Thursday, February 16, 2017

Can't Get The Border Adjustment Tax Inequity Argument Out of My Mind. Arghh!!

The argument that the Border Adjustment Tax is needed to address dastardly international tax inequities makes my skin crawl.  This argument is infinitely frustrating because it is so objectively untrue.  It is untrue because the math bears that out (see here, here, here and here), because logic bears it out, and because if it were actually true, there would be signs of it in certain instances, which there isn't.

So why does this piss me off so much?

1.   The Math is Quite Clear.  Kevin Brady, Paul Ryan and Peter Roskam routinely cite this as the reason we MUST institute this new tax scheme.  They argue, endlessly and insistently, that "border adjustments" are effectively an export subsidy benefiting foreign competitors of American companies.

The four citations above make it CLEAR that, objectively, VAT math does NOT work this way. Most Americans do not understand VAT because it is not used here (which is a very good thing). Please note that our company has had a UK office since 1994 so I have had to master VAT.  The math in the four posts above is correct and there is no possible subsidy - as a matter of mathematics. And as a matter of fact.

Brady, Ryan and Roskam know this.  They are lying.  Plain and simple.

VAT is a consumption tax.  The way it works is that the last guy in the chain of commerce pays the whole tax.  VAT is used as a substitute for personal income tax.  As a result, it is only intended to be imposed on final consumption within the taxing jurisdiction.  Hence, when the final sale is made to someone inside the jurisdiction, the tax flows directly to the taxing authority.  In the case of VAT, unlike sales tax, the tax is paid (net) at each level of distribution.  However, at the end of the line, it all adds up and the only taxpayer on a net basis is the consumer.

If the final consumer is NOT inside the taxing jurisdiction, the entire chain of tax is rebated, leaving everyone netted out to zero.  No profit and no loss for anyone, including the government. The tax is intended to be paid by the last guy, so an inequity could occur if (net) taxes are paid at some point along the way but there is no final domestic consumer. As you might expect, this problem is only experienced by the last internal buyer in the chain of commerce, namely the exporter.  The rebate to the exporter makes him whole and also empties the coffers of the government. There is no profit for anyone in this process, including the government. The math is shown in the above blogposts.  

2.   If VAT were an Export Subsidy, It would be Included in our Audited Financial Statements.  It's NOT.   Some basic logic here:  if the export rebate were an export subsidy, then the exporter would essentially receive a form of income from the net accumulation of VAT rebates.  This could be seen as a subsidy of its product cost. That's the basic (idiotic) contention of the House Republicans.

It so happens that (a) our UK office is an exporter, and (b) by law, our UK office is required to prepare audited financials every year.  Because our UK office is a UK company and exports outside the EU, in the parlance of Ryan/Brady/Roskam, it is a foreign corporation supposedly receiving a "benefit" because of VAT border rebates.  Unfortunately for the House Republican fantasists or paranoids, we do not have any such accumulation of tax revenues in our company.  I would be delighted if we did, but we don't. And one reason I know for sure (besides my demonstrated ability to add and subtract using Excel) is that it is absent from our audited financials. The content of our audited financials is controlled by rules of the accounting profession in the UK and by our independent auditor.  It's not a vanity document, it's an objective statement of our results.  

If we were accumulating cash or proceeds from VAT in any form, it would be a line item in our financials.  It would have to be, because otherwise we couldn't get the financials to balance.  If cash comes into the company, it must go somewhere. It can't hide.  

The reason VAT is missing from the statements is that neither cash nor profit or expense from VAT is retained by our company. The cash is turned over monthly (I believe) and as my math shows, we do not net any cash retained or paid out.  We are in the middle of the chain of distribution and hence act as a tax collector only.  We are not a tax "payer".

3.   The U.S. Signed GATT in 1947 and Knows How to File WTO Cases.  Have you noticed that the United States has a lot of lawyers?  In fact, we have many, many thousands and they have to keep busy to make a living.  One thing lawyers do in this country is file WTO cases.

WHAT?!  I am sorry to shock you.  Yes, we knew how to do that before Paul Ryan, Kevin Brady and Peter Roskam did their research and discovered the conspiracy theory of border adjustments. In other words, when we signed GATT in 1947, we didn't just throw it into a drawer and hope for the best.  Nope, lawyers got involved.  And they filed complaints. No way!!

And did you know you can find out how many such cases have been filed?  Well, you can. According to my research, the U.S. has filed 114 cases at the WTO.  The U.S. has been involved in 136 cases as a Third Party, and a further 129 cases as a defendant.  Yes, Virginia, sometimes lawyers in other countries sue us under WTO agreements to protest against our policies and practices.

So I think we can consider it an established fact that the United States knows all about the rules of the WTO, knows how to enforce those rules and is keeping a close eye on trade matters like VAT.  So why did we tolerate VAT border adjustments for the past 70 years until Ryan/Brady/Roskam made their "discovery".  Because we weren't actually snookered, as House Republicans would have you believe.  Had there actually been a "tax inequity", our thousands of lawyers would  have sued, as they most certainly knew how to do.   

So the contentions of Messrs. Ryan, Brady and Roskam are just baloney.  To be clear, they are lying to you. And the reason is that they want your money.  Lots of it.

You should be plenty pissed off about this.  Paul Ryan may look like a choir boy but he has some 'splainin' to do, as Ricky Ricardo used to say.  Tall tales don't cut it with me. Especially if the consequence is that I must figure out how to run a business that is subject to Federal taxes equal to 165% of our earnings.

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