Something is wrong, but apparently the message isn't getting to Ryan and Brady. Perhaps they prefer to go down with the ship. At some point, the more they push on this rope, their reputation will be on the table. Note the Saturday Night Live commentary this week on Paul Ryan's standing as a national leader:
Is this any surprise? History will be Ryan's judge as he continues to advocate for this generation's version of Smoot-Hawley. Woe be the Republican who goes on record to vote for this misbegotten tax bill.
Two new analyses highlight more disquieting effects from the BAT. One, an article by New York Fed economists appearing in the Liberty Street Economics blog, suggests that the BAT will manage to drive down both imports AND exports. Good job, Brady! They note that both import and export transactions are typically stated in U.S. dollars and therefore the fundamentals of import and export transactions will be more weakly linked to exchange rates. Costs will not decline for importers as Auerbach and Holtz-Eakin promise. [You know where I stand on this point . . . .] They also note that exports will be hammered by a rise in the dollar (exports become more expensive) but perhaps even more crucially, they observe that the biggest exporters are also the largest importers of intermediate inputs. In other words, as the exporters save on taxes, their costs will skyrocket and the selling price of their products in overseas markets will escalate leading to market share loss.
The double whammy.
And that's not all. They forecast that importers will have no choice but to raise prices. And those favored domestic manufacturers not subject to the BAT will notice the inflationary trend and seize the opportunity to raise prices, too. The authors have real market data to back up this common sense observation. Get ready for an inflationary firestorm.
And in an unpublished analysis by a Washington think tank named Economics Partners, more damning details emerge about the effects of the BAT. The authors Tim Reichert and Perry Urken demonstrate that the design of the BAT is intended to double tax imports and make U.S. exports entirely free of tax. The portion of imports subject to double taxation is the foreign manufacturer's profit plus its non-U.S. sourced components (subject to foreign corporate income tax).
It is worth noting at this point that VAT does not have this effect because ALL products in a VAT zone bear the same tax burden and furthermore, VAT is a consumption tax designed to replace personal income tax. The BAT is NOT a consumption tax but instead a coporate income tax which does NOT apply equally to all products. The vital difference is that domestic products are not taxed under the BAT but imports are.
U.S. exports on the other hand are not subject to U.S. income tax under the BAT and would be a deductible expense overseas. So U.S. exports are never subject to tax anywhere after implementation of the BAT.
The U.S. is subject to thousands of tax treaties that create a coherent international system of taxation. The U.S. helped establish this system which is designed to avoid double taxation. Clearly, the BAT would violate many of these treaties and also pose serious issues under WTO rules. Can you say trade war? The authors note that a logical response to the BAT is for other countries to adopt it. Whatever the purported U.S. benefits of the BAT, a worldwide eruption of BATs will not accrue to anyone's benefit. High effective tax rates worldwide can be anticipated.
But it gets worse. If U.S. exporters are allowed to deduct their costs while not recognizing the revenue, as many have supposed, then U.S. exporters will have negative taxable cash flow. This is a subsidy to U.S. exporters, clearly illegal under WTO rules. Retaliation seems likely under these circumstances.
The authors chillingly observe that we should not assume that deductions from exports can be applied to offset "income" created by imports. That offset was certainly part of my assumptions when I calculated an effective 165% tax rate on our company's 2016 earnings. The authors argue that an offset is by no means certain under the Blueprint. One driver might be an effort to fit under WTO rules (to eliminate the above export subsidy). Thus, the drafters of the BAT may segregate the taxable effects of imports and exports, making excess export cost deductions useful only to offset future export income.
Should this interpretation be correct, the BAT is far worse for importers than previously imagined. The BAT would almost be devilish if this contention turns out to be true. The authors' detailed analysis concludes that even multinational companies with a high ratio of exports to imports will still see their taxes rise. Oh boy, this is going to be so good for the U.S. economy. . . .
The implications of the Economics Partners analysis is that the BAT will affect all firms and will disrupt trade patterns, making the BAT a form of trade policy. Duh. I realize this is fundamentally at odds with the assertions of the estimable triumvirate of Feldstein, Holtz-Eakin and Auerbach but it seems obvious when considering the nature of the proposed law. This paper will be published soon and is worth a close reading.
I'm not sure what it will take to get the House Republicans to stand down. They won't be able to say no one knew what they were up to. Carrying on as if there is no evidence of high risk and serious legal and other problems is hardly good leadership. Ryan and Brady are putting their personal and party franchises at considerable risk.
The Republicans need to disavow the BAT before it's too late.