong incentive to show they can get something, anything, done now.   Having staked themselves to tax reform as their next big challenge, they MUST drop the BAT and concentrate their limited remaining resources on something that will pass.  The BAT will inevitably fail, and if Brady and Ryan push it to the limit, they will go down the drain with it.

Life is full of choices . . . .

Monday, March 27, 2017

Border Adjustment Clips March 27, 2017

More clips for you!

Americans for Affordable Products: Americans for Affordable Products Grows to More Than 400 Strong 3-27-17

UBMedia: Border Tax Adjustment 3-21-17

Politico Pro: USTR Nominee: U.S. Goods Could Be Hit With Duties Abroad Under Republican Tax Plan 3-21-17

The Boston Globe: Trump’s damaging border tax 3-20-17

Thursday, March 23, 2017

Rep. Tom Rice (R-SC7) Wants the BAT Which Will Harm His District

Tom Rice of South Carolina's Seventh District is a team player.  He toed the party line for Ways and Means Chairman Kevin Brady (at least on tax reform). In the March 7th #TaxReformTuesday, Rice extolled the party line:

As previously noted, Ways and Means members have reportedly been threatened with losing their seats on this critical committee if they don't pledge to support the terrible BAT.  Rice is a conservative who has supported trade initiatives in the past:  “South Carolina is experiencing a resurgence in manufacturing,” Rice continued. “Our manufacturers need access to the 96 percent of the world’s consumers that live outside of the United States.  Without trade agreements, our manufacturers face substantial barriers selling to consumers in other countries.

That's rich coming from Rice.

As Rice well knows, the Border Adjustment Tax will toast some of the most important employers in his district.  He has supported many of these manufacturers in the past.  Those manufacturers do a lot of importing.  The biggest importer in the Seventh District of South Carolina is Honda. Here is a quote provided by Rice himself:  

"'As our Timmonsville-based facility is the sole global production source for Honda all-terrain (ATV) and side-by-side (SxS) vehicles, Honda of South Carolina Mfg., Inc. understands the benefits of rules-based trade and open investment for increasing market-opening opportunities for our U.S.-origin products,' said Brian Newman, President of Honda of South Carolina Mfg., Inc. 'Therefore, we call upon Congress to pass TPA-2015 in order to strengthen the trade deals that the U.S. negotiates to better benefit American workers, American communities, and companies that manufacture in, and export from, the United States.' and companies that manufacture in, and export from, the United States."

Other large importers in Rice's district include Otis Elevator.  Here is Rice appearing at the Otis plant:

Tour of Otis Elevator Company

Chummy.  I bet they're glad he's their Congressman.  Here is Otis bragging about the honor of hosting Rice:

Otis was induced to build in his district, like Honda, and now they're screwed . . . by their own representative.  Their employees should take revenge at the polls. Other large importers in Rice's district are in auto parts, containers, packaging, molding, plumbing, boat manufacturing, clothing distribution and wire.  A nice spectrum of the economy, all about to get a whopping tax bill at the behest of their Congressman.

Please note that many of these companies sought to manufacture here as a way to gain entry to the U.S. market. Like many manufacturers, they import certain components, as one does in a global supply chain, as part of manufacturing finished goods which are often destined for the U.S. market.  In other words, no export tax relief for such a company.

Should Tom Rice care about these constituents?  Well, he could lose his seat on Ways and Means if he did.  Probably better for him to look after Number One.

As in prior importer profiles, my importer data comes from a public database and represents a two-year period (2015/16).  In Rice's district, there were 619 importers with a total of 16,555 entries in that period of time.  The top 76 of the importers, listed in alpha order below, accounted for 14,864 such entries. That's 29 per day for two years solid, 7,400 per year for only 76 companies.  Those companies employ many thousands of South Carolinians.  At least, they do at the moment.  In a small district (668,000 people), these are consequential numbers.

Tom Rice's planned BAT victims: