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.


  1. Good update. However, quibble with your conjunction in 2nd to last sentence of "e". Should "read kills all importers AND sparks an inflationary firestorm." In my business, I COULD buy domestic, but product costs are literally double those I pay by inporting. I doubt that I would have many customers at the price levels I would need to stay afloat. I guess that this phase-in would give us a few years to fire all our people and wind down the business. At which point I'm paying NO taxes at all. That will fix the deficit problem, I'm sure. Hard to believe that this is a serious proposal.

  2. The press on the Brady phase-in proposal has been bad, but that kind of feedback falls on deaf ears. No one to my knowledge has rushed to its defense, so perhaps there is a general recognition on the Hill that the proposal is not responsive to the known issues with the BAT. At some point, Brady and Ryan have to capitulate, but they seem to be playing a long game and are trying to outlast us. Perhaps they want to be remembered along with Smoot and Hawley. If they get their way, they will be in that same Hall of INfamy . . . .