Tuesday, January 31, 2017

Navarro Seems to Want a "Bought In America" Tax But Also Wants a Weak Dollar

Peter Navarro today accused Germany of tacitly manipulating the Euro to its recent lows,  This is a head scratcher, but worrisome.  Some of the remarks of Trump officials have already induced the beginnings of a trade war with Mexico.  That's bad, guys.

The same article says Navarro wants the Brady Plan implemented.  The Brady Plan which will cause the dollar to rise by 25% purportedly.

These two objectives, if that's what we must call them, are opposites.  You can't work toward a higher dollar (which will supposedly rescue me and fund my new giganto tax bill) and accuse other countries of manipulating their currencies down.

Peter, which do you want, dollar up or dollar down?

If another currency goes down against the dollar, (get ready for the big insight here) our currency goes up.  Theirs down, ours up.  AND if ours goes up . . . theirs goes down.  That's how these markets work.  Sorry.

The proponents of the Brady Plan say importers will not incur any extra expense because of the magic of dollar appreciation.  This assertion has been much scorned in this space.  Navarro demonstrates another reason to have NO faith in Holtz-Eakin or sidekick Auerbach.  If that plan is enacted and the dollar dares to move up, Navarro is fully committed to talking it back down, no matter the diplomatic cost to our country and its long term interests. Or your bankruptcy . . . or our inflationary firestorm.

I have pondered this and cannot identify any scenario where this ends up good for me, or good for anyone.  It has the makings of disaster, plain and simple.

If we really don't like a higher dollar, then why are we knowingly pursuing a policy that we predict will cause the dollar to rise from already historic levels?  Navarro is unhappy because other countries become more competitive when the dollar rises and their currencies fall.  That's his objection to the weak Yuan (of years past).  Yet he wants to implement a tax policy that will drive the dollar higher.  If he gets a lower dollar, then there is no realistic way for us to pay the new FIXED tax bill without raising prices on you. That's the justification offered for the crazy Brady Plan.

It is a rich irony that Navarro is swinging wildly at our largest trading partners, apparently motivated by the fact that we trade with them.  This is driven not by "currency bargains" but by the fact that we want to buy their products.  Navarro seems against giving you the choice to buy what you want and where you want it.  He is a conservative who wants a controlled economy.

Or he's a fantasist who imagines worlds comprised of incompatible elements simultaneously. A world with sugar plum fairies and closed borders, and super strong gravity but also the ability to float into the air at will.  He wants to compel you to buy American, and will tax the so-and-so out of you if you don't.  Hence, the Bought in America Tax (a more appropriate name for the BAT). It's an echo of the Communist era where someone like Peter Navarro gets to decide what is best for you, an idea oddly being sold to us by this era's version of conservatives.

Are we really prepared to accept this as the thinking behind a once-in-a-generation reworking of the Federal tax system?  Does this thinking in ANY WAY suggest coherence or discipline? Planning and foresight?  Good planning for all contingencies and strong accountability?  As to the latter, since Navarro has taken all possible positions, he can certainly claim to be right no matter what happens . . .

Gang, the Bought in America Tax is going to become reality if you let folks like Navarro and Brady bulldoze you.  They are swinging wildly at every target and spouting nonsense at every opportunity. Don't dismiss them or their positions as preposterous.  As I have shown, repetition of nonsense can convince many people of its veracity.  Yes, repetition of ANYTHING tends to build recognition and hence acceptance of the message's truth.  Even if it's not true.  The Big Lie.  You could end up financing the tax system through high tax bills and inflation if you don't start writing and calling your Congressman.

What are you waiting for?

Douglas Holtz-Eakin Says "Don't Worry So Much" - So That Settles it!!

In his "Daily Dish", Douglas Holtz-Eakin, together with Patrick Hefflinger, brings us up to date on "Eakinomics",

Please NOTE - I did not make this up.  He calls it "Eakinomics".  Click on the link and see for yourself.  Is this, possibly, a case of ego gone wild?  I will let you draw your own conclusions.

And IF it is a case of ego gone wild, should we REALLY consider basing our Federal tax system on somebody's ego trip?

I think that's a question worth reflecting on.

Anyhow, back at the ranch, Douglas shares the following news about "Eakinomics":  "To date, the leading proposal for tax reform has been the House 'A Better Way' blueprint, which contains a hotly-debated provision for 'border adjustment.'"

Isn't that an interesting perspective?  The leading proponent is someone other than Mr. H-E himself. It's so modest of Douglas to so generously share the credit.  Any idea why he is deflecting attention in this case??

Fun with words.  Mr. H-E intones:  "Border adjustment would be imposed by excluding all cross-border transactions from the tax base — revenues from exports would not be taxed, while costs from imports would not be deducted. Because cross-border transactions are excluded, their value cannot affect a firm’s tax liability."

Ahem, one kind of cross-border transaction is actually taxed under this wondrous proposal, namely imports.  Imports cross borders, too.  And 97.1% of all U.S. importers are small businesses.  And they are the ones who will be paying the bill for this plan.

Here's the head fake - according to Mr. H-E, we really need to do this . . . because:  "In the absence of this provision, there is huge opportunity for tax avoidance in a territorial system. A firm could sell to a foreign subsidiary goods, services or intellectual property at artificially low prices and then purchase its products at inflated prices. The result would be lightly-taxed foreign profits that could be repatriated back to the U.S. tax-free."

So, there you have it.  Holtz-Eakin is willing to throw us over a cliff because OTHER PEOPLE cheat. Incredibly, the problem cited, transfer pricing, is subject to rules and scrutiny.  Even more outrageous is the notion, flogged by Holtz-Eakin, that gaming to EVADE taxes (not avoid, but evade) through sham transactions is somehow a problem that justifies HIS Border Adjustment tax plan (it's his plan, not the House Republicans' plan).  Sham transactions are illegal.  If Mr. H-E has identified shady transactions that are somehow legit, the Federal government can regulate them and G-d knows, the IRS knows how to audit people.

So I don't accept that this plan is targeted on the real bad guys or that it will be effective in achieving that objective.

What I DO think is that Congress wants to place a tax burden of $120 Billion a year on small business importers to fund tax breaks allocated to other people.  It's among the 97% of taxpayers not paying the Border Adjustment tax that there are "winners" and "losers".  [Trust me, when you realize that some "winners" will never pay Federal taxes again while you must continue to pay taxes, you may have a harder time accepting that the BAT was a good idea.  But by then it will be too late.] Among the small business folks paying the $120 Billion are losers and worse losers.

And you will pay.  Believe me, you will pay.  The payment will come in the form of inflation. And when your dollars shrivel up, I hope you will not forget the term "Eakinomics".  We can all cherish that moniker.  It tells the tale.

Monday, January 30, 2017

CATO Institute Event on Border Adjustment Tax on February 2nd

The CATO Institute will be hosting the following event on February 2nd at B-340 Rayburn House Office Building at 12 noon to 1 PM EST.   I am told you can also watch live in Facebook at this link.

The CATO event:

Everything You Wanted to Know about Border Adjustability But Were Afraid to Ask

House Republicans have proposed to replace the corporate income tax with a destination-based cash flow tax. Proponents say this new tax is desirable because it is “border adjustable,” which means that exports would be exempt from tax and all imports would be subject to tax. Critics, by contrast, say such a tax violates the rules of the World Trade Organization and worry that an adverse WTO decision could set the stage for a value-added tax. Moreover, there are concerns that destination-based taxes undermine tax competition, thus making it easier for politicians to raise tax rates and increase the burden of government spending.

Join us for a lively discussion as top scholars comb through the implications and provide their considered analysis on the merits and demerits of these important reforms.

If you can’t make it to the event, you can watch it live online at www.cato.org/live and join the conversation on Twitter using #CatoEvents. Follow @CatoEvents on Twitter to get future event updates, live streams, and videos from the Cato Institute.

Sunday, January 29, 2017

Border Adjustment Tax Creates Winners . . . and Corpses

I get so frustrated by the casual arguments in favor of the Border Adjustment Tax. These arguments play right into the hands of the politicians who repeat misinformation and untruths in the hope that their assertions will stick.  If you hear them enough, you might actually start to believe them.

This is how the Big Lie worked, too.

How does that work?  The work of Kahneman and Tversky explain it.

Beware of the repetition of misinformation about the BAT.  Consider:

We need to level the playing field.

RW - The playing field is level, was level, and remains level. This expression refers to the fact that other countries have VATs and we don't. Please don't shed tears over this terrible "disadvantage". We can thank our lucky stars that we don't have a VAT.  Consider the opinions of The Heritage Foundation, The CATO Institute, Paul Krugman, and me (!).  This covers the political spectrum. So why the misinformation by Kevin Brady and the like?  Repetition of this tall tale may convince you over time that it's true.  It's not.

Frankly, if the playing field is not "level", the problem is corporate tax rates (as has been pointed out in this space multiple times).  U.S. corporate tax rates are the third highest in the world, after U.A.E. and Chad.  Our company pays 39.6% in Federal taxes.  The same business in Ireland would pay 12.5%. Why would anyone want to relocate in Ireland?  Who can guess?

All changes in the tax code create winners and losers.

RW - This misleading statement is intended to put you off the scent. You are invited to overlook the details of the proposal with this suggestion.  Our business is one of those details.  Perhaps more to the point, this is not about "winners" and "losers". That's appropriate when some people go from 35% tax rates to 37%, not when our business goes from 39.6% to 165%.  If that's what is intended, then the better explanation of the BAT is that it will create winners . . . and corpses.

Border rebates in China puts American companies at a disadvantage.

RW - This is a variant of the lie that the playing field is not level.  The math on VAT has been shown here again and again.  If VAT is actually a subsidy, then perhaps one of the people who can prove that assertion might want to share their math in this space.

You should assume that the silence of these critics signifies something. They can't disprove my math.  Silence in this case is consent. Put up or shut up, guys.

The dollar will rise enough to cover the costs of the BAT, and therefore consumer prices won't move.

RW - The precise prediction made by Auerbach and Holtz-Eakin is that our costs will decline sufficiently to cover the increased taxes we pay under the BAT, and ergo, you won't pay higher prices for my toys.  Regrettably, simply by writing this, you are more likely to remember it and believe it.  It is highly unlikely to be true, however, IMHO.  For one thing, do you honestly believe we do business in the most competitive market in the world and have the room to absorb, under any imaginable circumstances, an increase in our tax bill from 39.6% to 165% of earnings? There is simply no way to do business here with that kind of fat in the system.  And that goes for our vendors. They are simple businesses and work in a very competitive area, the provision of low tech services like assembly, molding and sewing. 

The idea flogged by the economists is that their input costs will go down sufficiently to cut my costs by the required 16-19% (based on our 2016 actual results, and depending what assumptions you make about exports under this scheme).  That kind of price drop is absurdly off the charts in our experience.  Logic alone suggests that it will never happen. Our factories have import content in the products they make for us.  They depend on oil, among other things. Plastics and pigments often are imported into China, too.  Other import content is more obscure (like transport, which depends on gasoline prices), but it's there. Their costs will RISE for this content while their cost for truly local content (basically labor) will fall.  Net net, they can't give me a big enough break.  That is, unless we induce a Depression in China. Please don't pray for that.

So, at the end of the day, big lies turn into truths over time.  When you hear Kevin Brady repeat assertions proven here to be false, you'll know what he's up to.  The more he says it, the more likely you are to believe it.  Don't be a sucker.

WSJ - Small Businesses Uneasy Over Border Adjustment Tax Plan

The Wall Street Journal profiled Learning Resources and other small businesses likely affected by the Border Adjustment Tax plan, noting in particular the damning fact that 95% of affected importers will be small businesses with less than 250 employees.  Boy, that sounds so smart to me . . . .

See below.

Small Businesses Uneasy Over Border-Adjustment Tax Plan

Owners say they may have to raise prices, lay off workers; exporters expect to benefit

Rick Woldenberg, chairman of Learning Resources, at his office in Vernon Hills, Ill. A proposed border adjustment would hurt the company, which sells toys mostly made in China. Photo: Taylor Glascock for The Wall Street Journal

By Ruth Simon and Richard Rubin
Jan. 29, 2017 12:57 p.m. ET

A proposed overhaul of the U.S. tax code favored by Republicans in the House of Representatives is drawing fire from small-business owners who sell everything from toys to materials used in kitchen cabinets.

Some business owners say they worry that a part of the proposal, known as border adjustment, could force them to raise prices and lay off workers. Others fear it could even put them out of business. The proposal could, however, benefit firms that are exporters or don’t import raw materials or finished products.

Under the plan, imports couldn’t be deducted as a cost of doing business, while exports would be exempted. That could lead to higher tax bills for firms that rely heavily on imports. The proposal is part of a broader tax overhaul that would cut corporate and individual tax rates.

Before his inauguration, then President-elect Donald Trump in a Jan. 13 interview with The Wall Street Journal, criticized the border tax plan as “too complicated,” though he later said the idea was still being discussed. The administration has since moved toward accepting the plan in part by tying it to Mr. Trump’s proposed wall on the U.S.-Mexico border.

“I am expecting disaster if they actually implement this plan,” said Richard Woldenberg, chief executive of Learning Resources Inc. in Vernon Hills, Ill., which employs about 150 people. The company sells rainbow-colored plastic cash registers, kitchen sets and other educational toys, most made in China.

Under a border-adjusted tax, a company that imported $200,000 of foreign made toys, spent $100,000 on domestic costs and sold the toys for $350,000, would only be able to deduct the $100,000 in local costs.

It would then pay taxes—at a proposed lower tax rate of 20%—on $250,000. So its tax bill would be about $50,000.

That same company could currently deduct the costs of imports as well as local expenses, and then pay 35% in taxes on $50,000. That results in a tax bill of about $17,500.

Economists and plan supporters say the dollar will rise to offset the tax change. If that happens, importers would pay less for goods they import, because a stronger dollar would reduce the actual cost of imports, and more in taxes, with their after-tax profits unchanged because of the border adjustment itself.

If the dollar doesn’t rise quickly or high enough, a border-adjusted tax is expected to penalize big retailers and other large corporations reliant on lower-cost foreign production. It could also prove painful for small firms, which typically have less ability to negotiate better deals with suppliers or push through price increases to customers or spend time and money modeling tax changes.

More than 95% of U.S. importers have fewer than 250 employees, according to 2014 U.S. Census data.

A puzzle globe is one of the educational toys made by Learning Resources. Photo: Taylor Glascock for The Wall Street Journal

Many Republican legislators remain committed to the measure. It is expected to generate $1 trillion over a decade, which would help offset both corporate and individual tax-rate cuts. Also, taxing companies based on the location of their sales limits incentives to shift profits and jobs abroad. The plan would let companies write off capital investments immediately and deny a deduction for net interest costs.

Lawmakers aren’t looking to exempt small businesses from the border adjustment, but they are trying to ensure the tax changes, as a whole, benefit smaller firms, said Rep. Tom Reed (R-N.Y.)

“This is a once-in-a-generation opportunity,” said Mr. Reed, a member of the House Ways and Means Committee. “If we don’t take care of everybody, you’re not going to have an opportunity to do it down the road.”

Lawmakers are exploring “safe harbors” for smaller firms where the businesses could have a choice between a simpler system and one that is more complex, he added.

Some small business owners believe they could benefit from the change. Greg Owens, chief executive of Sherrill Manufacturing Inc. based in Sherrill, N.Y., said that his company’s Liberty Tabletop flatware would be more competitive if imports become more expensive while his costs remain the same. That would make it easier for the 35-person company to sell its flatware, now mostly available online, through mainstream retailers and add a lower cost line. “It could put us back on the map,” he said.

But the plan is likely to penalize many other small firms.

“We do not have the cash cushion to absorb this kind of tax,” said Katherine Gold, chief executive of Goldbug Inc., an Aurora, Colo., distributor of children’s shoes and accessories. “It would put us out of business if we can’t pass it on immediately,” added Ms. Gold, who currently has more than 100 employees.

Mr. Woldenberg said his initial calculations show that a border-adjusted tax would increase Learning Resources’s tax bill by four- to fivefold, even with a lower corporate rate. That would force his company to raise prices by as much as 15%, which he fears could cause sales to drop by 20% or more.

Learning Resources tried in 2013 to find a U.S. molder to produce simple plastic counting toys it could sell at mass-market retailers with a “Made in the U.S.A.” label. Just one firm bid on the job. “They gave us a terrible quote,” Mr. Woldenberg said.

A second attempt last year also proved unsuccessful.

Many small companies don’t have the scale or skills to run their own manufacturing operations. “For a company my size, that absolutely is not a realistic option,” said Jennifer Arenson, chief executive of Global Sourcing Connection. Her Riverwoods, Ill, company has 26 employees; it supplies caps, pens, uniforms and other promotional items to Fortune 1000 companies.

Ms. Arenson, who acts as both a direct importer and distributor of other people’s products, said a company of her size couldn’t afford one factory, let alone the 10 she might need to produce the complete line of products her company offers.

Saturday, January 28, 2017

WSJ Video Explains Border Adjustment Tax Proposal

This useful video is a basic explanation of the controversial aspects of the Border Adjustment Tax proposal.  Runs 2:54.

Friday, January 27, 2017

Peter Navarro: Criticism of Border Adjustment Tax is "Fake News"

It's getting late and I'm exhausted but I have to share this one.  It's too good.

Peter Navarro just surfaced to set us all straight.  Peter Navarro, for those who don't know, is the sharp economic critic of China installed as the Trump Administration's director of the National Trade Council.  He appeared on CNBC today and, as the article notes, had a "let them eat cake" moment. I guess he's the Marie Antoinette of our era now.

You have to read this.  By the way, the article includes some pretty humorous tweets, that is if you haven't lost  your sense of humor yet.

From the article:

Retailers are worried about [the Border Adjustment Tax]. In a release published this month opposing the border tax, the National Retail Federation cited a talk by William Dudley, the Federal Reserve Bank of New York president, who said: "I think that it probably would lead to a lot of changes in the value of the dollar, the prices of imported goods in the US, and I'm not sure that that would all happen very smoothly. I also think there could be lots of unintended consequences."

CNBC's Melissa Lee pointed to a Citigroup estimate that said this new tax would be a massive hit to company earnings. That means people working in retail would likely lose their jobs as companies try to cut costs.

Navarro immediately got defensive.

"Well, first of all, this is a false narrative and a fake study," he countered.

Lee was a bit surprised. "Let me get this right," she said, "Citigroup did a fake study?"

"Citigroup has no credibility," Navarro said. He called the bank's analysis, and analysis from the Peterson Institute for International Economics, "garbage studies and scare tactics" and compared them to media outlets like MSNBC and CNN.

"We are not backing off," he said.

Lee pointed out that Citigroup isn't the media — it's research written for investors looking to find out if companies are healthy. Navarro ignored that point.

"Yeah, well, the Dow just hit 20,000, how you like them apples?" he said. "There are winners and losers."

Winners, we are assuming, are the people who get to keep their jobs. Losers are everyone else.

The internet wasted no time in expressing dismay at the interview — CNBC's own journalists included.

Whoa.  There are winners and losers.  That's a slogan we've heard from Brady, too.  So when the firings happen, it's okay - you're taking one for the team.

Every day gets stranger and stranger.  Please remember, Navarro articulates an argument supporting Kevin Brady and Paul Ryan. Navarro has become one of their compadres now.  This is among the many reasons Ryan and Brady should be looking over their shoulders.  They are fighting to KEEP this provision in the bill and that attracts the support of folks like Peter Navarro. Ryan and Brady are making this happen and will own it.  Please explain this to me . . . .

An Interesting Insight from Kevin Brady's District

Chairman Brady says he wants to listen but manifestly does not hear us.  According to him, we exaggerate and distort, and we are Special Interests. He will not engage on the facts, no rebuttal, just slurs and marginalization.  In a "Drain the Swamp" era, this is disappointing. , , times ten.

He asked for comments and feedback, and promised to listen.  But a politician and a promise, not a good combo.

I wrote a post recently called "Kevin Brady is WRONG - Twice - About VAT and Border Adjustment Taxes" and received the following comment today.  I want to make sure it isn't lost in the shuffle.

From Citizen:  "Brady is my Congressman. We tried to remove him in the last election but he squeaked by with 2%. He blocks Constituents, ignores e-mails, staff hang up on you when you call the office. He's a total disaster. We, the Citizens of TX 8, will remove him from office in '18. He's been in Congress since 1997. He's never held a job other than with the Chamber of Commerce. I hope he's blocked on this legislation."

As is well-known, at least to those with memory, all politics is local.  And "Citizen" is sending a message from home.  None of us like to be spurned or ignored.  Our employees don't like Washington power brokers playing dice with their careers and their life's work.  Our customers, American schools and American families, care deeply about their children and their futures.  They DON'T understand why politicians would needlessly endanger the products they depend on.  It's hard to get an answer if emails are ignored, staff hangs up, slurs are bandied about.

Listen to the justifications.  The politicians send out economists as stand-ins, and offer condescending blather to put off criticism.  From the Washington Post:  

"But economists say that under that taxation scenario, the value of the dollar would soar, thereby significantly cutting these businesses’ cost of goods. Therefore, the theory goes, they would not actually see a skyrocketing tax bill, and they wouldn’t therefore be forced to ratchet up prices for consumers. 'I think the focus on just the import costs and export prices, ignoring the potential exchange rate effect, is mistaken,' said Alan Auerbach, director of the Robert D. Burch Center for Tax Policy and Public Finance at the University of California, Berkeley. 'It’s understandable. But this is something that’s affecting the whole economy, not just one industry.' Woldenberg, for one, is skeptical as to whether that will play out in the real world like it does in the textbooks. Like many of his U.S. counterparts, his contracts with overseas factories are all in dollars. So he struggles to see how global currency fluctuations would affect his cost of goods. Auerbach concedes there might be some short-term pain there: Woldenberg and others like him would be stuck with the terms of their existing arrangements. But, for contracts on a go-forward basis, they can base their price negotiations on the new reality." [Emphasis added]

This kind of pap is so infuriating.  Let me translate Auerbach into English:  Woldenberg, poor guy, doesn't understand economics.  I have a PhD and worked under Martin Feldstein, so I speak with authority. Ergo my predictions must be right.  Hey, Kevin Brady is betting $1.2 Trillion on my idea. That blows my mind!  If I must be absolutely candid, "short term pain" refers to breathtaking inflation, budget cuts and lots of firings.  But they're only short term effects and will not affect my pay as a professor. And Woldenberg will muscle through, chin up, Old Bean. In the long run we're all dead anyway.  [Credit the last bit to John Maynard Keynes, a different economist.]

I might be able to take Auerbach's repetitive nonsense if he were actually accountable. He's not. He does nothing to rebut arguments based on empirical experience other than to deny them (generally in a condescending manner), assert his authority and repeat his extremely questionable predictions.  That's not an answer.  Sorry.

Ultimately, Citizen from TX-8 may have the only viable answer if the politicians won't listen.  Drain the Swamp indeed.

Washington Post: Trump-era Tax Reform Could be Coming For Your Toys

The Washington Post profiled our effort to shed light on the terrible Border Adjustment Tax today.  It can be found online at this link, and will be in Sunday's print edition in the Business Section.

Thursday, January 26, 2017

Hey Holtz-Eakin, the Dollar Went Up and the Peso Went Down - and Guacamole???

As they say on Bloomberg.com tonight, enjoy your Super Bowl guacamole while you can.  When
Trump proposed a 20% "border adjustment tax" on Mexican goods to pay for his new Southwestern real estate development, panic broke out. Who will pay for this?

Let's guess.

It's a serious issue. Mexico has little competition at scale for the supply of avocados to the U.S. They sent over 53 million pounds . . . last week.

Other folks are noting that your margaritas are threatened, too.  Tequila is a Mexican product. Hmmm.

Golly, I'm so confused.  Pardon me, a little dimwitted here.  There are so many smart, smart people proposing Border Adjustment Taxes.  It's tough for us Small Business people to figure it out. After all, if we're small, we must be dumb.  And no one is as smart as an economist.

We can all agree on that, can't we?!

So Douglas Holtz-Eakin and his sidekick Alan Auerbach assure us that the Border Adjustment Tax will cause the dollar to appreciate by 25% "immediately" and that, they promise, is a good thing. Among the many wondrous benefits is that costs will melt, they'll just MELT, as the dollar rises and those incredible savings will be passed on to you, noble consumer, through normal action in the competitive market. Absolutely nothing to worry about, you darned worryworts.  Or so they say.

It must be easy to be an economist.  You are in the predicting business, not the performance business. If you are good at predicting, like a weatherman, you are primo in your field.  Who cares if you turn out to be wrong?  You can always find an excuse to justify it.  Doesn't matter.  Have you ever seen a weatherman fired because it rained. Please!

But the Mexican peso seems to test the theory doesn't it?  With Trump talking down the peso, every day gets worse and worse for those poor people.  The dollar is rocketing up. This is good for people selling with peso costs.  Companies that employ Mexican labor are saving money, yes. But many of those companies have U.S. or other non-Mexican inputs which are rapidly becoming more expensive.  And the workers are getting poorer and usually have a lot of dollar-based costs themselves since many of those factories are near the U.S. U.S. companies operating in Mexico are having a hard time ignoring this reality and are choosing to bonus their Mexican labor to ease the extremis. Finally, and importantly, fixed investments in Mexico paid for in dollars are getting creamed, just whacked. Think of what you could sell your vacation home, or factory, for today with the peso down nearly 50%, and going down every day.  It's ugly.

And it's not wondrous.

Today's action by Trump to threaten a "border adjustment tax" (where have I heard that term before???) has triggered an absolute panic over the cost of imports from Mexico, and a direct and immediate fear of rising prices in the U.S.  To be paid by you, of course.

Hey, Holtz-Eakin, I wonder why your crystal ball seems cracked.  How is your magic wand doing?

And in the meantime, enjoy that guac.   I hope it's really good, because it will cost more next time, and to be worth it, it had better be good.  Or else you'll eat something else, or just play with your phone.  Fantastic!

WITA Border Adjustment Tax Conference, Economists Panel and Q&A

As noted, I appeared in the Washington International Trade Association (WITA) policy conference today on the industry panel  Preceding our panel was a panel of economists.  The conference was two hours long, half for each panel, and is worth a watch if you have time.

I have already posted the videos of the industry panel.  I am posting the videos of the economists panel here.

The panel comprised Gordon Gray (American Action Forum), Dan Mitchell (CATO Institute) and John Veroneau (Covington & Burling) and was moderated by Catherine Schultz of the National Foreign Trade Council.

I hope you will enjoy watching this interesting discussion.

Video 1 (Opening Remarks and Schultz):

Video 2 (Gray, Mitchell and Veroneau):

Video 3 (Q&A):

WITA Border Adjustment Tax Conference, Industry Panel and Q&A

Today, I appeared as part of the Washington International Trade Association (WITA) policy conference entitled "Border Adjustment Taxes, Tax Reform and Trade".

The event was sold out, with more than 230 people in attendance.  In my opinion, the event was very strong with good participants discussing the issue sensibly and in an even-handed manner. The panelists were smart and offered useful and provocative perspective.

The event was two hours long, almost to the minute.  The two sessions were about equal in length.

I am going to put up the second panel first. This panel was comprised of taxpayers (industry people).  I was on this panel, surprise!

The panel comprised Janet Boyd (Dow), Brian Reardon (Venn Strategies, representing pass-through entities), Rachelle Bernstein (National Retail Federation) and yours truly Rick Woldenberg (CEO, Learning Resources, Inc.).  The moderator is Timothy Keeler of Mayer Brown and formerly the CoS in the office of the USTR.  The website for WITA is www.wita.org.

The first video below is the opening remarks for the second panel, plus remarks by Boyd and Reardon. The second video is Rachelle Bernstein and me (I begin at 10:13).  The last video is Q&A.  They're all good.

My true recommendation is that you watch all two hours.  If you aren't that into this, you should watch me.  You might like my jokes, and more importantly, you might understand better why my hair is really on fire. There's not much hair left but it's on fire.

Video 1 (Boyd, Reardon):

Video 2 (Bernstein and Woldenberg):

Video 3 (Q&A):

Wednesday, January 25, 2017

Border Adjustment Tax Targets Small Business

If you feel you're not getting the full story when House Republican leaders talk about their tax plan, you are right.   The Brady Plan has been framed to sell it, and as a result, they have you pointed in the wrong direction.  

Frame:  They say we are "losing" because virtually all other companies provide tax rebates at the border, but we tax our products instead.

Answer:  Debunked numerous times here.  VAT is not an export subsidy, and corporate taxes take place everywhere.  OUR taxes are higher than everyone else's but this has nothing to do with VAT.

Frame:  They say this tax is simplified.

Answer:  The BAT is inherently complex and unpredictable because the tax base diverges from any concept related to profit.  Taxes turn on other, sometimes idiosyncratic terms, where taxes can skyrocket or disappear unrelated to the presence or absence of profit.

Frame:  The BAT is the "cornerstone" of the Brady Plan and no tax reform is possible without it.

Answer:  Well, they certainly want your money.  To give you everything else, they need that money so they can avoid doing it some other way.  That's the reality - the BAT is necessary if they are to avoid having to prepare a different combination of benefits and costs, and savings.

Frame:  Opponents to the plan are exaggerating and are Special Interests.

Answer:  I can't speak for others but I provide my data sources and show my math.  I make mistakes like others, but one thing I won't do is lie.  If I am mistaken or somehow "exaggerating", please rebut me here. I'll publish your expose.

And as to the Special Interests, I am "special", at least according to my mother. But you should know who the "special" people are who will bear the brunt of this tax. Surprise - it's your neighbors!  The target is Small Business.   Consider:

Number of Employer Businesses in the U.S. (2012):  5.73 million
Percent of Small Businesses in total businesses:  99.7%
Number of U.S. importers (2014):  187,825
Number of Small Business Importers (2014):  182,371 
    (97.1% of all importers and 3.2% of overall businesses)
Total Imports (2014):  $2.058 Trillion
Total Small Business Imports (2014):  $643 Billion

To recap, 97.1% of importers are Small Businesses and they themselves are only 3.2% of all employer businesses.  That's a very small, fragile group of businesses, usually the biggest job creator group in the U.S. and comprised largely of family and entrepreneur-run businesses.  That's who is going to pay the cost of this tax.

The BAT is projected to earn $120 Billion per year over the next ten years.  It's interesting that 20% of the Small Business Imports is also about $120 Billion.

For House Republicans who think this is not relevant to them, consider the math for your district, (totals, divided by 435):

419 Small Business Importers (1-499 employees).  
Estimated worker headcount of 80,000-125,000 per Congressional district.
Total Small Business Imports annually:  @$1.5 Billion
Total Small Business BAT annually:  @$300 Million

So what Mr. Brady isn't telling you and what he hopes you'll never figure out is that he is planning to soak family businesses to give other businesses a break. This is his great innovation.  He cloaks it in nationalistic nonsense and blather about tax inequities he can't substantiate.  But we can substantiate who will be paying this tax. Small businesses, family businesses and entrepreneurs.  You.

I think that's rotten.  I think Brady needs to respond to this concern immediately and set the record straight.

Tuesday, January 24, 2017

Kevin Brady Wants Advice, and Here Is Mine.

Chairman Kevin Brady gave a speech before the Chamber of Commerce today, and asked for advice:

"Understandably, some companies that import a lot of foreign products have concerns. Taxing both foreign and ‘Made in America’ products at the same rate is a big change. We are listening to their concerns and we welcome their feedback. We continue to invite CEOs to engage constructively on the design and transition of this critically important provision so that imports and exports continue to contribute to our local economies. . . . As we take the next steps on tax reform, I’m asking all of you to consider our proposal as a whole and how its provisions—working together—will help your companies compete and succeed here in America and throughout the world. We have already received outstanding feedback on our proposal from many of the companies and industry leaders represented in the audience today. With your continued participation, I am confident we can get the details right and seize this once-in-a-generation opportunity for pro-growth tax reform." [Emphasis added]

Well, the speech included a variety of claims which are untrue or spectacularly misleading:

-  “And while it’s new to America, border-adjustability is used throughout the world to give our foreign competitors a big advantage over the U.S."

RW - I have previously explained that VAT does not give advantages to anyone, domestic or foreign. Mr. Brady keeps repeating this untruth.  He needs to stop.  The issue, as previously noted, is actually corporate tax rates.  

-   “Today ‘Made in America’ products and services are at a tax disadvantage here in America and around the globe. That’s because foreign competitors like China, Europe, Mexico, and Canada all adjust their taxes at their borders—adding taxes to American-made products and taking taxes off their own." 

RW - As noted above, VAT rebates at the border do not give advantages to anyone.  They are not a subsidy. This is SIMPLE MATH.  Likewise, VAT taxes applied at the border are the same as VAT taxes applied to domestically-produced items.  Read my blog, Brady is WRONG.

-   “This tax disadvantage on ‘Made in America’ products and services destroys true competition. Worse, it often means the best location for a U.S. company to sell to America is overseas."

RW - Ummm, let's not forget that correlation is not causation. While Brady may want to plant the seed in your mind that international competitiveness can be traced back to tax systems, that is obviously nonsense.  There are myriad factors that affect competitiveness, but labor and other input costs (like rent, energy, etc.) are the real drivers.  Does anyone think that factories move to Mexico because of the taxes?  No, it's labor.  I don't know why Brady thinks you won't remember this salient fact.  China is also known for low wages.  It's not tax, and if it were taxes, we might have heard of it before Brady came up with this tall tale.

-   “At the end of the year businesses will add up export sales and disregard them—they aren’t taxable. And at the same time you’ll add up import costs and disregard them—they aren’t counted as deductible expenses. Naturally, businesses are already doing these basic calculations anyway."

RW - Wow, who wrote this?  This juxtaposes two radically different things with dramatically different impacts, but seems to suggest that they are the same because . . . you can disregard them?  Hello?  "Disregarding" revenue for tax purposes puts 75 cents per revenue dollar INTO your pocket. [Based on "S" Corp rates.] "Disregarding" COGS for imported products takes 25% of COGS out of your pocket and puts it in Uncle Sam's.  Basic application of arithmetics demonstrates that these are hardly the same thing.  I rather doubt your principal objection to paying Federal taxes is that you have to add up a few lines.  Does Brady think we're idiots?

It's worth noting that Brady is NOT telling you that the lucky exporters who can disregard their revenues can STILL deduct their expenses.  This is why some companies, like Boeing and GE, may never pay taxes again.  You will, don't worry, but they may not.  Some may even generate so many losses that the tax system will force them to buy companies with high taxes.  

-   “But make no mistake, there are severe consequences for America if special interests succeed in blocking this provision. Foreign products would continue their tax advantage over ‘Made in America’ products—undercutting President Trump’s focus on American jobs and growth. Tax rates on businesses would have to increase significantly from the proposed 15% and 20% rates, undercutting our ability to make America competitive again."  

RW - First of all, thanks for calling me a "Special Interest".  Wow, I hit the Big Time now!  We Special Interests, I mean the people who imported 17.4 million containers last year, are basically all Small Businesses.  In 2014, the number of importing companies was 187,825, of which 182,371 were Small Businesses (under 500 employees).  In other words, 97.1% of importers are Small Businesses. Total imports were $2,057 Billion, of which Small Businesses imported $643 Billion.  

So Brady plans to tax us Special Interests (Small Businesses) an INCREMENTAL 25% of that number - or $160 Billion.  Ouch.  Ouchy-ouch-ouch-shit-that-hurts.

And the notion that without this noxious provision, the government will have increase rates, I say two things. First, now that we are facing taxes in excess of our profits, I am okay with rates below 39.6% but above 25% if need be.  It's all in the framing, baby!

And second, Brady can cut spending.  He can do his job.

So here's my advice:  Stop telling untruths.  You know what you're doing.  Your speech writers are reading this blog.  If you say things you know aren't true, what are you?  

We Special Interests will not be intimidated.  We will not let you kill us.

Border Adjustment News Clips 1-24-17

As noted, some links may not work because of subscription requirements. [Fixed the links 1-25-17]

Monday, January 23, 2017

What are the Political Calculations Behind the Border Adjustment Tax???

As the House Republicans prepare for a summit later this week with President Trump to discuss the agenda for the coming weeks and months, I think it is fair to ask how Paul Ryan and the House Republicans view the politics of the Border Adjustment Tax.

We have already debunked the notion that this proposal fixes any purported "tax injustice".  They must know this.

The Brady Plan (including the Border Adjustment Tax) is revenue neutral so they know it's not a tax cut.  It's a tax reallocation.

Given that the Real taxes won't change, because the House Republicans oddly aren't planning to cut spending in what is anticipated to be a fully partisan bill, the layer of fat that is government won't shrink, so this bill won't be stimulative either.  Costs aren't going down, and cash overall will not flow into the public's pockets.  It will flow from some of our pockets into other people's pockets.

And finally, Mr. Trump seems to be against the notion of a Border Adjustment Tax.  As previously noted, Mr. Trump said he didn't "love it" and now today, he apparently clarified that he intends to punish "round tripping", where a company moves production from the U.S. to a low-cost jurisdiction for the purpose of making products more cheaply for the U.S. market.  From the WSJ: "Mr. Trump has described his 'border tax' in the past as a selective 35% tax on companies that outsource production to other countries and then import goods back to the U.S. That is different from the 'border adjustment' that is a key feature of the House Republicans’ tax plan. Mr. Trump has criticized that idea, which would tax all imports and exempt exports from U.S. business taxation."

So why are the House Republicans so anxious to shoot their bullets at this target? What's in it for them?  Mr. Trump is just starting out, with an aggressive agenda which overlaps with theirs.  If Mr. Trump (justifiably) opposes the Border Adjustment Tax (as does his new Treasury Secretary), don't the House Republicans have a lot to lose in pushing on this controversial bill?

We hear rumors that some Republicans in Congress are worried at being asked to vote in favor of this bill only to see it crash and burn in the Senate.  There is institutional memory of the famous BTU Tax fiasco of the Clinton era:

"The politically disastrous 'BTU incident.' Back in 1994, President Clinton and Democratic leaders of the House persuaded rank and file Democrats to to approve a new energy tax, dubbed a 'Btu tax,' for British Thermal Unit, the measure of energy. House Democrats were highly reluctant to support the unpopular tax  increase as part of a budget plan, but the White House twisted their arms. But then Clinton turned around and negotiated a deal with the Democratic Senate to scrap the Btu tax, which left the House Democrats hanging out to dry. The Democrats lost the House in the 1994 elections. Moral: To avoid “getting BTU’d,” weigh the political consequences before you vote."


And this is hardly the only risk.

    -  Raging inflation
    -  Layoffs tied to rising Federal taxes
    -  Disappearing products from shelves
    -  Regressive tax policies, with price inflation making the poor poorer.
    -  Wild currency fluctuations will cause . . . what?  This cannot be predicted, but nirvana is not the only possibility.
    -  Competition to acquire tax losses distorts markets further from natural pricing.
    -  Basic tax equity disappears as highly profitable companies pay NO TAXES, while you and I and Mr. Buffett and his secretary continue to pay taxes.

I think that's a lot of risk to take politically.  Politics are local, guys, and  your home voters may notice some of this.  When they get laid off from their dream jobs because their employers can't fund taxes or have priced themselves out of business, will they be satisfied with the economists' assurance that this is all for the best?  I mean, satisfied when they walk into the voting booth?

I do not believe the House Republicans must include the BAT.  They have other options to fund the other goodies they want.  That may take more coalition building or some elbow grease.  But the Republicans are purportedly the party of smaller government.  This can be done with little political cost.

We'll know more as the week goes on.  Will the House Republicans fall on their BTU Tax sword? Stay tuned!

Sunday, January 22, 2017

The Fall in the British Pound Models Border Adjustment Tax-Induced Inflation

Among the wishful thinking underlying the Border Adjustment Tax proposal is that importers' costs will fall so much from dollar appreciation that the massive new tax bills will essentially be funded by their suppliers' misfortunes.  Given that our factories are our lifeblood, the idea of shaking them down to pay a mega tax bill to Uncle Sam is quite unappealing.  

More importantly, the idea that we can somehow squeeze our costs enough to cover a Federal tax bill of 165% of earnings leaves me very skeptical.  We believe there is no way to cover this cost from our supply chain, ever, and that we will be forced to pass most or all of the new tax bill on to consumers.  That idea gives me the willies.  We haven't raised prices in two years.

This remarkable fantasy is set forth in the seminal article by Alan Auerbach and Douglas Holtz-Eakin, "The Role of Border Adjustments In International Taxation".  This article might as well have been handed down on a mountaintop chiseled into stone tablets for the amount of devotion it receives among advocates for Border Adjustment Taxes.  Pardon me for being an apostate.

The economists are flogging the idea that the dollar will skyrocket when their scheme becomes law.  According to them, it happens immediately and presumably endures forever. Have I lost you yet? Tuned me out because this is so obviously ridiculous? The economists posit that the dollar will appreciate by 25% based on a 20% tax rate.  There is a formula for this, don't worry, so it must be true.  Ahem . . . .

Anyhow, the notion that a rising dollar translates immediately (or ever) into lower costs for an importer is rather speculative, IMHO.  Most of us out here in the real world do not have a Forex department and do not play the futures market to make our money.  Remember, 99.7% of American businesses are small businesses.  We cannot capture currency fluctuations on the market, that's entirely fantastic and bad advice, too. It's important to note that we buy in U.S. dollars.  In fact, 85% of U.S. foreign liabilities are dollar-based.  In other words, it's not just us who do this.  

To capture currency gains, we will need to renegotiate each and every price on each and every item with each and every factory, and then that lower cost must both cover the (much) higher tax and flow to the bottom line. This is the same thing as saying that we must convince our factories to mark the product to market, no matter how their costs have changed (or not) and, importantly, bear the currency risk. This is never going to happen, based on my experience running this company for more than two decades.

Since a price negotiation is a zero-sum game, one way for a factory to play this is to say no. And if you can't develop a competitive second source, hardly an unprecedented situation, then what? I repeat, then what, Mr. Fancy Economist?

Our tax bills will not fluctuate with the currency, so we must pay a fixed sum to the government, with or without currency savings.  And if we can't save enough to pay Uncle?

That's why you can bet your bottom dollar that this plan is inflationary.  Very inflationary.

I can give you some evidence to chew on.  Consider the math of the Border Adjustment Tax - we must pay a premium of our new tax rate (25%) times the value of our imports as the BAT.  We are assessed this premium as a tax in this case. Notably, the same burden could be imposed on us by a depressed currency.  if the dollar fell by the same amount as (and in lieu of) the proposed tax, we would experience the same cost increase, right?  [I realize that the magic proposed by Auerbach and Holtz-Eakin runs the other way, but please bear with me.]  In other words, the burden on the company is the same - a 25% tax surcharge is the same money as a 25% cost increase caused by a falling home currency.

Turns out that post-Brexit, the British Pound fell from $1.50 on the evening of the Brexit vote on June 23, 2016 to a low last week of $1.20 - a 20% slide.  This simulates the two effects of Brexit - namely, U.S. exporters finding their products rising in cost over there, and British importers who buy in dollars experiencing a 20% rise in costs virtually overnight.

What do you suppose British importers are doing to fill the holes in their budgets?  Here are a few clippings for your information showing the rampant and shocking price increases being experienced over in the U.K.  [Inflation is also raging in Mexico, another country which experienced a massive fall in its currency.] You can find many more such stories if you spend a little quality time searching on Google. This is not my imagination . . . .

Marks & Spencer - raised prices 15%.  This came after a promise to hold prices.  "[An] unnamed supplier told The Times that the supermarket put itself in a 'ridiculously hopeless situation' by making the promise."

Unilever - raise prices by 10% on many food items and found itself in a war with Tesco's, one of their best grocery customers.  From the WSJ:  "But for importers, the fall of the pound is painful. Changes in exchange rates affect input prices almost immediately. The cost of imported materials for businesses rose by 9.3% in August compared with a year earlier. Such changes take time to filter through to consumers. Consumer prices increased less than 1% in the period. Still, for many U.K. residents, sterling’s fall is already causing discomfort. Overseas vacations are more expensive, keeping more Britons at home. Retail prices of many imported goods, such as electronics, wine and cars, have been ticking higher for weeks."  

Is it possible we've seen our last British tourist for awhile?  If Mr. Brady has his way, yes.

LEGO, Sainsbury's, Tesco, Brompton, Tesla, Ford Motors, GM Vauxhall, Nissan

Next (Retailer), Sainsbury's, Horby Toy Trains, RyanAir, Unilever, EDF, GB Energy

UK Inflation, British Airways, Apple (MacBooks), Holiday Inn, Morrisons, Nestle, Premier Foods, Christmas Pudding  The price rise in Christmas pudding is a good example of how inflation will flow downstream from imports.  Christmas pudding, which went up in price by 21%, is baked locally but contains sugar, among other things.  There are no sugar plantations in the U.K. Sugar is imported, so its price skyrocketed with the depreciation of the Pound.

Apple (apps), Dell, HP, Microsoft   Obviously, this will affect imported goods that are intangibles, too.  Apple raised prices by 25%, and Microsoft by 22%.

I am literally dumbstruck that our political leaders would risk setting this kind of fire. This is but one illustration of the extraordinary risks implicit in the Border Adjustment Tax.  On the specious justification that they are curing a "tax injustice" and the thin assertion that a revenue neutral plan will actually stimulate growth, House Republicans are taking massive historic risks.

Risks that affect YOU.  I hope you are starting to sweat.  You should be nervous.