Saturday, January 14, 2017

Never Pay Taxes Again under Border Adjustment. Awesome!

At the outset, I think I need to clarify that this is a great law, and if I have ever given you the impression that I don't like it, well, I must be a poor communicator.  What an awesome law!  Who thought of this thing?!  Statue for Kevin Brady?

Do you like to pay taxes?  I actually don't mind too much, it means we are making money, and it costs something to enjoy the privileges we enjoy as U.S. citizens. There is no reason that should be free.

Or should it?

Border Adjustment Tax (BAT), as I have explained, is a bastardized version of a consumption tax. It isn't really a consumption tax, but it has elements of it.  BAT really is a part of income tax, but it behaves like a surcharge on Net Taxable Income calculated as a percentage of your imports.

I think that may be the perspective of a company that imports a lot and exports a little.  But if you export a lot and import a little, it looks like a tax holiday because your export revenues are not taxed at all. And you still get to deduct your expenses.  Happy Days!  Who thought of this, I want to give them a kiss! Surely, those are the secret thoughts of exporters.

So why not join the fun?  I have been wallowing in self-pity because we must finally pay the piper for being baaaaaad people, bringing high quality educational products into this country from foreign places, oooooo.  But if we were more of an exporter . . . .  In fact, we are a global company, not a very big one, but international in design.  We have an office and distribution point in the U.K. and ship all over the world.  So we are in fact an exporter.

But what if we were much more of an exporter?  We wouldn't generate ONE PENNY of taxes for each additional dollar of exports.  Any associated expenses notably good ole' American goods we sell overseas, will hit our tax return as deductible expenses.  [It has been my assumption that the BAT only affects the importer, so presumably, we don't need to export ONLY things made here. We can also export anything already in the U.S. and get that deduction. If someone else imported it, it's fine ot export and get that deduction.]

Let's see . . . deductible expenses but no taxable revenue.  Do I smell a "loophole"?

Anyone see where I'm going with this?  Why ever pay taxes again?  If GE and Dow Chemical will never pay taxes again, why not replicate their tax return?  How to do it?  Buy winter wheat or North Dakota crude on an exchange and flip it to a foreign buyer. It can be done on an exchange, you never even need to touch the stuff.  And you certainly don't need to worry about making a profit.  You can even lose a little money, who cares?  You get a huge deduction for the goods that are being exported but no taxable income.  You can MANUFACTURE LOSSES.

There is no limit to this.  As long as it is legitimate business activity, you are good.  Since the BAT bastardizes the tax system and causes it to stray from being an income tax into something that has no real name, this is legit.

And it doesn't matter what the prevailing price is since you don't care if you make a profit.  This is not about profit, this is about manufacturing losses.  

An amusing side note is that this is a strong sign of a terrible law. When the law encourages you to engage in business activities that have no profit motive or business justification, it is a highly inefficient or downright defective bill.  This is very often associated with tax or trade bills.  Poorly conceived laws can create situations where tax revenue flows to private parties rather than the government, which I have always felt was stupid. If we must pay taxes, why pay it to anyone other than the government? Consider, for instance, trade rules that impose quotas on the import of certain goods.  I have encountered this from time to time in our business.  You can always import whatever you need, but you need to find and acquire the relevant certificates.  These things trade. You end up buying them from someone who has them but doesn't need them, or more likely a middleman.  In other words, you pay the tax (the price of the certificate) to a private person rather than the government. 

In this gambit, that's exactly what will happen.  Say prices rise for certain commodities because of demand to export the goods caused by the availability of the BAT tax wipe-out loophole.  This price rise will flow to producers (they collect the tax as excess profits) and be passed along to consumers in the form of price inflation from rising input costs. Rising demand is caused not by a strong economy but instead by a need to manufacture tax losses, all without a profit motive.  So tax revenues flow down the loophole, prices rise for the general public driven by artificial demand and the corporate effective rate goes to zero.  What an awesome idea . . . .

Thank you, Kevin Brady.  You saved our company.  We owe you a debt of gratitude.  We'll use our permanent tax holiday to pay for a party!

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