Monday, January 16, 2017

Trump Calls BAT "Too Complicated"

In today's WSJ, President-elect Trump specifically called out the BAT, referring to it as "too complicated".  [This was also reported in The Hill.]  The Journal reports:

"'Anytime I hear border adjustment, I don’t love it,' Mr. Trump said in an interview with The Wall Street Journal on Friday. 'Because usually it means we’re going to get adjusted into a bad deal. That’s what happens.'"

Trump went on to trash the currency theorizing underpinning the BAT:

"Mr. Trump said the U.S. dollar was already 'too strong' in part because China holds down its currency, the yuan. 'Our companies can’t compete with them now because our currency is too strong. And it’s killing us.' The yuan is 'dropping like a rock,' Mr. Trump said, dismissing recent Chinese actions to support it as done simply 'because they don’t want us to get angry.'"

This gets a little garbled.  Trump says our dollar is too strong, and I agree, but then goes on to say that the Yuan is the cause of that strength . . . because the Chinese are propping up the Yuan.  Correlation is not causation, and I don't see the connection.  In addition, Mr. Trump presumably wants the Yuan up or down, and successfully makes the case for both - he thinks the Chinese are manipulating the currency up, which somehow prejudices us, but on the other hand, wants our dollar weaker, which seems to mean that he wants the Yuan to . . . appreciate?  Let's not try to figure this out.

Anyhow, this wrinkle could finally put some real headwinds in the sails of the Brady plan and the BAT. Let's hope so.

The fundamental problem here is that the BAT is neither a VAT nor an income tax.  It is an odd combination of the two which produces unfair and unpredictable tax results, bizarrely favoring certain companies and savagely punishing others. Our company is unfortunately one of the latter. It's random in some sense.  

When one separates out the VAT elements of the plan (the House Republicans don't want to impose a VAT), the issue becomes simpler and easier to understand.  The U.S. has the third highest corporate tax rates in the world, period.  [You can download a spreadsheet of all worldwide corporate tax rates from this site.  In my previous post, I cited a KPMG list, with similar data.  It's real.]  Ireland is at 12.50%.  Almost anyplace you can think of has rates 15% or more below U.S. rates.  As an "S" Corp, we pay 39.6% in Federal taxes.  Any idea why inversions happen?

So what's the solution?  Well, I hesitate to mention it, but Mr. Trump has a useful and actually responsive suggestion:

"On the campaign trail last year, Mr. Trump proposed lowering the corporate tax rate to 15% and in the interview with the Journal on Friday, he seemed to suggest that rate cuts were his preferred mechanism for improving the corporate tax system. 'Under the border adjustment concept, if somebody is making a motorcycle or a plane in our country, they’re getting a credit for the plane they make before they send it over to wherever it’s going,' Mr. Trump said. 'And you don’t need that plus lower taxes and everything else. And it’s too complicated. They get credit on some parts and not other parts. Where was the part made? I don’t want that. I just want it nice and simple.'"

Amen.  The real problem is that our corporate rates are too high and uncompetitive. That creates the incentive to seek low tax jurisdictions which drives companies overseas. There is no way to solve this while being in denial.  I have suggested that we lower rates to be competitive, and put a sunset on the lower rates, at which point if agreed financial metrics have not been met (tax base growth), then rates increase and cuts are made to get us back to even.  This does not imperil ANY companies nor is it inflationary nor is irreversible nor is it illegal under WTO.  

It might even work.

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