Wednesday, January 11, 2017

The Brady Plan Will Kill Educational Toys – But Will be Good for Porn (Especially Russian)!

Not sure how the House Republicans pick their “winners-and-losers” when they draft a new tax law.  Do you? 

In the case of the so-called “Brady Plan” or Border Adjustment Tax, named after the estimable Rep. Kevin Brady of Texas, our company will be trashed. We’re a chosen victim for the crime of making our educational products overseas.  Yes, our company develops toys and educational materials in Chicago and Los Angeles and owns the intellectual property in the United States, but makes the products outside our country.  This is how our entire industry works – but apparently that’s baaaaad.  Very bad, very sad.  It goes without saying that the 150 people who work here must be bad people, too.  Shame, shame, shame.  Luckily, Mr. Brady plans to correct this by imposing an effective tax rate on our company of 165% of earnings.  That should defend the American Way of Life!  As covered in yesterday’s blogpost, the tax mavens will achieve this by taking away the right to deduct the cost of our goods from our taxable income. 

Just to give you a sense of the evils Brady and his cabal are trying to protect you from, here’s a clip of a couple of our products:

So who have the Republicans chosen as a “winner” under their new tax law?  The Porn Industry!  Apparently, good public policy dictates that we must replace educational toys with pornography.

So we won’t be allowed to deduct the basic economic input that generates revenue (inventory, made elsewhere) but Merchants of Porn will face no such restriction.  They can deduct the cost of their basic input – good ole’ American jobs! – and also their expenses for those fancy location shoots, production costs, and the like.  And when they “export” their product, meaning when they sell it to someone outside the country, they don’t have to declare that revenue.  So they can take full deductions for everything, even foreign-made cameras they buy locally (giving them a tax break on the border adjustment tax built into the camera cost), but don’t even have to declare all of their revenue.  And, of course, they get a nice tax rate reduction.  Think of it as a “thank you” for creating good American jobs!

Back of the envelope, a “S” Corp porn mogul will see his/her Federal tax rate nominally drop from 39.6% to 25% but if he exports, it gets even better.  Let’s see how the math works out for a porn production company that exports 10% of its product. [I made up these numbers – at least I admit it, unlike the economists.]

                                                      Current Law                                    Brady Plan
Revenue:                                          $100.00                                        $ 100.00
Labor                                               ($ 40.00)                                      ($  40.00)
SG&A                                              ($ 40.00)                                      ($  40.00)
Net Taxable Income                        $  20.00                                         $  20.00
Deduct Export Revenues                                                                     ($  10.00) 
Federal Tax                                    ($   7.92)  [39.6% rate]                  ($   2.50)   [New 25% rate]

To recap, the Federal tax rate on our family business goes from 39.6% to 165% because we make school supplies overseas, and Sleazoid Porn Mogul’s rate goes from 39.6% to 12.5%.  That’s great public policy!!!

Ah, but what about Russian porn? Surely there’s something in there for them.  [Yech, bad metaphor.]  Of course there is!  The Internet has no border, so there’s no place to tax intangibles that flow over the line.  Huh?  In other words, when a consumer pays for porn that comes from outside the United States, such as porn from Russia, there is no border adjustment tax.  This is called a “loophole”. There is apparently no way to find these cloud-based consumer transactions and therefore no way to tax them.  Although we have been promised a territorial tax system, so darned efficient and good for America, foreign porn merchants can send downloads here without any border adjustment tax.

That’s just for educational toys . . . .

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