Wednesday, April 26, 2017

WSJ Reports This Morning that Mnuchin Says No BAT in Trump Plan

We're getting closer.  In a just released article in the WSJ, Treasury Secretary Steve Mnuchin says the BAT will not be part of the Trump tax plan:

"Mr. Mnuchin said at an event Wednesday morning that the administration wants permanent policy changes but temporary cuts could be considered too.  'This is going to be the biggest tax cut and the largest tax reform in the history of our country,' he said at a conference in Washington. . . . Mr. Mnuchin said the administration’s proposal won’t endorse the border adjustment feature that is central to the House GOP plan. The provision attempts to raise revenue by taxing imports, but not exports. Mr. Mnuchin said the administration wasn’t opposed to the provision in concept and that he liked aspects of it. But he said, 'We don’t think it works in its current form.'

The WSJ goes on to comment on Speaker Paul Ryan's position:

"Mr. Ryan hasn’t backed down on the border adjustment idea, but he said Wednesday that he knows the proposal needs modifications in response to criticism from retailers and others. 'We don’t want to have severe disruptions,' Mr. Ryan said."

This is the closest to a concession that I have seen Ryan make on the BAT.

As noted in my last post, we should not assume that the BAT is dead yet.  The Republicans need cash to make this plan work.  Unless and until they realize that real costs must be reduced, they are likely to continue to rely on reallocation, which is the appeal of the BAT (to certain people).

An interesting notion is that a massive tax reduction is the perfect opportunity to slash entitlements. After all, if you are actually going to pay far less in taxes, a future financial need like retirement or retirement health care can be financed with those saved dollars.  Why leave the money in the inefficient hands of the government?  So, for instance, the government could shift the burden of current entitlements on Americans based on age and ability to pay (income).  This would not have to pull the rug out from under anyone, but would sharply reduce the size of government and the size of the budget deficit.  It's a way out, but would require political courage, political collective action and thoughtful design.  No one need be roadkill to get this done.

In any event, the BAT is getting closer to its just demise.  We fight on until it's dead and gone.

Trump Tax Plan - What Does It Mean? And Other News

Today's buzz is the pre-announcement of the Trump tax plan.  Let's call it "Candy for Everyone". Federal corporate rates for C Corps and S Corps alike (and other pass through entities) would be reduced to 15%.  Each percentage reduction in the corporate rate supposedly costs the Federal government $100 Billion in revenue over ten years.  This kind of chop is thus expected to create HUGE deficits for as far as the eye can see.

The Trump White House response to this is the Laffer Curve, namely the lower rates are paid for with growth.  So nothing to worry about.  Yup.

The presence of the BAT in this proposal is in dispute. The New York Times says "no", while CNBC says "yes" as a placeholder, whatever that means.  Actually, the placeholder concept is an acknowledgement that they will need to raise revenue to make this work.

So much of this makes no sense to me.  First of all, tax reductions on this scale must be matched not by reallocation of tax burden (the revenue loss is too massive to recoup simply by shifting burden from one group of taxpayers to another) but instead by spending cuts.  This Congress and today's American public is not prepared to ignore the deficit and risk ruining America's future to throw a really great party right now.  But no one seems prepared to cut spending or meaningfully reduce the size of government. The Freedom Caucus won't support a massive expansion of the deficit (or allow borrowings to support it), and many other more moderate Republicans will also oppose it as fiscal conservatives.  One wonders where Mick Mulvaney is on the plan.  Democrats will never support it.

Trump's gambit seems to be a form of bribery - make the tax reduction so ridiculously large that no one will oppose it.  Pure greed will create the necessary support, by this reasoning.  I cannot see this working, as nice as a massive tax reduction might be.  Such massive deficit generation is irresponsible and not called for at a time of peacetime high employment.

Second, the process to get a bill passed without Democrat support (a given, in my book) is via reconciliation.  The "candy" proposal seems particularly ill-suited to this approach, if not utterly impossible.

IF something like the Trump plan gets any traction, the need to find revenue will be overwhelming. No one apparently wants to face the music on entitlements so that means tax increases somewhere must be included to offset the tax reductions (this is reallocation, not a reduction in tax revenue).  I would like to think this is an impossible scenario but there is no indication yet that anyone plans to make it impossible.  So IF this happens, the BAT comes back to the table.  In this chess game, it again seems like checkmate for Ryan and Trump.  The Senate is still not likely to go along with the BAT. In the House, the recent opposition by Rep. Marsha Blackburn (of Freedom Caucus and Trump Transition Team fame) suggests that Ryan needs to anticipate a fatal challenge to 216 Republican votes for a BAT plan.

So what on Earth are Trump, Ryan and Brady thinking?  I would love to say "nothing" but no one knows.  This is just more Trump-era chaos in my book.  His zigzagging and belligerence with Canada this week is a harsh reminder of how unpredictable his policies are and the great difficulty in predicting his next move on . . . anything.

We will all have to stay tuned.

And in other BAT news, the House Ways and Means Tax Policy subcommittee hearing on the BAT scheduled for Thursday of this week has been postponed, perhaps to May 3rd.  In light of the Trump plan announcement scheduled for tomorrow, the timing and nature of the hearing may change yet again.


Monday, April 17, 2017

Rumorville

The gossip about the BAT is swirling.  We have already covered that chaos in the White House makes the situation all the more opaque.  IMHO, the White House may ultimately be influential on taxes (duh) but does not have the political power to overcome the very negative perception of the BAT in the Senate.  No one can assure agricultural state Senators that retaliation will not be aimed at American farmers (most are Small Businesses, btw).  No one wants a trade war affecting American grains, period.  As a consequence, the White House can only be an impact player if it steers the process away from the BAT.

As such, Ryan and Brady remain at high risk.  It seems incumbent on them to blink first.  Since there is no realistic path for the BAT to become law, and if they choose to continue to push on that rope, they not only take their political careers in their hands but also squander whatever advantage comes with the White House at their back, Ryan and Brady would be well-served to have an epiphany and switch horses midstream.  I see this as their possible political salvation. This aspect of the Blueprint didn't work. Time to move on.  Guys, remember the "Sunk Cost Effect"?

Today, as if to make the point that the BAT has hopeless optics (reflecting hopeless policy and economics), Five Below and Dollar Tree warned of its ill effects.  Dollar stores are a critical part of the economy serving lower income Americans.  A "dollar" store becomes hard to imagine under the BAT.  Think of the range of voters affected. This is pretty obvious. The BAT is a regressive tax on all Americans.  This is BAD politics.

Axios reports that Ryan and Brady are now considering what they call the "candy option" (all the good stuff, but none of the costs).  In other words, a Reagan-style cut in rates with deficit spending. It's the Laffer Curve.  I don't see this as realistic in this environment.  Has no one noticed the Freedom Caucus?  Those folks won't deficit spend, so this seems like another dead letter to me.

At some point, Congress will wake up to the long suggested idea of cutting spending to go along with an adjustment in rates.  This is an old idea espoused by many, including in this space, and offers the best and most realistic chance to deliver on lower rates.  The high rates in this country are the root cause of dissatisfaction (and inversions).  So far, leadership cannot bring themselves to rally around this kind of realistic plan.

With midterms increasingly on everyone's mind, progress on such divisive and electorally explosive issues seems unlikely.  A coalition across the aisle seems inconceivable, and in the leadership vacuum that is the Republican Party today, even a Republican coalition seems out of the question.  So what's next?

Brady and Ryan seem intent to maintain the appearance of a functioning government so rumors swirl about pending Tax Policy subcommittee hearings, possibly in the next two weeks.  Everyone is vying to get a microphone.  Discussing these issues in the light of day would do some good. We are, after all, neighbors and no one has moral superiority in wanting a better outcome for America than anyone else.  We all want the home team to win.  Getting tax reform done right is important to all of us.  The employees, customers and suppliers of our company, Learning Resources, have a strong interest in it, too.  We are not simply "against" novel initiatives.  We are prepared to contribute to solutions - but the politicians must be willing to listen and to move in a more responsible and realistic direction.

Stay tuned!

Saturday, April 15, 2017

Chaos at the Top - Wither the BAT?

Actual news on the Border Adjustment Tax has slowed down, but media attention has not diminished.  How is this possible, and why is it happening?

It's possible because there is just no clear direction in Congress, or more generally in Washington, on how to proceed on taxes.  The confusion frankly runs in every direction. Among the problems is a real absence of leadership.  Paul Ryan says that the House, the Senate and the White House are all on different pages.  And, of course, the White House is on a different page every day.  Consider, for instance, that Mick Mulvaney, the OMB Director said the following on March 24th:  

"Standing on the White House lawn Friday morning, Mulvaney told CNBC that President Trump decided to stop negotiating with lawmakers over the healthcare bill because he 'has other things he wants to do. He wants to get tax reform done. He wants an infrastructure bill approved. He’s got other jobs programs moving through the White House,' Mulvaney said.

That seems clear, right?  Today, the WSJ says it's the exact opposite:  

"After losing a fight to revamp the health-care system, President Donald Trump said last month he was prepared to put the setback behind him and move on to the next challenge, rewriting the tax code. Three weeks later, he said he is determined to resurrect the health-care bill even if it means delaying the tax overhaul, telling The Wall Street Journal in an interview: 'I want to get health care done… I think I will get it done.'  The tax overhaul, he said, would have to wait."

And so why is the media continuing to pour resources into covering the BAT?  Simple, the leadership continues to plug it like nothing's changed. The threat hasn't lifted and as House Republican leaders cling to the BAT despite the bad odds, one must either regard it as a last gasp by fading leadership or that the odds are growing that bad policy could be become bad law at some point.

As if to make the point that anything could happen and that chaos is reigning, consider these WSJ articles published on the SAME day this week:  Trump Threatens to Withhold Payments to Insurers to Press Democrats on Health Bill and Trump Administration Takes Steps to Stabilize Health-Insurance Market.  The threats are wild, inconsisten and vary by the day.  Or by the hour.

Nutty events are reported daily. This may be my favorite recent BAT story, from the Washington Post on April 11th:  

"In recent weeks, the president has held meetings with his counterparts from other countries. But in some cases, those sessions have only heightened doubts that Trump has a clear sense of what direction he intends to take U.S. foreign policy. Few if any world leaders, for example, have had as much experience in dealing with U.S. presidents as German Chancellor Angela Merkel, who is on her third. During their White House meeting last month, Merkel tried to pin down Trump on one of the top concerns of U.S. trading partners: a proposed “border adjustment tax” to be imposed on imported goods. Publicly, Trump has signaled an openness to the idea, but he also said it has drawbacks."

"'Don’t worry,' Trump told Merkel, holding his thumb and forefinger close together. 'It will only be a little bit.' Trump’s breezy answer — and Merkel’s exasperation — has been the talk of diplomatic circles in Washington and Europe. 'So all the chancellor of Germany knows is that, ‘It will only be a little bit,’' said a senior European diplomat in Washington, holding up his fingers as Trump did, and repeating an account confirmed by others in anxious embassies in Washington. 'It’s very puzzling.' The White House did not reply to a request for information about the exchange between Trump and Merkel."

Given all of this nonsense and noise, whatever rational argument is being made to declare the impending death of the BAT, it lives on and continues to get coverage.

We are in a dangerous phase. The BAT remains a threat.  Too many people have written it off, but with this kind of volatility and a terrible leadership vacuum, it could come roaring back.  Please note that this is all politics, not policy.  In Washington, politics and policy are from different planets.  Bad policy, regrettably, does not disqualify legislation.  In some circumstances, it even makes it more attractive (for political reasons). Politics is the real driving force here.  And the BAT may make good politics for some people at some point.  

I still think the BAT will die, but am not comfortable with the present situation.  One would think that if Trump were going to support the BAT, he would have hitched his wagon already. Trump has an uneasy alliance with Ryan (and vice versa) which may become politically toxic to both of them at some point, in which case the BAT dies for sure.  However, politics makes strange bedfellows.  We must remain vigilant until Paul Ryan concedes.  

Tuesday, April 11, 2017

Fake News . . . or Fake Congressman?

Late last week, Americans for Prosperity and Freedom Partners published a new study  on the economic impact of the Border Adjustment Tax, and Kevin Brady immediately labeled it a "so-called study" and "fake news".  I happen to be mentioned in the study, and it's an honor to be called "fake news" by the illustrious Mr. Brady.  After all, he's a so-called Congressman!

Let me help you with this use of the term "fake news".  In a Kevin Brady context, "fake news" is an inconvenient fact that appears in the media.  It is deemed especially "fake" if it is associated with an opponent of whatever ridiculous position Brady is pushing at that particular moment.

This is not entirely different than our President's practice of citing flagrantly ridiculous reporting on Fox News (e.g., Andrew Napolitano's assertions about Obama wiretapping) while at the same time pointing the finger at the "failing New York Times" or CNN as a source of "fake news". I guess, "fake" depends on where you sit these days.  Some people also call this a validation bias, or just plain old delusional behavior.  Take your pick.

So what did this "fake" study show?  Well, among other things, it drew from data I have previously highlighted in this space, namely the "fake news" promulgated by the U.S. Census Bureau (fake!) about 2014 import totals.  State totals are actually now available for 2015, as well as a range of other updated information.  The data is similar between 2014 and 2015, so the conclusions don't change.

And the "fake" news being flogged by the always suspect U.S. Census Bureau (practically the National Enquirer of the U.S. Government, as you know) is state import totals.  The links are above, check them out for yourself.  The Freedom Partner report performs some simple fourth grade math on the Census Bureau data and observes that regional patterns of trade will punish certain states more than others.  You probably could have guessed that.  Consider that Rep. Erik Paulsen represents the home district of Best Buy and Target but spinelessly stands strong behind the BAT.  Yup, some places will get hammered. The study shows that, and dares to publish a ranking.

Like most "fake news", the study provides copious citations, presumably to other sources of fake news.  Who knows.

The state most sensitive to the BAT using this data is actually Michigan.  Michigan is a seat of the auto industry.  My home state of Illinois, that great state, is seventh on the list.  We also feed the auto industry.  Have you ever heard of global supply chains?  Most of the top adversely-affected states have heavy exposure to auto manufacturing.  Again, the report correlates this data and makes it digestible.  Unlike the coarse and baseless remarks of Mr. Brady.  [The study does similar correlation work on retail jobs by state.]

If there is anything "fake" here, it's the kindly assumption on page six that the impact of exchange rate movements will cover half of the burden of the BAT.  I strongly doubt that, myself.  Okay, it's not "fake" just because I disagree with it but, frankly, it's kinda fun calling it "fake news". Try it, you'll like the sense of power and condescension calling news "fake".  Am I right??

To  make matters more unpleasant for Congressmen with a penchant for stretching the truth, Americans for Prosperity released this commercial to run on cable stations this week:



It's a real shame that House Republican leaders cannot deal with the truth, and have a career-threatening compulsion to push bad policy with even worse politics.  That's not our fault. We will push back hard and since they are on some sort of kamikaze mission, they may pay the ultimate political price for their insistence on this terrible policy initiative.

And in the meantime, we can savor our "fake news"!

Wednesday, April 5, 2017

Why You Should Care about the Gorsuch Confirmation

I am sure you, like me, are watching the Neil Gorsuch Supreme Court nomination drama with ghoulish fascination.  As you probably know, the Republicans are threatening to go "nuclear" by reinterpreting Senate rules (changing procedure) to allow a majority vote to end debate. This would allow the Republicans to end the Democrats' filibuster going on right now, and effectively make it possible for a majority vote to decide a Supreme Court nomination.

This controversy seems like a Hatfield-McCoy dispute.  Tit-for-tat, a never ending escalation, dating back to who-knows-when.  The last "nuclear" trigger was pulled by Harry Reid to allow majority vote to end debate on judicial nominations short of the Supreme Court.  Didn't take long for the Republicans to go the next step, prompted by lingering Democrat rage over McConnell's plan to not consider the nomination of Merrick Garland last year and their intent to retaliate against Gorsuch.  Notably, McConnell's idea was first made by Joe Biden in the 90's.

Don't assign black hats and white hats here.  You can see that this is an oscillating drama with no good guys, just viciousness and no consideration for us.  You know, the public.

The WSJ recaps the sorry descent into hell:

"The rise in partisanship has fed an escalating feud between the parties over how to use the Senate’s procedural tools to keep the other side in check. Democrats, when in the Senate minority during President George W. Bush’s presidency, sought to block a set of Mr. Bush’s judicial nominees before the Gang of 14 agreement defused the tension. The parliamentary arms race between the parties has just continued since 2005,” said Sarah Binder, a senior fellow specializing in Congress at the Brookings Institution. “Minorities exploit the rules and majorities find new ways to restrict those new avenues. Later, when Republicans were in the minority, their opposition to some of then-President Barack Obama’s judicial and executive nominees helped push Democrats, led by former Sen. Harry Reid of Nevada, to change the chamber’s rules in 2013. That change enabled the Senate to approve lower-court and executive nominees with just a simple majority. Then last year, Republicans, back in control of the Senate, refused to hold a hearing for Merrick Garland , Mr. Obama’s nominee to the Supreme Court after Justice Antonin Scalia died in February. That stoked anger among liberal voters, who pressed Democratic senators this year to oppose Mr. Gorsuch. The pressure from Democratic voters also was driven by resistance to Mr. Trump’s inflammatory comments and early actions in office. This is like a troubled relationship where everybody has a grievance and everybody has a little bit of a reason to be angry, but the question becomes, what do we do next?” said Sen. Schatz of Hawaii."

Sadly and dangerously, the WSJ notes that we can still fall deeper down this hole:

"However, lawmakers from both parties say there is no appetite now for changing the 60-vote threshold for procedural hurdles on most legislation. GOP lawmakers have said Mr. Reid’s decision to change the rules in 2013 paved the road for their alteration later this week. The consequences of the 2013 rules change became evident this year, when Mr. Trump’s nominees, many of whom were contentious, cleared the Senate often along largely partisan lines."

This is the threat you should be worried about, a lot. The Senate's procedural rules are a valuable check-and-balance against "Majoritarianism". The concept that we should always do what the Majority wants is extremely dangerous. The issues that arise are very threatening to all of us.  As a minority, I am particularly averse to Majoritarianism.  Issues of personal liberty and individual rights are directly threatened by this, and not to be melodramatic, but those are critical issues that define what makes America great. The inconvenient roadblocks in the Senate protect us all. Stripping them away in a Hatfield-McCoy style dispute injures us all, considerably.

As it relates to the Border Adjustment Tax, consider what makes this terrible proposal hard to translate into legislation and law. The Republicans are only able to push tax reform through as part of reconciliation, a Senate procedure that severely constrains the terms in the law. Reconciliation is valuable because debate can be terminated with a majority vote. Connecting the dots yet?  

If debate on legislation can be ended by majority vote, this rule can easily change - right now.  A block of cooperating Republicans in the House and Senate, backed by the White House, can do whatever they like, with no obstacles. This makes Trump a King, not a President. Democrats in Congress would have no role until their power can be restored by the voters, then they would set about doing what the Republicans are doing right now, namely tearing down what the last guy did.

Yoyo-ing laws and regulations will come at a terrible cost to all of us.  We should care, a LOT, about this pending change in rules in the Senate.  There's no point in my calling my Illinois Senators, they are both Democrats so we know where they stand.  If you live in a state with a Republican Senator or Senators, I suggest you write them and call them today to protest this change in rule.  I also suggest you organize groups of people, large groups of people, to also do this today. We can only stop this by group action as voters.

This is serious.  Your actions can make a difference.


Tuesday, April 4, 2017

Border Adjustment News Clips (April 4, 2017)

More clips for you!

Weekly Standard: Weekly Standard: Simplify, Simplify, Simplify 4-10-17

Washington Post: White House explores two new tax ideas — a value-added tax and carbon tax — as leading proposal to raise revenue falters 4-4-17

CNBC: White House reportedly looks at two new tax options to replace divisive border adjustment 4-4-17

McClatchy DC: A tax at the border could be the next big Republican disagreement in Congress 4-3-17

Pulse News: Korean firms’ tax levy likely to shoot up under border adjustment tax 4-3-17

The Citizen’s Voice: Hoping Toomey votes against proposed border adjustment tax 4-3-17

WSJ: A New Tribalism Spreads in Donald Trump’s Washington 4-3-17

The Advocate: Letters: Business taxes passed to consumers 4-2-17

News Leader: Pay attention to unfair federal income tax codes 4-2-17

WSJ: How to Make Tax Reform Bipartisan 4-2-17

McLaughlin & Associates: March National Poll Results – Border Adjustment Tax (BAT) 3-31-17

The Tax Times: Possible Phase In Of Any Potential Border Tax Plan 3-31-17

CNBC: Trump still hasn't made up his mind on House border tax, Commerce's Wilbur Ross says 3-31-17

Financial Post: “Very little support” for border adjustment tax in Washington: Carr” 3-30-17

NY Times: Why I Support a Border-Adjustment Tax 3-30-17

Bloomberg: Congress Weighs Options to Soften Controversial Centerpiece of GOP Tax Plan 3-30-17

CNBC: John Deere Co. CEO: "Very Concerned" for farmer customers 3-30-17

Washington Examiner: Conservatives Can’t Afford To Let A Border Adjustment Tax Derail Tax Reform 3-29-17

CNBC: Congress’ Border Adjustment Tax: Senator Portman: GOP Should Pursue “More Traditional” Approach 3-29-17

Fox Business: Tax reform will be done this year: Rep. Kevin Brady 3-29-17

New York Magazine: 9 Big Questions About GOP Tax Reform 3-29-17

Philly.com: Border adjustment tax bad news for Pa. 3-29-17

CNBC: An influential GOP senator throws cold water on the polarizing House border tax provision 3-29-17

Mic: The Biggest Threat to Trump’s promise of job creation might just be Senate Republicans 3-28-17

The Daily Caller: Godfather Of Republican Border Adjustment Tax Plan Was A John Kerry Adviser 3-28-17

CNBC: Former U.S. Senate Budget Committee Chairman And Ways & Means Committee Chairman Judd Gregg 3-28-17

The Detroit News: Trump Should Ditch Border Tax 3-28-17

The Hill: Trump puts foreign investors first by supporting the Republican tax plan 3-28-17

ABC News: What we know (and don't) about Trump's tax reform plan 3-28-17

AL.com: Import tax talk casts shadow on Walmart hoopla in Mobile 3-28-17

The Times of India: Tax plan pivot may leave discretionaries vulnerable 3-28-17

Bloomberg: The Job Killer for the Retail Industry 3-28-17

WSJ: Republicans’ Tough Call on Taxes: Quick, Short Yardage or Hail Mary? 3-28-17

Fox Business: Congress’ Border Adjustment Tax: Ways & Means Member Kelly: “No” 3-27-17

CNBC: Border Adjustment Tax Something That Is “Very Convoluted” 3-27-17

Bloomberg: Kevin Cirilli: Border Adjustment Tax Has Divided GOP In Ways Similar To Health Care 3-27-17

Fox Business: At This Point The Border Adjustment Tax Is The Divide Within The Republican Party, Which Is Putting The Whole Tax Reform Effort In Jeopardy 3-27-17

CNBC: Border Adjustment Tax Is Opposed By U.S. House Freedom Caucus Leader & “The Number Of Senators Who Are Skeptical Of It Keeps Growing 3-27-17

WSJ: Congress Gears Up for Fight Over Spending After Failure of Health-Care Bill 3-27-17

The Hill: Retailers get aggressive in fight over GOP tax plan 3-27-17

NY Times: Trump’s Take on Corporate Tax Rate Could Look Very Much Like Obama’s 3-27-17

Fox News: Border Adjustment Tax “Even More Complicated Than Health Care Reform” 3-26-17

Fox News: Rep. Brady: We're full steam ahead on tax reform 3-26-17

The Hill: Vulnerable Senate Dem: Border tax concerning for agriculture 3-23-17