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.

No comments:

Post a Comment