Rep. Devin Nunes (R-CA22), a member of the House Ways and Means Committee, sparked a hot debate on CNBC yesterday with some pretty inflammatory statements about the BAT. If you don't like be condescended to, you may need to calm yourself now. Nunes intoned:
"'This plan is not controversial,' Nunes, one of the GOP architects of the tax plan, told CNBC's "Power Lunch" on Thursday. 'Quite frankly, it's a little offensive some major American companies that are importers who do business worldwide, are even raising concerns of this plan, because I don't see them going to Germany or Mexico or China to raise these concerns. And Donald Trump has been exactly right to call people out on this.'" [Emphasis added]
Okay, that's ridiculous. But he babbled on:
"'I think this is a very simple way to border-adjust. It's not a VAT (value-added tax). It's not a sales tax. It's not a tariff. We want to have business taxes completely revamped in this country because we want to encourage people to invest in the economy so that jobs can be created,' Nunes said. 'We can get out of debt financing and into equity financing, so it's a plan that will really make America great again.'" [Emphasis added]
Let's try to unpack this.
I think Nunes is right - the BAT is not a tariff and is not a sales tax. Last night, I explained that the BAT is not a solution to foreign tax "injustice" because there is no foreign tax "injustice" to remedy.
[As an aside, I want to know if you think I am wrong or my analysis is off. This blog is not my bully pulpit or an ego trip - I am trying to foster discussion of a very important subject. Call me out if I'm wrong. I plan to do the same about you.]
So what is it?
Is the BAT a consumption tax? No. A consumption tax is imposed at each level of distribution on all products and services. The Border Adjustment Tax is ONLY imposed on imported products and is an adjustment to the income tax. As a result, consumption of certain services and products are outside the Border Adjustment Tax and are unaffected. Translated - those products can be sold at a lower price to you, the consumer, while imported products will be sold at much higher prices.
This difference from a consumption tax also means that corporations will have wildly different experiences under this law. Some companies that export a lot of product will find themselves with high tax-deductible expenses but low taxable revenue. Translation - they won't ever pay taxes again. Other companies, like ours, will find the opposite - a lot of taxable revenue but few deductible expenses. We will face taxes greater than our profit. Taxes will no longer be based on profit, so the have's and have-not's will separate widely.
Is the BAT a Value-Added Tax? No. A VAT is a form of consumption tax. In this case, the BAT is actually a kind of income tax, rather than a VAT. As explained last night. income taxes and consumption taxes are different systems and necessarily linked by public policy concerns. VAT ideally is a substitute for personal income taxes and is territorial in nature (it only applies to consumption that takes place here). Unfortunately, a VAT can be very regressive, meaning that a higher proportion of income is taken in taxes from the poorest and most vulnerable in society. Think of consumption taxes of 20% imposed on a steak. That would soak up a lot of income to an hourly worker at McDonald's but a much smaller portion of the income of, say, a U.S. Congressman. To remedy this bad public policy result, tax planners overlay income taxes on top of VAT so that the VAT tax burden can be shifted by varying income tax rates from poorer folks to richer folks.
In the case of the BAT, it is an adjustment to income tax. The reason House Republicans use a suggestive acronym like "BAT" is that they want to fool you into thinking this is something like a VAT. It's not. It is tied to consumption only in that it is imposed on CERTAIN products that are consumed here, and because it is highly unlikely to be magically funded by a skyrocketing dollar (future blogpost, you'll have to wait, Douglas Holtz-Eakin), the cost will be passed along to consumers as if it were a VAT. The passed-along cost will actually be deductible by middlemen but not by the end consumer who just pays up. Some items will therefore skyrocket in cost under the BAT. [This is a big issue, will return to later.]
The tax planners say that the tax will be funded by cost reductions from a rising dollar (reduced COGS). So the cost of the BAT is either to be borne by our factories, or by our company, or by people who buy our products (you). This is not how a VAT works. VAT substitutes for personal income tax and is not a cost borne by manufacturers, but instead by consumers. These differences matter.
Is the BAT a Sales Tax? No. A sales tax is paid entirely by the consumer at the end of the line, never by resellers. A sales tax regime can lead to a lot of cheating, especially for high ticket items. The BAT will be assessed as part of income tax on corporations and will only be funded by consumers if it must be passed along. You know, inflation . . . .
Is the BAT a tariff? No. A tariff is assessed on imports as a way to regulate trade. Tariffs are deductible expenses as are the products which are imported. Tariff math is different than BAT math. Consider two imported items costing $100, one subject to a 25% tariff, and the other subject to a 25% Border Adjustment Tax. Each item is then sold to a U.S. consumer for $200, its price before of these taxes. Income tax rates are assumed to be current law for the tariff scenario, and the A Better Way Blueprint rates for "S" Corps for the BAT example. The new taxes drive both products into the red. Which is worse?
Tariff item under current law:
Tariff ($ 25.00)
SG&A ($ 80.00
Profit ($ 5.00)
Federal Tax (39.6%) ($ 1.98)
Net Cash Flow: ($ 3.02) [$200-$100-$25-$80+$1.98]
BAT Regime, same item
SG&A ($ 80.00)
Profit $ 20.00
Add back COGS $100.00
Federal Taxes (25%) ($ 30.00)
Net Cash Flow: ($ 10.00) [$200-$100-$80-$30]
The BAT company bleeds more than three times worse in this illustration. So the BAT is not a tariff, it's much much worse. Do the math, this is the equivalent of a 36.56% tariff on all imported goods at current tax rates. Smoot Hawley . . . .
The politicians are playing fast and loose with the numbers and ideas. Just because they're math impaired doesn't mean you must be.
More to follow . . . .