Tuesday, June 20, 2017

Ryan Speech on Tax Reform Said to Not Reference the BAT

CNBC reports today (at 5.22 in the below video) that Paul Ryan makes no reference to the Border Adjustment Tax in his pending speech on tax reform.  Treasury Secretary Mnuchin did not rebut this assertion.  If true, this is a major shift from Mr. Ryan.  Is the end near???

Mnuchin speaks in the same interview about the need to implement a territorial tax system. Please NOTE that we can have a territorial system without having a VAT or a BAT. Territorial tax systems and the Border Adjustment Tax are not synonymous.  Mnuchin is saying that he does not want to tax income earned offshore, and thus wants to open the door to repatriation of foreign earnings on some basis.

I have previously reported rumors that a hybrid system will be proposed wherein foreign earnings are taxed at a lower level to replace the BAT.  This plan would match (minimally) what Mnuchin is claiming.

Stay tuned!

Tuesday, June 13, 2017

Brady Proposes a Five-Year Phase-In of the BAT

The picture of stubbornness, Kevin Brady today proposed a five-year phase-in of the BAT to "address" the transition issues of the BAT.  He proposes to phase the tax in 20% a year, with 20% of imported COGS included in taxable income in year one, 40% in year two, etc.  I am assuming everything else in the plan remains the same.

A quick examination of our company's actual 2016 results modeled against the Blueprint show the following tax bill based on pre-Blueprint Net taxable income (we pay 43.6% now):

Year One:      14.2%
     [Lower than the projected Federal rate of 25% because of exports and other adjustments]
Year Two:      51.8%
Year Three:   89.5%
Year Four:     127.2%
year Five:      164.9%

Does that look appealing to you?  So we'll live two extra years, but will face a tax-induced cash squeeze beginning in year two.  That's when we start raising prices.  Do you like inflation?

This proposal presumes you would prefer to slowly be asphyxiated rather than shot through the heart.

Other relevant points that expose the thin thinking of Mr. Brady:

a.  No proof that the Dollar will save us.  This proposal ignores the FACT that no one can attest to the direction of the dollar.  The premise of this scheme is that the skyrocketing dollar will protect everyone from inflation.  There is zero reason to believe this, and no one would take the bait at the May 23rd hearing, either.

Mr. Brady thinks we're napping here.

b.   Foreign-sourced content in goods made overseas will make costs RISE.  The content or components imported by foreign manufacturers will rise in cost even as costs for locally-sourced content will fall under this scheme.  We believe a rising dollar ELEVATES our import costs.

c.   The phase-in of the BAT only enhances the probability of WTO lawsuits and retaliation. The illegality of the scheme isn't changed by Mr. Brady's proposal, and the delay in implementing it will only give our trading partners more time to organize to sink us.

d.   Trade wars with critical trading partners will almost certainly be sparked.  The handouts to U.S. exporters, which cannot be compared to the so-called border adjustment in VAT jurisdictions, will almost immediately lead to retaliation by big trading partners.  The BAT will quickly make U.S. companies a more volatile customer base for foreign manufacturers, intensifying the urge to retaliate.

e.   A revenue-neutral "tax cut" is not a tax cut, it is a reallocation of tax burden.  The government still intends to kill importers, but is content to do it over time.  The proposal does not address the fact that 97% of importers are small businesses.  This phase-in only spreads the pain of the shifting tax burden over a few years before it kills all importers or sparks an inflationary firestorm.  Every other outcome is PURE speculation.

f.   Turnarounds will still die under the revised BAT proposal.  Weak importers will still see taxable income miraculously appear, even in year one.  Think about all the retailers struggling to stay alive right now. Gymboree went bankrupt this week, and retailer Ascena said they would close 600 Dress Barn, Ann Taylor and Lane Bryant stores.  Money-losing importers have taxable income when COGS is added back to their losses.  So they will owe taxes in losing years.  Close more stores so you can pay Mr. Brady!

g.   VAT systems still don't prejudice U.S. manufacturers.   This fact is well-known but Brady prefers to keep lying to preserve his faulty plan.

If the BAT was rejected by thoughtful Members of Congress, so will BAT 2.0.  Give up, Mr. Ryan and Mr. Brady.  You will either lose your vote or lose your jobs.  This is the wrong place to draw a line in the sand.

Monday, June 12, 2017

The Last Days of the BAT???

Wither the Border Adjustment Tax?  Wither indeed.

As noted in this space several times, and fairly obvious to everyone following this issue closely except for two people, the Border Adjustment Tax proposal is nearing its just demise.  There is nowhere to turn, and only a concession by Ryan and Brady stands between us and rationality.

On June 9th, Rep. Jim Jordan published an Op-Ed in The Washington Examiner entitled "America-first tax reform begins with dismissing a border adjustment tax".  This article is being seen as the official position of the Freedom Caucus, an independent group of 30 or more Republican members of Congress (the exact list is not known).  You may recall that the Freedom Caucus did a lot of damage to Paul Ryan's efforts to repeal Obamacare.  They tend to vote as a bloc.  This means there are officially more than 30 "no" votes out there, plus others who have stated a negative position.  On Ways and Means alone, Reps. Paulsen, Tiberi, Renacci and Kelly have all publicly stated opposition or very strong concerns.  The path to law in the House is dead.

And in the Senate, no realistic tax reform fantasy can include "turning" the BAT opposition of Senators Cotton, Graham and Perdue into "yeses".  So it's not getting through the Senate.

As predicted many times in this space, the power vacuum of Trump/Ryan is encouraging more Republicans to chart their own course.  The prediction was a gradual breakdown of the Republican pack with defectors leading to more defectors. The approach of Midterms has only hastened this process.

Are the House Republicans so dense that they can't see that the BAT stands between them and tax reform?  Happily, I can say with confidence that they aren't that dense.  In fact, they are starting to speak about it, out loud even.  The WSJ reports that pressure is finally being applied UP by House Republicans against Ryan and Brady to ditch their pet idea and move toward something more realistic and likely to be the basis of a new tax law.  My conversations with folks on the Hill confirms that conversations are being had, and the obvious being stated aloud for the right ears to hear.  There are even signs that these pleas are being heard.  You never heard me say that before.

Sadly, the real problem is that Ryan won't accept a plan unless it's revenue-neutral.  This is quite unfortunate, and may result in his political downfall if he doesn't give up the ghost.  "Revenue-neutral" is when a tax cut isn't a tax cut, but only burden shifting among taxpayers.  The correct approach is deficit-neutral, namely reducing tax revenues being matched by reduced governmental expenditures.  Oddly, in a town where advocating the devastation of health care for millions seems to be just fine (explain that to me, please), no one in Washington will speak of attacking other larger entitlements, even if done in a fair and forward-looking manner.  Those plans exist and will not endanger Seniors.

If Ryan won't consider deficit-neutral, there is little hope for tax reform.  It is hard to believe that Congress will be irresponsibly cut taxes without cutting expenses, leading to spirally deficits we may not survive. We are already looking too much like Greece and can't afford to make the comparison even more direct.

This is coming to a head, finally, and we should see news, important news, soon.  Keep your eyes peeled.  Help may be on the way.

Thursday, June 8, 2017

Border Adjustment Tax Seems Impossible But Remains on Life Support

Despite holding a hearing May 23rd that built a strong record against the BAT, and which provided an opportunity for Republicans to openly oppose the plan, Brady and Ryan continue to coyly hold fast to their insistence on the BAT.  As noted in Bloomberg this week, this stubbornness is putting tax reform in doubt.

The pat explanation - that Ryan is a "wonk" - does not ring true to me.  Ryan is bright and is an accomplished politician, to say the least.  He is Speaker of the House and has been a Vice Presidential candidate.  It is hard to dismiss him with condescension.  So what is his gambit?

It's a good question.  Roll Call counts 30 House Republicans who have expressed serious doubts or opposition to the plan, plus at least 18 Republican Senators.  There is just NO WAY that this provision can pass out of Congress over that obstacle given the likelihood that the tax bill will get zero Democratic votes, and the more Members of Congress come out against the BAT, the safer it is for others to go public with their reservations.  This headcount of Republican resistance is a major degradation of where Brady and Ryan were just weeks ago.  The well-financed and supremely well-organized Americans for Affordable Products coalition is providing unrelenting and effective resistance to the BAT, keeping the headlines and Op-Eds flowing.  The pressure will not relent.  I do not see a credible plan to raise the BAT from the dead.

That said, The Hill reports that Senator Orrin Hatch, the Chairman of the Senate Finance Committee, doesn't rule it out.  He previously said that he had "real reservations" about the plan and knows well that he lacks the necessary votes given the strong opposition of several Senators who are unlikely to come back to the fold (Perdue, Cotton and Graham).  Notably, the White House has also stated its opposition to the BAT. This appears to leave little room for a Second Coming.

While it seems like a good guess that the BAT is being saved as a "trade" later, even that seems far fetched because you can't get much value for something has no value.  Ryan and Brady lack credibility when it comes to forcing the plan into law, and thus have little leverage in a trade.

This all seems like politics, and that's the worry.  Hatch's warning that the BAT could spring back to life is the Doomsday scenario - a back room sellout at the last minute, out of public view.  While this in the nightmare, it seems less and less likely as the machinery of Midterms are coming on fast.  Notably, today's election results in the U.K. hint that the worldwide fever that propelled people like Trump into office is passing fast.  Supporting something as drastic and reckless as the BAT gets more politically hazardous every day.  And the delay in passing any portion of the Trump agenda means that whatever anger it would or will engender has less and less time to pass.  It all adds up to voter anger.  And as everyone knows, there are (many) other reasons for voter anger at the polls in 2018. Not a pretty picture for Republican prospects in 2018.

If the Republicans have any hope of demonstrating they are able to govern, they will need to drop the BAT and move on to something else soon, long before the 2018 Midterms.  The BAT has to go, but the decision to kill it rests with Ryan and to a lesser extent, Brady. Stand by but please keep the pressure on.  They need to feel the heat every day until they cave.