Tuesday, May 30, 2017

Border Adjustment Tax - So Where Are We?

It's tempting after last week's hearing to declare the BAT dead.  The hearing featured some very damaging testimony, and if you think that actually matters, it is hard to see how House Republicans could muster a vote in favor of the BAT with that testimony available for midterm election commercials. In choosing to have this hearing, the Republicans built the record against their own (stupid) idea.  This hearing certainly didn't convince any wavering Senators to come over to the Dark Side.

Among the hearing highlights were:

a.  The previously posted question by Rep. Jim Renacci about assurance that the dollar will adjust as predicted.  The rogue's gallery of Republican witnesses would not give that assurance. Brian Cornell, CEO of Target, helpfully openly admitted that no such assurance was possible. [Cornell was a star in the hearing.]  This question (by a Republican Congressman) crushed the Brady currency argument, and shamed the august economists who have been making unsupportable promises about the dollar saving the day for the BAT.  Smug economists have treated us all like idiots for months, but when push came to shove, no one was willing to stand up in defense of the ridiculous theory. Notably, Democratic witness and economist Kimberly Clausing of Reed College pointed out that in 75% of the cases where a country with a floating exchange rate adopted a VAT, the currency moved the wrong direction.  Oops!

b.   Most of the Republican witnesses persisted in their "correlation is causation" arguments, which rang hollow in large part because they made no sense.  The consistent theme was the simpleminded assertion that (name your economic gripe) was created by the "broken" tax system. Even Lawrence Lindsey was prone to this hyperbole.  The CEO of ADM even asserted that declining sales of his commodities was due to our tax system.  He should be embarrassed for stooping this low.

c.    Devin Nunes continued to parrot the party line (as did Peter Roskam, the other Brady attack dog at the hearing).  In this case, he repeated the nonsensical observation that "Iraq, Syria, North Korea and Mali" don't have VATs, hence we're nuts to not grab the VAT idea while we can.  Among the objections raised to this "insight" was the fact that the BAT is not a VAT, and no conclusions can therefore be reached by Nunes' absurd oibservation.  Rep.  Doggett pointed to the esteemed economies of Estonia and Latvia which have VATs but have not shown great growth.  This counter-argument seemed to have as much impact of Nunes'.

d.   Rep. Sanford Levin made some very strong points, such as the fact that we have lost WTO cases in the past that relate to proposed taxes like the BAT.  He also took issue with the notion that economic ills are directly traceable to tax systems, pointing to labor arbitrage as a big driver of moving jobs overseas.


He also noted that everyone pays corporate income tax in their home country, hence an actual level playing field.

e.   Although no one took on the tedious mathematics of VATs, the urban myth of profiting from border adjustments was repeated but with little impact.

Notably, Rep. Erik Paulsen came out explicitly against the BAT.  With Rep. Kelly and Renacci on record against it, the Republican "no" votes on this bill seem to make it impossible to move forward.  Paulsen's move seems particularly portentous, so much so that it suggests that Brady and Ryan were trying to set up a shift in position through Paulsen.  I say this because Paulsen is a very close associate of Brady, and one wonders how Paulsen could take such a contrary and embarrassing position right in front of his patron and friend if it were not cleared in advance.  And if he did clear his plan with Brady, then Brady may finally be ready to trade this awful proposal away.

The question is when.  Given the chaos in the White House and disarray on several fronts in Congress owing to many factors, including the distraction of meltdown in the Trump agenda, Brady is said to be unsure of what happens next.  He is rumored to hold the BAT as a fallback position when nothing else works.  I wonder if this is credible in any way after this hearing.  In my opinion, he can't overcome the record now.

Other rumors suggest that Brady and Ryan are prepared to trade the BAT for a modified territorial tax system wherein foreign profits would taxed at lower levels than today, but not at zero.  This would raise replacement revenue in some amount to replace the prospect of the BAT revenues. A modified territorial system would be better than nothing at all, and no business would suffer at the relaxing of this tax (the savings are less than a total removal of the tax, but something is better than nothing, right?).

As long as Brady and Ryan are prepared to sustain the notion that the BAT has a chance of becoming law, we cannot give up our opposition.  That said, it seems like it's just a matter of time now. Let's keep pushing and hopefully, Brady and Ryan will eventually concede that there have better things to do with their time than push for this terrible tax.

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