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.

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