Thursday, March 30, 2017

Is It Surprising that Dogs Think They Could Support a Cat Tax?

In today's New York Times, William T. Jones, Chairman and CEO of family-controlled Cummins Allison, explains why he supports the BAT.  I don't know him but believe he is stating his views candidly and clearly.  The problem is that he's wrong in several important respects.  He repeats the urban myths and simple nonsense of Kevin Brady and Paul Ryan. Given the size and scale of his business empire, Mr. Jones has no excuse for his failure to know what he's talking about.

Urban Myth No. 1:  "In general, it’s a good idea to shift the United States tax system toward consumption as opposed to production, which a border-adjustment tax would do. More than 150 of America’s trading partners currently impose consumption taxes, or “value added” taxes, of up to 25 percent on American exports. This means that American-made exported goods are burdened with the costs of American taxes as well as those of foreign taxes. Our foreign competitors face no such consumption tax when entering the American market, but they enjoy value-added rebates from their home countries, which help lower their prices in our market."

Three ideas are expressed here.  First, America's trading partners impose VAT on American exports.  That is true, but they apply VAT to ALL products, not just imported products.  If Cummins-Allison is competing against a local product, both the imported and domestic products are assessed VAT.  This tax is neutral to everyone for this reason.  

Second, Jones asserts that our products are bearing the burden of American taxes as well as foreign taxes.  Again, no prejudice against American products here. He is referring to American corporate taxes as the "American taxes".  Corporate taxes are assessed in VAT jurisdictions typically, so this burden is felt everywhere. As noted above, American products do not bear a special VAT burden not felt by other products in VAT jurisdictions.

Notably, American corporate taxes are very high.  That's our own fault.  It is not a structural problems in our system of taxation.

Third and finally, Jones asserts that border adjustment in VAT jurisdiction is some sort of subsidy.  I have debunked this numerous times. See these articles for details:  January 12, January 15January 18, and February 16,  This is an urban myth and is just not true.

Urban Myth No. 2:  "Although my costs would rise somewhat because I have to import certain components that are no longer made domestically, the border tax would compensate for that loss by canceling out the tax-rebate advantage currently enjoyed by my foreign competitors."

As noted, the so-called "tax-rebate advantage" does not exist.  If it did, my company would be receiving it, and it is nowhere to be found on our books. We have a UK affiliate which exports out of the EU.  If the tax rebate (border adjustment) in VAT jurisdictions is some kind of subsidy, we would have at least 20 years of accumulated subsidy in our bank account and on our audited financial statements. We don't. This is an urban myth and Mr. Jones doesn't know what he's talking about.

Simple Nonsense No. 1;  "Those who object to the border-adjustment proposal — chiefly retailers who sell imported goods — claim that there will be exorbitant price increases for consumers. But there is reason to think any such increases would be smaller than critics suggest, as the tax would be applied only to the (lower) wholesale price at the border, not to the (higher) retail price in their stores."  

This is ridiculous because Mr. Jones apparently believes that the Border Adjustment Tax will have to be passed along to consumers, but fails to recognize that the price charged for the heavily taxed imported products will be marked up at each level of distribution, just like a VAT.  The math dictates that the price increase will be as large as the terrified importers can steel themselves to impose, converging on the 20-25% increase in costs that they experience.

Urban Myth No. 3:  " . . . perhaps those higher prices could be mitigated for lower-income Americans by a tax credit phased out over, say, three years — during which time retailers should be able to find or help establish American suppliers to meet their needs at lower cost."

We have not been able to find a single factory able to produce any of our products at a competitive cost since we began trying in 2013.  Bananas aren't grown in this country, Bordeaux wine comes from France, Corona beer from Mexico, and cut-and-sew products like shoes and apparel are never going to come back to a high value-added manufacturing economy like ours. As I have pointed out in prior blogposts, if manufacturing does come back, it will be robotic.  Car manufacturing by people is an outmoded idea.  Mr. Jones' assertion is a myth.  

Simple Nonsense No. 2:  "If the W.T.O. — principally a bureaucratic collaboration of America’s competitors — were to reject an American border-adjustment tax, it might well be time for the United States to re-evaluate its relationship with that organization."

Maybe we should move away from the WTO and maybe we shouldn't, but that's sort of irrelevant here.  If we breach these contracts and treaties, we will likely start a trade war. The WTO may be a sideshow.  Time to wake up and smell the coffee!

Mr. Jones caps his analysis off with a summary of the Ryan/Brady fictions and mythology: "Theoretically, tax systems should collect revenue efficiently and distort markets as little as possible. But in an age of large-scale market distortion driven in part by the consumption taxes of our foreign competitors, why should American companies like mine be unilaterally disadvantaged because of misplaced fealty to an idealized tax system?"

The notion that "large-scale market distortion" is being driven by VAT systems is unsupported and unsupportable.  Job losses in this country are not being driven by taxes. Jobs move off-shore as companies seek more efficient manufacturing, allowing their products to sell at lower prices. The constant shifting of resources in an economy creates opportunity.  It's not a one-way street.  By lowering the cost to produce, companies open up new markets previously unreachable at the old, higher costs. New jobs are created as a result.  Very often, these jobs pay much more than the low-skill jobs that were displaced.

We have to move away from a fear-based view of the economy.  We must embrace the vibrancy of an economy where capital can flow across borders and where the rules encourage efficiency for everyone's benefits.  Jobs may shift as a result, but that does not mean that we will stop creating jobs for Americans.  We have an enviably strong economy.  If things were so bad, how would that be possible?

Let's hope Congress sees through this smoke screen.

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