Wednesday, January 18, 2017

Kevin Brady is WRONG - Twice - About VAT and Border Adjustment Taxes

Rep. Kevin Brady continued his misinformation campaign today with dueling Ways and Means Committee Press Releases contending that we Americans are subject to foreign tax injustices, and asserting that he is here to save us.

PLEASE BE ON ALERT when Congress screams that we are all in danger, and that they are going to save us.  This usually means they are running for reelection, not that you are facing any real peril.  

In one press release, Mr. Brady informs us that the United States is among the very few countries not assessing a "border adjustment tax".  To make the point, he includes a map and notes that we have the company of "North Korea, Cuba, Syria, Iraq, and Afghanistan".  Are you sold yet?  Mr. Brady then misleads with the following:

"So, if a product is made in America, our nation’s antiquated tax code forces U.S. businesses to pay a “Made in America” export tax when that product is sold abroad. Not only does this increase the price of American-made products relative to those made in other countries, it serves as a direct incentive for businesses to move jobs, operations, and investments outside the United States."

This is flat out WRONG.  In the United States, we do not have a value-added tax.  That is nothing to cry about.  A VAT makes everything more expensive, and also pushes tax expense onto the poor unfairly.  We enjoy a higher standard of living because we don't have a VAT.  The fact that those other countries don't have a VAT isn't evidence that our system is dysfunctional.  Look around you - does this country remind you of North Korea or Afghanistan?

We do have a corporate income tax, and that's what Mr. Brady seems to be calling an "export tax". It couldn't be anything else because there is no export tax in our country, period. Did you know our corporate income tax is an "export tax"?  I didn't.  In fact, as I have covered several times here, U.S. Federal corporate tax rates are the third highest in the world, behind the U.A.E. and Chad.  Other countries, like China, the U.K., Canada, Ireland, you name it, ALSO apply corporate income taxes, but their rates are much lower than ours.  So if Mr. Brady is referring to the fact that we have a corporate income tax, that is not a penalty on our manufacturers because everyone pays one.

If Mr. Brady is admitting that our corporate rates are uncompetitive, he found a funny way to express himself. That is, however, the real problem.  He goes on to assert something puzzling:  "America’s major international competitors stopped taxing their own exports a long time ago – and for good reason."  If he is saying they don't have corporate income taxes, he's wrong (or worse).  If he is referring to VAT border adjustments, see below.  Also wrong.

Not content to leave it at that, Brady then released another press release heralding his words on CNBC.  In this interview, he repeats the tall tale that VAT is somehow an export subsidy.  [He does not explain how this is possible under the WTO rules we agreed to.  That would be interesting.]  He said:

Because we know what our competitors do. We know China, Europe, Mexico, Canada, others all border adjust their taxes. We don’t. But, we’re about the only country left that doesn’t, of major size. As a result, today, Chinese steel has a tax advantage over American steel. Mexican beef and autos has an advantage over American beef and autos. Foreign oil over U.S. oil. That can’t continue. This border adjustable tax is a very simple tax, but it’s powerful in the way it works.

The math proves Brady WRONG.  [I have also proven that the BAT is an illegal subsidy on U.S. exports, which will trigger retaliation.]

A - Domestic manufacturer
B - Reseller who exports a product purchased in the local market.
C - Foreign manufacturer
D - Foreign buyer

VAT Zone Domestic Item Export Transaction (20% VAT):

A sells to B for a price of $20 plus $4 VAT
A keeps $20 on which he pays corporate income tax on his profits.
A remits $4 in VAT (received from B) to the government. 

B sells (exports) to D for $40.  D does NOT pay VAT as a foreign buyer.
B keeps the $40, and pays corporate income tax on his profits ($40 - $20 - other costs)
B receives a $4 rebate of VAT previously paid to A. The government pays the rebate. B nets out at zero in VAT, as does A, as does the government.

The rebate paid to B is the so-called "export rebate" that Brady is complaining about.

VAT Zone Foreign-sourced Item Export Transaction (20% VAT):

C sells to B for a price of $20. Put differently, B imports from C for a price of $20.
C keeps $20 and pays corporate income tax in his home country on his profits.
B remits $4 in VAT to the government. 

B sells (exports) to D for $40.  D does NOT pay VAT as a foreign buyer.
B keeps the $40, and pays corporate income tax on his profits ($40 - $20 - other costs)
B receives a $4 rebate of VAT previously paid to the government.  B nets out at zero in VAT, as does the government.

As you can see, the two scenarios are the SAME.  There is NO tax injustice done to the domestic manufacturer, the foreign manufacturer, the reseller or the foreign buyer..

Brady goes on to drop one more whopper:  "We’re working with importers, for example, to design the transition on border adjustability, to make sure we’re accommodating their concerns."    Ummm, he hardly seems to be on a listening tour . . . .

It does NOT make sense that we have been taxed this way since 1913 and been a signatory to the WTO General Agreement on Tariffs and Trade since 1947 but it was only Kevin Brady who figured out that VAT is a subsidy other countries pay to their manufacturers to gain a trade advantage.  It also doesn't make sense that this has been going on for years, but we enjoy the highest standard of living in the world, have the strongest currency and economy, and are generally the richest nation on Earth.  So how can anyone contend that we have done this with an arm tied behind our backs?

That SIMPLY is not true, and Kevin Brady needs to put his math where his mouth is.  It's easy to go on TV and spout off. Next time, Mr. Brady, bring your white board and educate us on the numbers.  We already know our geography, so you can skip the map. SHOW US YOUR NUMBERS.  

Put up, or shut up.


  1. 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.

  2. You keep at it, Citizen of TX-8. We need to hold our politicians accountable. It's "government of the people, by the people, for the people" I am one of the people, and so are you. This is our government and those are our neighbors doing this to us. Don't let them get away with it! Thanks for reaching out on my blog. Rick

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