Thursday, July 27, 2017

It's not your imagination - The Border Adjustment Tax is DEAD!!! Yahoo!

Read the joint statement here (published by the White House).  

In pertinent part, it says:

"And we are now confident that, without transitioning to a new domestic consumption-based tax system, there is a viable approach for ensuring a level playing field between American and foreign companies and workers, while protecting American jobs and the U.S. tax base.  While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform."  

In other words, it's dead and it's gone, not to return.

The Washington Post says it clearly - it's a concession of defeat by Ryan and Brady.  

Let's hear it for rationality!

Rumorville - BAT to finally bite the dust - today?

In an article published today on Politico Pro, Chris Wilhelm quotes two unnamed White House sources (Scaramucci?  Priibus?) with "knowledge of the matter" who state that a unified tax reform agenda to be published later today will formally drop the noxious Border Adjustment Tax. The unified agenda is said to reflect the combined views of tax reform of the White House and congressional leaders.

Stay tuned!

Monday, July 17, 2017

Obamacare Legislation Collapses in Senate. The Republicans can't Govern.

Not sure why I still worry about the BAT.  There is zero indication that the Senate would ever go for it, and even more to the point, the Republicans have nearly proven mathematically that they are unable to govern. Who knew?

Well, I have predicted that the Republicans would fracture, and they have.  What I have not been able to foresee is the Ryan/Brady political suicide pact to stick with the loathsome BAT until death do them part.  And that seems to be where they're at, despite no semblance of a House majority much less a path through the Senate.  All one needs to see is the healthcare debacle to know that the Republicans are all over the map on policy.  No Democrat will rescue them, either.  Bipartisanship under these circumstances is an absurd fantasy.

This being said, we are still exposed to a sell out by someone.  Even that seems hard to picture.  As we daily march closer to Midterms and further from the Trumpian invective of the 2016 General Election, with his wild promises and wilder plans, the odds that any member of Congress will take their political future in their hands by voting for something as destabilizing as the BAT seems below zero. I just can't see it.

Nevertheless, with Ryan and Brady clinging like grim death to this awful idea, we cannot let go.  It could, somehow, rise from the dead with such powerful if unpersuasive advocates.  When they say "no mas", I will consider the BAT dead, but until then, it's alive.

Thursday, July 6, 2017

When will the BAT go away, for good?

There really hasn't been any substantive news on the BAT in the last couple weeks. Between North Korean missile launches, fake news twitter bombs and the stymied health care reform debacle, the issue seems to have gone on the back burner.  Nevertheless, Brady and Ryan remains nominally committed to the idea, regardless of the sinking support for the initiative.  Aside from those with a vested interest in the BAT proposal, namely Paul Ryan and Congressmen who have thrown their lot in with him to gain power (Brady, Nunes, Roskam, etc.), no one seems to have even mild enthusiasm for the proposal.

Without the votes, Ryan and Brady face worse odds on tax reform than even killing off Obamacare.  The likely debacle of healthcare legislation makes tax reform less likely by the day.  Some, like Bloomberg, are saying that Ryan and Brady are saving it as a bargaining chip for later.  That may be true, but a bargaining chip is only valuable if it is credible.  In this case, the BAT is full of holes.  I don't see what it is worth as a bargaining chip.  The behavior of leadership is baffling and frustrating.  No one knows why they won't give up the ghost.

Interestingly, the toll taken on the Republican brand by Mr. Trump and his shenanigans is becoming quite clear.  The WSJ notes that Republicans are striking out in getting volunteers to run against incumbent Democrats in Senate races in states where Trump won big.  To me, this is predictive of the continuing stalemate and maelstrom that is Congressional action by Republicans.  The debasement of the Republican brand makes it hazardous to follow leadership, either Congressional leadership (Brady and Ryan) or the White House.  Notably, Rep. Pat Tiberi is mentioned by the WSJ as declining to run against Sherrod Brown.  That's quite interesting, given that he is one of the Republicans on Ways and Means who have spoken publicly about his problems with the BAT.  So here's a Congressman who is definitely sticking around and is nevertheless publicly poking Ryan and Brady in the eye.

So why can't Ryan and Brady keep the Republicans in line?  Any number of reasons, but I believe it's all about incentives.  There is little incentive to fall in line.  How can leadership reward "good" behavior?  How can leadership discipline Republicans who won't play ball?  Again, no answer.  The White House has not demonstrated that it has the power to enforce either.  The wins in by-elections this year have all occurred in very safe districts that the Republicans struggled to hold.  Without a way to keep folks in line, in an environment dominated by a President who is alienating everyone, it is hard to picture Ryan and Brady holding a cohesive and trustworthy majority together for hardly anything, much less radical tax reform.

So we must continue to wait and watch.  Fortunately, the admirable Americans for Affordable Products continues to pummel the BAT on a daily basis.  Thank heavens for them.  We will prevail in due course, but it may take time before an acknowledged victory can be declared.

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.