Tuesday, February 28, 2017

Americans for Affordable Products Letter to Congress Signed by More Than 200 Members

February 28, 2017

The Honorable Paul Ryan
U.S. House of Representatives
H-232, U.S. Capitol
Washington, DC 20515

The Honorable Mitch McConnell
Majority Leader
U.S. Senate
S-230, U.S. Capitol
Washington, DC 20515

The Honorable Nancy Pelosi
Democratic Leader
U.S. House of Representatives
H-204, U.S. Capitol
Washington, DC 20515

The Honorable Chuck Schumer
Democratic Leader
U.S. Senate
S-221, U.S. Capitol
Washington, DC 20515

Dear Speaker Ryan and Leaders McConnell, Pelosi and Schumer:

We are a coalition of job creators, entrepreneurs, business leaders and small businesses united in support of pro-growth, comprehensive tax reform that protects existing jobs and creates new ones. The Border Adjustment Tax, however, seriously jeopardizes the opportunity to update our outdated, complex and anti-competitive tax code.

The goal of tax reform should be to lower effective tax rates for businesses of all sizes and ensure Americans benefit with more money in their wallet. We believe the Border Adjustment Tax would do the exact opposite by raising effective tax rates for many companies to well over 100%.

The Border Adjustment Tax is not simple or fair. It proposes a massive tax increase on consumers and would result in increased costs on everyday necessities like food, clothing, gasoline and prescription drugs – necessities that Americans rely on daily – by as much as $1,700. It is really a "cost of living tax" that will make the lives of millions of middle-class Americans harder and more expensive.

Moreover, it imperils millions of good jobs in America as viable businesses likely would be forced to close as the result of this policy. Our coalition represents over 42 million American jobs tied to the retail sector and millions of other jobs in allied industries like automobile manufacturing. We believe that tax reform must proceed without the Border Adjustment Tax in order to ensure the job creation potential of the U.S economy remains vibrant.

As you and your colleagues work to develop your framework for tax reform, we hope you will keep our point of view in mind.

We believe in American jobs, especially the resurgence of U.S. manufacturing, but American families should not bear the burden and existing jobs should not be put at risk.

Collectively, we stand ready to work with you on solutions that will reform our outdated tax code in a comprehensive manner and look forward to an ongoing dialogue that helps you understand the severe negative economic impact this legislation will have on all Americans. Thank you for your leadership on this matter.

Abercrombie & Fitch
Advance Auto
Alabama Retail Association
Alliance of Wisconsin Retailers
American Apparel & Footwear Association
American Beverage Licensees
American Eagle Outfitters, Inc.
American Import Shippers Association (AISA)
American International Automobile Dealers
American Sale
American Signature Inc.
American Supply Association
Arizona Retailers Association
Arkansas Grocers and Retail Merchants
Ascena Retail Group Inc.
Association of Food Industries
Association of Global Automakers, Inc
Auto Care Association
Automotive Aftermarket Association Southeast, Inc.
Beall’s Inc.
Belk, Inc.
Best Buy
Big Lots
BJ’s Wholesale
Brea Bead Works
Break North
California Retailers Association
Carolina Imports
Caster Connection, Inc.
Chico’s FAS
CN Railway
Colorado Retail Council
Competitive Edge
Connecticut Retail Merchants Association
Consumer Technology Association
Council of Fashion Designers of America, Inc.
Crate & Barrel Holdings, Inc.
Dave’s Soda and Pet City
Deer Stags Concepts
Diageo North America
DICK’S Sporting Goods
Dillard's, Inc.
Dollar General
Dollar Tree, Inc.
Family Dollar Stores, Inc.
Fashion Accessories Shippers Association (FASA)
Fashion Jewelry and Accessories Trade Association
Five Below
Florida Grocers Association
Florida Petroleum & Marketers Association
Florida Retail Federation
Food Marketing Institute
Footwear Distributors & Retailers of America
Fresh Produce Association of the Americas
Gap Inc.
Gemini Shippers Association
George Jackson Promotions
Georgia Retail Association
Hirsch Gift
Home Furnishings Association
Idaho Retailers Association
IKEA North America Services, LLC
Illinois Retail Merchants Association
Image Source
Indiana Retail Council
International Franchise Association
International Housewares Association (IHA)
International Seaway Trading Corp.
International Wood Products Association
Iowa Retail Federation
J. Rene‚ Group
J.Crew Group, Inc.
Jewelers of America
Jewelry Television
Jo-Ann Stores, LLC
Kansas Retail Council
Kentucky Retail Federation
Kohl's Department Stores, Inc.
Learning Resources
Levi Strauss & Co
Lord & Taylor
Louisiana Retailers Association
Macy’s, Inc.
Maryland Retailers Association
Meijer, Inc.
Mercuria Energy Group Ltd.
Michaels Stores, Inc.
Michigan Retailers Association
Minnesota Retailers Association
Mississippi Retail & Grocers Association
Missouri Retailers Association
Montana Equipment Dealers Association
Montana Restaurant Associations
Montana Retail Association
Montana Tire Dealers
Nakios Group
National Association of Beverage Importers
National Association of Chain Drug Stores
National Association of Music Merchants
National Fisheries Institute
National Grocers Association
National Retail Federation
National Truck Stop Operators
Nebraska Retail Federation
Neiman Marcus Group, Inc.
New Hampshire Retail Association
New Jersey Retail Merchants Association
New Mexico Retail Association
Nfinity Athletic LLC
NIKE, Inc.
North Carolina Retail Merchants Association
North Dakota Retail Association
Ohio Council of Retail Merchants
Oklahoma Retail Merchants Association
Payless ShoeSource
Pennsylvania Food Merchants Association
Pennsylvania Retailers Association
Pernod Ricard USA
Petco Animal Supplies, Inc
Pier 1 Imports
Premiums Plus
Pro Image Sports
Promotional Products Association International
PVH Corp.
Quad Graphics
Random Harvest Inc.
Raymour & Flanigan Furniture
Reflective Shopper
Retail Association of Maine
Retail Association of Nevada
Retail Council of New York State
Retail Industry Leaders Association
Retailers Association of Massachusetts
RG Barry
RhythmLink International
Rio Grande Valley Partnership
Rite Aid
Ross Stores, Inc.
Saks Fifth Avenue
Saks Fifth Avenue Off 5th
San Antonio Hispanic Chamber of Commerce
SanMar Corporation
South Carolina Hispanic Chamber of Commerce
Schwartz & Benjamin
Sears Holdings Corporation
Society of Chemical Manufacturers & Affiliates
Society of Independent Gasoline Marketers of
South Carolina Retail Association
South Dakota Retailers Association
Southern California Local Beads Store Association
Spencer Spirit Holdings, Inc.
Stage Stores, Inc.
Steve Madden
Stowe Mercantile
Strikeforce Bowling LLC
Synclaire Brands
Tailored Brands
Target Corp.
Tea Association of the U.S.A., Inc.
Tennessee Retail Association
Texas Retailers Association
Texture Technologies Corp.
The Bon-Ton Stores, Inc.
The Children's Place
The Container Store
The Greenbrier Companies, Inc.
The Honest Company
Tommies, LLC
Toms Shoes, LLC
Toy Industry Association
Toyota Motor North America, Inc
Travel Goods Association (TGA)
TTI Global Resources
U.S. Fashion Industry Association
Utah Food Industry Association
Utah Retail Merchants Association
Vermont Retail & Grocers Association
Virginia Retail Federation
Walgreens Boots Alliance
Washington Retail Association
Weaver's, Inc
Wegmans Food Markets, Inc.
Wolverine Worldwide
Zakback, Inc.

Sunday, February 26, 2017

Martin Feldstein Insults Your Intelligence in Defending the Border Adjustment Plan

Martin Feldstein published an Op-Ed in the WSJ this evening entitled "The Illusory Flaws of ‘Border Adjustment’". [If the link doesn't work for you, I suggest you Google the title of the article which should get you in.]  Mr. Feldstein is an esteemed economist, much more recognized that little Gepetto me, but in this case, Mr. Feldstein is way off base.  

Actually, he goes further - he calls you stupid for disagreeing with him:

"Why then do American importers and retailers object to the border-adjustment tax? One reason may be that they do not understand how the rise of the dollar would keep the selling prices of imported goods unchanged. Alternatively, they may not trust the economic analysis, worrying that the dollar would rise only partially or slowly, leaving them worse off. To them, border adjustment looks like an unnecessary risk with no potential upside. But there is a real benefit: The border-adjustment tax would produce enough revenue to make cutting the corporate tax politically feasible." [Emphasis added]

I, personally, do not like to be called stupid in writing.  It is condescending and arrogant. And all the more galling because the author of the insult is wrong.

We hear the insults but rarely if ever do we hear any acknowledgement of the obvious - this tax is going to KILL companies, in particular small businesses.  Kevin Brady was asked the following question yesterday in an interview at CPAC: "I wanted to ask you about the fact that, according to a U.S. Census Report, 97% of importers are small business[es]. Are you concerned that there could be job losses that hurt small businesses due to this tax?"  And Mr. Brady responded:  "No, I don't, because [of] the way we are designing this tax and phasing it in to address those issues." Yup, he's not concerned, and neither is Mr. Feldstein.  He's excited about the $120 Billion raised by the tax, as you will see in reading his article.  As previously related in this space, small businesses imported $643 Billion in 2014.  Multiply that by 20% and you get the full proceeds from the tax.

Transition or no transition, it's a small business tax.  Small business pays the entire bill. Feldstein and Brady are detached from reality.

Feldstein starts by recounting the pablum that the rising dollar (up 25%!) will reduce costs for importers sufficient to make everything balance.  No price increases to you, the consumer.  And if you don't agree with him, as he makes clear above, you just don't understand.  He does, you don't.  

So here's my retort:

FIRST, the direction of the market cannot be predicted with confidence.  Duh.  Feldstein is predicting the direction of the market when he makes a pretty darned specific call that the dollar will rise 25%.  His formula says so, and if you doubt this, you are a worrier.  See above.

We cannot afford to bet our economy on somebody's "hunch".  It is also true that economists have CONCEDED that exchange rates follow a random walk.  This has a name: The Exchange Rate Disconnect Puzzle. It's a thing. Feldstein knows about it.  Why he wants to sell this bill of goods is a question worth asking.  

And to the extent he has the direction of the dollar move right, his claim suggests that the move is "permanent".  And I ask you - what other market move can you name that was "permanent"? Would you bet real money that a shift in the market value of an asset would never reverse, ever? Other than inflation, which is an inapplicable concept in this case, I cannot cite any similar market situation. To suggest, imply, hint or even think that a move like this would last forever is asinine. That's the right word for it.  No apologies to Mr. Feldstein.

SECOND, Feldstein blandly overlooks the calamitous impact of a sudden rise in the U.S. dollar by 25%. No worries about tanking the export market for U.S. companies, and he sniffs at the cost of the BAT-induced reduction in the value of American assets overseas, noting that it is "only" 3% of household net worth.  This is how economists say they don't want to think about the details. Many (most?) of these assets are owned by corporations which may have borrowed against the assets in another currency (dollars?). The sharp loss of capital from this massive number (Trillions of dollars) will not only rock many unsuspecting companies but may trigger a major financial crisis in the Third World where there are a lot of dollar-denominated loans in place. Contagion?  Feldstein doesn't acknowledge the risk.  

And no question about how we're compensated for taking this massive risk.  Oh yeah, all the money they are going to vacuum out of small business importers.  Until we all croak.

THIRD, Feldstein ignores that U.S. companies typically buy in dollars, not foreign-currency. We don't have forex departments and make life simple by matching the buy and sell currencies.  So there is no "automatic" savings. Feldstein points to the oil market for reassurance.  He makes the point that when the dollar rises, oil prices typically fall.  But anyone who watches oil prices knows this phenomenon is not reliable.

In any event, this response (also provided to me by Brady's tax counsel at Ways and Means in December) fails to take into account that oil doesn't care which hole in the ground it comes out of, about 90 million barrels are produced daily and hundreds of millions of barrels are traded in exchanges all over the world every day (spot market and futures).  On the other hand, our products are produced in small quantities, are available from only one source (us), and perhaps shockingly, there is no spot market or futures market for our products.  So you can't hedge.

Feldstein isn't saying so directly, but he wants us to hedge.  His argument has the necessary implication that we must buy futures contracts to capture gains from dollar appreciation (rather than relying on getting lower prices from our factories). Thus, he advocates for a system that forces small businesses to gamble. As a government policy. This is so reckless and delusional it hardly merits a reply.

FOURTH, Feldstein seems to be detached from the reality of how products are made. Every physical product has inputs that are local and other inputs that are imported.  Only pure service businesses have only local costs. Yeah, I know you're thinking of hookers but I am sure economists are thinking of lawyers.  In any event, if you buy a product overseas, some aspect of that product came from elsewhere and would likely rise in price as the dollar rises in price. Local content will actually fall in cost (cheaper hookers, I mean lawyers, in dollar terms). The net of the two effects is what importers like our company will face when the dollar screams upward. I have written about this in the past.  After speaking to many factories, we think our costs will RISE if the dollar goes up by 25%.  Feldstein says everything is going to be fine, trust him, and if we disagree, we just don't understand.

In this case, I am pretty sure I do understand.  It's a darned shame that Feldstein will stoop so low to push the defective idea of his former protege Auerbach and his crony Holtz-Eakin.  His arguments are flimsy and he will lose this argument.

Border Adjustment Clips (2-26-17)

Lots of clips because there's a lot of news!  Some of the links may not work for you because of required subscriptions.

Morning ConsultWhy a Border Tax is a Tax on Middle America 2-23-17

FactCheck.orgBorder Adjustment Baloney 2-23-17

Chicago Tribune: American-made companies worried about proposed border tax  2-23-17 [Local manufacturers import components and are afraid of the BAT.]

Politico ProClub for Growth hits Noem, who's running for governor, on border tax 2-22-17

Bloomberg BNA: GOP Faces Tax Plan Dilemma as Senate Snubs Border Adjustment 2-17-17

Dayton Daily NewsRetailers rise up against border tax 2-17-19

Friday, February 24, 2017

Robert Reich Argues that the Border Adjustment Tax Benefits Big Companies at the Little Guy's Expense.

He may have a point. Watch his video. Putting aside the politics (I am not really interested in white hat/black hat arguments), he rightly points out that as prices rise, the little guy get slammed. Although he doesn't make the point explicitly, that would also include small businesses affected by the law. And the benefit flows to large Fortune 500 companies, the ones who are hooting and hollering for this law.  Money, money, money - those guys will make larger and larger profits while paying little or no taxes.  Worse yet, the inflationary firestorm created by the BAT will also give those big guys a free pass to raise their prices, too.  In other words, their profits will swell in addition to the unfair tax break they'll enjoy . . . if they can successfully con us.

Don't worry - you'll still pay taxes.

This is an astounding tax inequity that Congress is creating and seems blissfully content in doing so. The opportunity to vacuum out our pockets is too great a temptation, I guess.

Watch out for Majoritarianism here.  What is good for the Big Guys is not good for everyone. Deciding to do this while ignoring the hideous impact on a segment of the population is, frankly, un-American.

It is a fallacy that the only way to achieve tax reform is via the BAT as funding mechanism. That is just an excuse, the route of least resistance for the lawmakers who don't want to perform the harder task of cutting spending.  And in any event, their real motivation in having a revenue-neutral tax plan is so they can pass the tax law via reconciliation, meaning by simple majority vote.  No need to cultivate Democratic support.  Bipartisanism is dead or a sham.  Take your pick.

Watch the video.

Washington Post Quotes Blogpost about BAT's Negative Impact on Importers in Brady's Own District (Feb. 22, 2017)


Ryan promises to replace Obamacare 'this year,' but implementation could take longer

For weeks now, House Speaker Paul Ryan (R-Wis.) has struggled to convince his colleagues of the benefits of the border adjustment tax. If his reasons seem unsound and unconservative (Why should the government dictate which suppliers you use?), it’s because he is not being honest about the motivation behind the plan to tax imports. The one and only reason behind the push centers on the massive deficit the rest of the GOP tax plan would create. (Take a fiscally irresponsible tax plan and add in a counterproductive border tax adjustment!) In short, his tax plan needs the infusion of cash that a tax passed on to U.S. consumers would raise.

Libertarian economist Veronique de Rugy blasts Ryan for intellectual dishonesty in claiming that the “United States was at a disadvantage because other countries’ exports are exempted from taxes while U.S. goods aren’t.” This is wrong:

For instance, he claims that Japanese exports are exempt from taxes. No, Japanese products exported to the U.S. are exempt from the Japanese VAT but the Japanese company is still paying U.S. corporate tax on its U.S. profits. And you know what? In that sense, the Japanese export is treated exactly like the U.S. goods sold in the U.S. In other words, the playing field is even! I repeat: Japanese goods in the U.S. are taxed like U.S. goods in the U.S. How about U.S. exports in Japan? Well, it gets hit by the Japanese VAT in Japan and by the Japanese corporate tax but so are Japanese goods sold in Japan. Again, the only disadvantage faced by U.S. companies selling tape recorders abroad comes from the U.S. tax system, which requires that income earned in Japan be taxed by Uncle Sam at 35 percent after benefiting from a tax credit for tax paid in Japan. If the U.S. company decides to keep its Japanese income outside the U.S., the U.S. rate won’t apply.

The plan will raise the cost of consumer goods. (Not even Fed Chairman Janet Yellen buys into the notion that the U.S. dollar will instantly and sufficiently rise in value to offset higher prices.) And it will hurt a whole bunch of businesses that rely on imports, whether they are sold directly to U.S. consumers or, in many cases, incorporated into U.S.-manufactured goods.

De Rugy concludes: “The way to fix the U.S. disadvantage is not to create a new expansive tax that would penalize imports in the U.S. — including imports for the benefit of U.S. domestic companies — and would penalize U.S. consumers. The solution is to reform our corporate-tax rate by lowering the rate and moving to an origin-based territorial-tax regime.” The problem is that such an approach won’t raise sufficient revenue to offset revenue losses from Ryan’s underlying tax plan, raising the question as to whether the tax plan is the real culprit here. (Maybe a smaller tax cut, or one that does not reward upper-income taxpayers at all, would be wiser? Nah, that would rain on the parade of the right wing, which for years has been pining for a huge Ronald Reagan-style tax cut, although our current debt, tax code and economic situation bear no resemblance to the factors Reagan faced in the 1980s.)

This is no small or esoteric policy debate. Without the border adjustment tax, the GOP tax plan will be (rightly) excoriated for blasting an enormous hole in the budget. However, with the border adjustment tax, the Senate and a great many House Republicans will not vote for it.

Retailers have organized against the border adjustment tax. In particular, small businesses — the darling of Democrats and Republicans alike — foresee disaster. The Wall Street Journal recently reported that small businesses “typically have less ability to negotiate better deals with suppliers or push through price increases to customers or spend time and money modeling tax changes. More than 95% of U.S. importers have fewer than 250 employees, according to 2014 U.S. Census data.”

Richard Woldenberg, chief executive of Learning Resources, is marshaling some interesting data to defeat the plan. He told the Journal that “a border-adjusted tax would increase Learning Resources’s tax bill by four- to fivefold, even with a lower corporate rate. That would force his company to raise prices by as much as 15%, which he fears could cause sales to drop by 20% or more.” He pointed out that it is not as though there are domestic suppliers readily available. (“Learning Resources tried in 2013 to find a U.S. molder to produce simple plastic counting toys it could sell at mass-market retailers with a ‘Made in the U.S.A.’ label. Just one firm bid on the job. ‘They gave us a terrible quote,’ Mr. Woldenberg said.”) For this very reason, many of President Trump’s products are made outside the country and imported.

Woldenberg is also amassing some politically potent data. On his website, he writes:

Rep. Kevin Brady [R-Tex.] is a big cheerleader for the BAT as Ryan’s designee and Chair of Ways and Means. He has said publicly on numerous occasions that he will go forward with this provision at all costs. Thus far, despite lots of bad press and organized opposition that will endanger his Republican majority in the House, he has refused to relent.

Notably, Brady’s own district is full of importers. . . . According to my research in a public database, there have been 24,402 import entries associated with zip codes either wholly or partially within Brady’s district over 2015-16.  The total importer count is 2430 in this two-year period, including many individuals (let’s call them “voters”).  They will all have to pay up in Brady’s BAT …

Brady may be in a GOP safe seat, but he is not immune to a primary challenge.

Trump and arrogant lawmakers can swear up and down that protesters in their districts are paid phonies. What they cannot ignore are the legions of small businesses, importers, retailers and consumers who will surely conclude that they’ll be worse off than they are now with the border adjustment tax. It is the sort of issue (tax cuts for the rich! price hikes at Walmart!) that can set off a wave election.

Ryan might persist with the border tax adjustment gimmick, but it likely will mean the end of his tax reform effort. That would be some economic karma if a non-conservative, distortional tax grab knocked the legs out from under a GOP that has decided to discard its fiscally responsible free-market positions.

[557 Comments as of February 24, 2017]

Part II of My Article in Global Toy News about Problems Caused by the Border Adjustment Tax (Feb. 15, 2017)

Why The Border Adjustment Tax Will Harm the Toy Industry

Guest-writer (1) Us_doc
RickRick Woldenberg is CEO of Learning Resources, Inc., a 150-employee manufacturer of educational materials and educational toys based in Vernon Hills, Illinois with offices in Gardena, California and Kings Lynn, England.  Rick joined the company in 1990 as a member of the third generation in his family business, and has served as CEO for nearly 20 years. To learn more about the Border Tax visit: www.BorderAdjustmentTax.com.

Last week, I provided a tool for you to estimate the financial impact of the proposed Border Adjustment Tax (BAT) on your business. In this article, I will review the troubling issues posed by the BAT.
  1. High Taxes and Unpredictable Taxes. Under the BAT, tax rates can skyrocket to more than earnings because your tax base is converted from Net Taxable Income into a nonsense number. Rather than base Federal taxes on what you earn, the new tax will be a percentage of an odd manipulation of earnings, interest expense, CapEx, import COGS and export sales.  As a result, Federal tax bills will vary wildly year to year, depending on how your numbers shift over time. Companies with exactly the same model, structure, payroll and profitability will face spectacularly different tax bills.
  2. Get Used to Gross Tax Inequities. The notion that we all pay similar tax bills becomes obsolete under the BAT. Some of us will pay a multiple of earnings in Federal taxes under the BAT, while others will pay nothing at all. Importers will fare the worst. Do importers really deserve this treatment? Why aren’t jobs at importers “good American jobs”? Multinational Fortune 500 companies are probable winners because of high export sales. No one knows the consequences of such inequities in the business community or society at large.
  3. Dollar Appreciation Won’t Save Toy Companies. The "theory" behind the BAT is that the dollar will appreciate by 25% “immediately” and importers will then save enough from renegotiated contracts to pay the big new tax bill on imports. Seemingly the only people who believe this will work are the people putting forth the law. Questions abound from the likelihood and durability of sharp dollar appreciation, the challenge of extracting savings in dollar-based contracts and the negative impact on our factories of cost increases in imported content (e.g., oil, plastics, paper). Dollar appreciation is also likely to further depress U.S. export sales..
  4. Small Business in the Crosshairs. Since more than 97% of U.S. importers are small businesses, the BAT unfairly targets Small Business and family businesses. The projected annual proceeds of the BAT, $120 Billion, are approximately equal to the tax on the value of 2014 imports by small businesses. In other words, the burden falls disproportionately on small businesses. This may explain why Fortune 500 companies favor the BAT. They won’t be paying for it.
  5. Here Comes Inflation. Many people are openly skeptical that dollar appreciation will make the BAT cash flow-neutral for importers. If savings from the purportedly surging dollar don’t cover the new tax bills, importers will have no choice but to raise prices sharply. Price increases could range from 5% to 25% or more. The BAT will likely unleash an inflationary firestorm on America.
  6. Lose Your Job to a Robot? The BAT arguably creates a financial incentive to automate your business. The need to cut costs will be overwhelming for importers like toy companies. Fully deductible CapEx will tempt many companies put into distress by the BAT. Spending on automation will eliminate jobs to fund tax payments. What jobs will be left? Who wants to be a robot repairman?
House Republicans’ Border Adjustment Tax plan will restructure our industry and will cause many casualties. Don’t wait for this to happen to you! The time to make your voice heard is now. Your Congressman and Senators need to hear from you. Remain silent at your peril. If we band together, we can defeat this common enemy.