Latest News on the BAT

As one crazy week winds down, and another presumably ramps up (Merrick Garland for FBI Director, says Mitch McConnell!), there have been a couple more Border Adjustment Tax tidbits worth pondering:

a.  Mnuchin tells G-7 that Border Tax isn't part of his plan.  On Saturday, Treasury Secretary Steven Mnuchin reassured G-7 nations that he won't be including the BAT in his tax plan.

“'The emphasis was initially on a border tax, which is taxation, but also trade policy,' said Italian Finance Minister Pier Carlo Padoan in an interview. 'Now, the emphasis—and Secretary Mnuchin was very clear about this—is about tax reform.'”

So Mnuchin says NO on BAT in public to allies.  Good sign.

b.  President Trump Explains the role of the BAT in his tax plans.  Mr Trump's words can't be summarized, you must read them yourself.  This is from the transcript of his interview by The Economist, a fascinating document, worth a scan (believe me):

"But as you said Mr President, a border-adjustment tax has some similarities to that. Are you still considering a border-adjustment tax?

We are dealing with Congress…because it’s not really what I’m considering. I mean look, on health care, I think we have a great bill and there’s still a little bit further to go because we’re also dealing with the Senate, but the Senate I believe really wants to get something done because Obamacare is dead, just so we understand. Obamacare is absolutely dead. The insurance companies are leaving. Yesterday Aetna just announced they’re pulling out. You have states that aren’t going to have any insurance companies. You know when people say, “Oh, Obamacare is so wonderful,” there is no Obamacare, it’s dead. Plus we’re subsidising it and we don’t have to subsidise it. You know if I ever stop wanting to pay the subsidies, which I will.

You’d pull the plug on that? If this bill doesn’t go through you’d stop those subsidies?

No, this bill only gives them one month. They don’t realize that, that’s another thing. Good point. This bill gives them one month, it gave, you know the subsidy…

The continuation of the subsidy?

The subsidy to the insurance companies, yes. Anytime I want because actually."

Uh-huh, I get it now . . . .  Btw, this is real, check the link.  And if that's not convincing, please note the New York Times' description of what it's like to speak for Mr. Trump.

c.  South Carolina Republican Party Adopts Resolution Against BAT.  A big slap in the face for Mr. Ryan and Mr. Brady from a core Republican State.  See the resolution here.

A busy weekend of news, and next up are the hearings on Thursday.

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.  

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"!

Is It Surprising that Dogs Think They Could Support a Cat Tax?

In today's New York Times, William T. Jones, Chairman and CEO of family-controlled Cummins Allison, explains why he supports the BAT.  I don't know him but believe he is stating his views candidly and clearly.  The problem is that he's wrong in several important respects.  He repeats the urban myths and simple nonsense of Kevin Brady and Paul Ryan. Given the size and scale of his business empire, Mr. Jones has no excuse for his failure to know what he's talking about.

Urban Myth No. 1:  "In general, it’s a good idea to shift the United States tax system toward consumption as opposed to production, which a border-adjustment tax would do. More than 150 of America’s trading partners currently impose consumption taxes, or “value added” taxes, of up to 25 percent on American exports. This means that American-made exported goods are burdened with the costs of American taxes as well as those of foreign taxes. Our foreign competitors face no such consumption tax when entering the American market, but they enjoy value-added rebates from their home countries, which help lower their prices in our market."

Three ideas are expressed here.  First, America's trading partners impose VAT on American exports.  That is true, but they apply VAT to ALL products, not just imported products.  If Cummins-Allison is competing against a local product, both the imported and domestic products are assessed VAT.  This tax is neutral to everyone for this reason.  

Second, Jones asserts that our products are bearing the burden of American taxes as well as foreign taxes.  Again, no prejudice against American products here. He is referring to American corporate taxes as the "American taxes".  Corporate taxes are assessed in VAT jurisdictions typically, so this burden is felt everywhere. As noted above, American products do not bear a special VAT burden not felt by other products in VAT jurisdictions.

Notably, American corporate taxes are very high.  That's our own fault.  It is not a structural problems in our system of taxation.

Third and finally, Jones asserts that border adjustment in VAT jurisdiction is some sort of subsidy.  I have debunked this numerous times. See these articles for details:  January 12, January 15, January 18, and February 16,  This is an urban myth and is just not true.

Urban Myth No. 2:  "Although my costs would rise somewhat because I have to import certain components that are no longer made domestically, the border tax would compensate for that loss by canceling out the tax-rebate advantage currently enjoyed by my foreign competitors."

As noted, the so-called "tax-rebate advantage" does not exist.  If it did, my company would be receiving it, and it is nowhere to be found on our books. We have a UK affiliate which exports out of the EU.  If the tax rebate (border adjustment) in VAT jurisdictions is some kind of subsidy, we would have at least 20 years of accumulated subsidy in our bank account and on our audited financial statements. We don't. This is an urban myth and Mr. Jones doesn't know what he's talking about.

Simple Nonsense No. 1;  "Those who object to the border-adjustment proposal — chiefly retailers who sell imported goods — claim that there will be exorbitant price increases for consumers. But there is reason to think any such increases would be smaller than critics suggest, as the tax would be applied only to the (lower) wholesale price at the border, not to the (higher) retail price in their stores."  

This is ridiculous because Mr. Jones apparently believes that the Border Adjustment Tax will have to be passed along to consumers, but fails to recognize that the price charged for the heavily taxed imported products will be marked up at each level of distribution, just like a VAT.  The math dictates that the price increase will be as large as the terrified importers can steel themselves to impose, converging on the 20-25% increase in costs that they experience.

Urban Myth No. 3:  " . . . perhaps those higher prices could be mitigated for lower-income Americans by a tax credit phased out over, say, three years — during which time retailers should be able to find or help establish American suppliers to meet their needs at lower cost."

We have not been able to find a single factory able to produce any of our products at a competitive cost since we began trying in 2013.  Bananas aren't grown in this country, Bordeaux wine comes from France, Corona beer from Mexico, and cut-and-sew products like shoes and apparel are never going to come back to a high value-added manufacturing economy like ours. As I have pointed out in prior blogposts, if manufacturing does come back, it will be robotic.  Car manufacturing by people is an outmoded idea.  Mr. Jones' assertion is a myth.  

Simple Nonsense No. 2:  "If the W.T.O. — principally a bureaucratic collaboration of America’s competitors — were to reject an American border-adjustment tax, it might well be time for the United States to re-evaluate its relationship with that organization."

Maybe we should move away from the WTO and maybe we shouldn't, but that's sort of irrelevant here.  If we breach these contracts and treaties, we will likely start a trade war. The WTO may be a sideshow.  Time to wake up and smell the coffee!

Mr. Jones caps his analysis off with a summary of the Ryan/Brady fictions and mythology: "Theoretically, tax systems should collect revenue efficiently and distort markets as little as possible. But in an age of large-scale market distortion driven in part by the consumption taxes of our foreign competitors, why should American companies like mine be unilaterally disadvantaged because of misplaced fealty to an idealized tax system?"

The notion that "large-scale market distortion" is being driven by VAT systems is unsupported and unsupportable.  Job losses in this country are not being driven by taxes. Jobs move off-shore as companies seek more efficient manufacturing, allowing their products to sell at lower prices. The constant shifting of resources in an economy creates opportunity.  It's not a one-way street.  By lowering the cost to produce, companies open up new markets previously unreachable at the old, higher costs. New jobs are created as a result.  Very often, these jobs pay much more than the low-skill jobs that were displaced.

We have to move away from a fear-based view of the economy.  We must embrace the vibrancy of an economy where capital can flow across borders and where the rules encourage efficiency for everyone's benefits.  Jobs may shift as a result, but that does not mean that we will stop creating jobs for Americans.  We have an enviably strong economy.  If things were so bad, how would that be possible?

Let's hope Congress sees through this smoke screen.

Martin Feldstein Insults Your Intelligence in Defending the Border Adjustment Plan

Martin Feldstein published an Op-Ed in the WSJ this evening entitled "The Illusory Flaws of ‘Border Adjustment’". [If the link doesn't work for you, I suggest you Google the title of the article which should get you in.]  Mr. Feldstein is an esteemed economist, much more recognized that little Gepetto me, but in this case, Mr. Feldstein is way off base.  

Actually, he goes further - he calls you stupid for disagreeing with him:

"Why then do American importers and retailers object to the border-adjustment tax? One reason may be that they do not understand how the rise of the dollar would keep the selling prices of imported goods unchanged. Alternatively, they may not trust the economic analysis, worrying that the dollar would rise only partially or slowly, leaving them worse off. To them, border adjustment looks like an unnecessary risk with no potential upside. But there is a real benefit: The border-adjustment tax would produce enough revenue to make cutting the corporate tax politically feasible." [Emphasis added]

I, personally, do not like to be called stupid in writing.  It is condescending and arrogant. And all the more galling because the author of the insult is wrong.

We hear the insults but rarely if ever do we hear any acknowledgement of the obvious - this tax is going to KILL companies, in particular small businesses.  Kevin Brady was asked the following question yesterday in an interview at CPAC: "I wanted to ask you about the fact that, according to a U.S. Census Report, 97% of importers are small business[es]. Are you concerned that there could be job losses that hurt small businesses due to this tax?"  And Mr. Brady responded:  "No, I don't, because [of] the way we are designing this tax and phasing it in to address those issues." Yup, he's not concerned, and neither is Mr. Feldstein.  He's excited about the $120 Billion raised by the tax, as you will see in reading his article.  As previously related in this space, small businesses imported $643 Billion in 2014.  Multiply that by 20% and you get the full proceeds from the tax.

Transition or no transition, it's a small business tax.  Small business pays the entire bill. Feldstein and Brady are detached from reality.

Feldstein starts by recounting the pablum that the rising dollar (up 25%!) will reduce costs for importers sufficient to make everything balance.  No price increases to you, the consumer.  And if you don't agree with him, as he makes clear above, you just don't understand.  He does, you don't.  

So here's my retort:

FIRST, the direction of the market cannot be predicted with confidence.  Duh.  Feldstein is predicting the direction of the market when he makes a pretty darned specific call that the dollar will rise 25%.  His formula says so, and if you doubt this, you are a worrier.  See above.

We cannot afford to bet our economy on somebody's "hunch".  It is also true that economists have CONCEDED that exchange rates follow a random walk.  This has a name: The Exchange Rate Disconnect Puzzle. It's a thing. Feldstein knows about it.  Why he wants to sell this bill of goods is a question worth asking.  

And to the extent he has the direction of the dollar move right, his claim suggests that the move is "permanent".  And I ask you - what other market move can you name that was "permanent"? Would you bet real money that a shift in the market value of an asset would never reverse, ever? Other than inflation, which is an inapplicable concept in this case, I cannot cite any similar market situation. To suggest, imply, hint or even think that a move like this would last forever is asinine. That's the right word for it.  No apologies to Mr. Feldstein.

SECOND, Feldstein blandly overlooks the calamitous impact of a sudden rise in the U.S. dollar by 25%. No worries about tanking the export market for U.S. companies, and he sniffs at the cost of the BAT-induced reduction in the value of American assets overseas, noting that it is "only" 3% of household net worth.  This is how economists say they don't want to think about the details. Many (most?) of these assets are owned by corporations which may have borrowed against the assets in another currency (dollars?). The sharp loss of capital from this massive number (Trillions of dollars) will not only rock many unsuspecting companies but may trigger a major financial crisis in the Third World where there are a lot of dollar-denominated loans in place. Contagion?  Feldstein doesn't acknowledge the risk.  

And no question about how we're compensated for taking this massive risk.  Oh yeah, all the money they are going to vacuum out of small business importers.  Until we all croak.

THIRD, Feldstein ignores that U.S. companies typically buy in dollars, not foreign-currency. We don't have forex departments and make life simple by matching the buy and sell currencies.  So there is no "automatic" savings. Feldstein points to the oil market for reassurance.  He makes the point that when the dollar rises, oil prices typically fall.  But anyone who watches oil prices knows this phenomenon is not reliable.

In any event, this response (also provided to me by Brady's tax counsel at Ways and Means in December) fails to take into account that oil doesn't care which hole in the ground it comes out of, about 90 million barrels are produced daily and hundreds of millions of barrels are traded in exchanges all over the world every day (spot market and futures).  On the other hand, our products are produced in small quantities, are available from only one source (us), and perhaps shockingly, there is no spot market or futures market for our products.  So you can't hedge.

Feldstein isn't saying so directly, but he wants us to hedge.  His argument has the necessary implication that we must buy futures contracts to capture gains from dollar appreciation (rather than relying on getting lower prices from our factories). Thus, he advocates for a system that forces small businesses to gamble. As a government policy. This is so reckless and delusional it hardly merits a reply.

FOURTH, Feldstein seems to be detached from the reality of how products are made. Every physical product has inputs that are local and other inputs that are imported.  Only pure service businesses have only local costs. Yeah, I know you're thinking of hookers but I am sure economists are thinking of lawyers.  In any event, if you buy a product overseas, some aspect of that product came from elsewhere and would likely rise in price as the dollar rises in price. Local content will actually fall in cost (cheaper hookers, I mean lawyers, in dollar terms). The net of the two effects is what importers like our company will face when the dollar screams upward. I have written about this in the past.  After speaking to many factories, we think our costs will RISE if the dollar goes up by 25%.  Feldstein says everything is going to be fine, trust him, and if we disagree, we just don't understand.

In this case, I am pretty sure I do understand.  It's a darned shame that Feldstein will stoop so low to push the defective idea of his former protege Auerbach and his crony Holtz-Eakin.  His arguments are flimsy and he will lose this argument.

Washington Post Quotes Blogpost about BAT's Negative Impact on Importers in Brady's Own District (Feb. 22, 2017)

Ryan’s tax plan is headed forfailure

By Jennifer Rubin

Opinion

Ryan promises to replace Obamacare 'this year,' but implementation could take longer

For weeks now, House Speaker Paul Ryan (R-Wis.) has struggled to convince his colleagues of the benefits of the border adjustment tax. If his reasons seem unsound and unconservative (Why should the government dictate which suppliers you use?), it’s because he is not being honest about the motivation behind the plan to tax imports. The one and only reason behind the push centers on the massive deficit the rest of the GOP tax plan would create. (Take a fiscally irresponsible tax plan and add in a counterproductive border tax adjustment!) In short, his tax plan needs the infusion of cash that a tax passed on to U.S. consumers would raise.

Libertarian economist Veronique de Rugy blasts Ryan for intellectual dishonesty in claiming that the “United States was at a disadvantage because other countries’ exports are exempted from taxes while U.S. goods aren’t.” This is wrong:

For instance, he claims that Japanese exports are exempt from taxes. No, Japanese products exported to the U.S. are exempt from the Japanese VAT but the Japanese company is still paying U.S. corporate tax on its U.S. profits. And you know what? In that sense, the Japanese export is treated exactly like the U.S. goods sold in the U.S. In other words, the playing field is even! I repeat: Japanese goods in the U.S. are taxed like U.S. goods in the U.S. How about U.S. exports in Japan? Well, it gets hit by the Japanese VAT in Japan and by the Japanese corporate tax but so are Japanese goods sold in Japan. Again, the only disadvantage faced by U.S. companies selling tape recorders abroad comes from the U.S. tax system, which requires that income earned in Japan be taxed by Uncle Sam at 35 percent after benefiting from a tax credit for tax paid in Japan. If the U.S. company decides to keep its Japanese income outside the U.S., the U.S. rate won’t apply.

The plan will raise the cost of consumer goods. (Not even Fed Chairman Janet Yellen buys into the notion that the U.S. dollar will instantly and sufficiently rise in value to offset higher prices.) And it will hurt a whole bunch of businesses that rely on imports, whether they are sold directly to U.S. consumers or, in many cases, incorporated into U.S.-manufactured goods.

De Rugy concludes: “The way to fix the U.S. disadvantage is not to create a new expansive tax that would penalize imports in the U.S. — including imports for the benefit of U.S. domestic companies — and would penalize U.S. consumers. The solution is to reform our corporate-tax rate by lowering the rate and moving to an origin-based territorial-tax regime.” The problem is that such an approach won’t raise sufficient revenue to offset revenue losses from Ryan’s underlying tax plan, raising the question as to whether the tax plan is the real culprit here. (Maybe a smaller tax cut, or one that does not reward upper-income taxpayers at all, would be wiser? Nah, that would rain on the parade of the right wing, which for years has been pining for a huge Ronald Reagan-style tax cut, although our current debt, tax code and economic situation bear no resemblance to the factors Reagan faced in the 1980s.)

This is no small or esoteric policy debate. Without the border adjustment tax, the GOP tax plan will be (rightly) excoriated for blasting an enormous hole in the budget. However, with the border adjustment tax, the Senate and a great many House Republicans will not vote for it.

Retailers have organized against the border adjustment tax. In particular, small businesses — the darling of Democrats and Republicans alike — foresee disaster. The Wall Street Journal recently reported that small businesses “typically have less ability to negotiate better deals with suppliers or push through price increases to customers or spend time and money modeling tax changes. More than 95% of U.S. importers have fewer than 250 employees, according to 2014 U.S. Census data.”

Richard Woldenberg, chief executive of Learning Resources, is marshaling some interesting data to defeat the plan. He told the Journal that “a border-adjusted tax would increase Learning Resources’s tax bill by four- to fivefold, even with a lower corporate rate. That would force his company to raise prices by as much as 15%, which he fears could cause sales to drop by 20% or more.” He pointed out that it is not as though there are domestic suppliers readily available. (“Learning Resources tried in 2013 to find a U.S. molder to produce simple plastic counting toys it could sell at mass-market retailers with a ‘Made in the U.S.A.’ label. Just one firm bid on the job. ‘They gave us a terrible quote,’ Mr. Woldenberg said.”) For this very reason, many of President Trump’s products are made outside the country and imported.

Woldenberg is also amassing some politically potent data. On his website, he writes:

Rep. Kevin Brady [R-Tex.] is a big cheerleader for the BAT as Ryan’s designee and Chair of Ways and Means. He has said publicly on numerous occasions that he will go forward with this provision at all costs. Thus far, despite lots of bad press and organized opposition that will endanger his Republican majority in the House, he has refused to relent.

Notably, Brady’s own district is full of importers. . . . According to my research in a public database, there have been 24,402 import entries associated with zip codes either wholly or partially within Brady’s district over 2015-16.  The total importer count is 2430 in this two-year period, including many individuals (let’s call them “voters”).  They will all have to pay up in Brady’s BAT …

Brady may be in a GOP safe seat, but he is not immune to a primary challenge.

Trump and arrogant lawmakers can swear up and down that protesters in their districts are paid phonies. What they cannot ignore are the legions of small businesses, importers, retailers and consumers who will surely conclude that they’ll be worse off than they are now with the border adjustment tax. It is the sort of issue (tax cuts for the rich! price hikes at Walmart!) that can set off a wave election.

Ryan might persist with the border tax adjustment gimmick, but it likely will mean the end of his tax reform effort. That would be some economic karma if a non-conservative, distortional tax grab knocked the legs out from under a GOP that has decided to discard its fiscally responsible free-market positions.

[557 Comments as of February 24, 2017]

WSJ - Small Businesses Uneasy Over Border Adjustment Tax Plan

The Wall Street Journal profiled Learning Resources and other small businesses likely affected by the Border Adjustment Tax plan, noting in particular the damning fact that 95% of affected importers will be small businesses with less than 250 employees.  Boy, that sounds so smart to me . . . .

See below.

Small Businesses Uneasy Over Border-Adjustment Tax Plan

Owners say they may have to raise prices, lay off workers; exporters expect to benefit

Rick Woldenberg, chairman of Learning Resources, at his office in Vernon Hills, Ill. A proposed border adjustment would hurt the company, which sells toys mostly made in China. Photo: Taylor Glascock for The Wall Street Journal

By Ruth Simon and Richard Rubin
Jan. 29, 2017 12:57 p.m. ET

A proposed overhaul of the U.S. tax code favored by Republicans in the House of Representatives is drawing fire from small-business owners who sell everything from toys to materials used in kitchen cabinets.

Some business owners say they worry that a part of the proposal, known as border adjustment, could force them to raise prices and lay off workers. Others fear it could even put them out of business. The proposal could, however, benefit firms that are exporters or don’t import raw materials or finished products.

Under the plan, imports couldn’t be deducted as a cost of doing business, while exports would be exempted. That could lead to higher tax bills for firms that rely heavily on imports. The proposal is part of a broader tax overhaul that would cut corporate and individual tax rates.

Before his inauguration, then President-elect Donald Trump in a Jan. 13 interview with The Wall Street Journal, criticized the border tax plan as “too complicated,” though he later said the idea was still being discussed. The administration has since moved toward accepting the plan in part by tying it to Mr. Trump’s proposed wall on the U.S.-Mexico border.

“I am expecting disaster if they actually implement this plan,” said Richard Woldenberg, chief executive of Learning Resources Inc. in Vernon Hills, Ill., which employs about 150 people. The company sells rainbow-colored plastic cash registers, kitchen sets and other educational toys, most made in China.

Under a border-adjusted tax, a company that imported $200,000 of foreign made toys, spent $100,000 on domestic costs and sold the toys for $350,000, would only be able to deduct the $100,000 in local costs.

It would then pay taxes—at a proposed lower tax rate of 20%—on $250,000. So its tax bill would be about $50,000.

That same company could currently deduct the costs of imports as well as local expenses, and then pay 35% in taxes on $50,000. That results in a tax bill of about $17,500.

Economists and plan supporters say the dollar will rise to offset the tax change. If that happens, importers would pay less for goods they import, because a stronger dollar would reduce the actual cost of imports, and more in taxes, with their after-tax profits unchanged because of the border adjustment itself.

If the dollar doesn’t rise quickly or high enough, a border-adjusted tax is expected to penalize big retailers and other large corporations reliant on lower-cost foreign production. It could also prove painful for small firms, which typically have less ability to negotiate better deals with suppliers or push through price increases to customers or spend time and money modeling tax changes.

More than 95% of U.S. importers have fewer than 250 employees, according to 2014 U.S. Census data.

A puzzle globe is one of the educational toys made by Learning Resources. Photo: Taylor Glascock for The Wall Street Journal

Many Republican legislators remain committed to the measure. It is expected to generate $1 trillion over a decade, which would help offset both corporate and individual tax-rate cuts. Also, taxing companies based on the location of their sales limits incentives to shift profits and jobs abroad. The plan would let companies write off capital investments immediately and deny a deduction for net interest costs.

Lawmakers aren’t looking to exempt small businesses from the border adjustment, but they are trying to ensure the tax changes, as a whole, benefit smaller firms, said Rep. Tom Reed (R-N.Y.)

“This is a once-in-a-generation opportunity,” said Mr. Reed, a member of the House Ways and Means Committee. “If we don’t take care of everybody, you’re not going to have an opportunity to do it down the road.”

Lawmakers are exploring “safe harbors” for smaller firms where the businesses could have a choice between a simpler system and one that is more complex, he added.

Some small business owners believe they could benefit from the change. Greg Owens, chief executive of Sherrill Manufacturing Inc. based in Sherrill, N.Y., said that his company’s Liberty Tabletop flatware would be more competitive if imports become more expensive while his costs remain the same. That would make it easier for the 35-person company to sell its flatware, now mostly available online, through mainstream retailers and add a lower cost line. “It could put us back on the map,” he said.

But the plan is likely to penalize many other small firms.

“We do not have the cash cushion to absorb this kind of tax,” said Katherine Gold, chief executive of Goldbug Inc., an Aurora, Colo., distributor of children’s shoes and accessories. “It would put us out of business if we can’t pass it on immediately,” added Ms. Gold, who currently has more than 100 employees.

Mr. Woldenberg said his initial calculations show that a border-adjusted tax would increase Learning Resources’s tax bill by four- to fivefold, even with a lower corporate rate. That would force his company to raise prices by as much as 15%, which he fears could cause sales to drop by 20% or more.

Learning Resources tried in 2013 to find a U.S. molder to produce simple plastic counting toys it could sell at mass-market retailers with a “Made in the U.S.A.” label. Just one firm bid on the job. “They gave us a terrible quote,” Mr. Woldenberg said.

A second attempt last year also proved unsuccessful.

Many small companies don’t have the scale or skills to run their own manufacturing operations. “For a company my size, that absolutely is not a realistic option,” said Jennifer Arenson, chief executive of Global Sourcing Connection. Her Riverwoods, Ill, company has 26 employees; it supplies caps, pens, uniforms and other promotional items to Fortune 1000 companies.

Ms. Arenson, who acts as both a direct importer and distributor of other people’s products, said a company of her size couldn’t afford one factory, let alone the 10 she might need to produce the complete line of products her company offers.

Washington Post: Trump-era Tax Reform Could be Coming For Your Toys

The Washington Post profiled our effort to shed light on the terrible Border Adjustment Tax today.  It can be found online at this link, and will be in Sunday's print edition in the Business Section.

My Op-Ed on Breitbart.com

Want to Create U.S. Jobs? Forget the BAT, and Lower Corporate Taxes

by Rick Woldenberg

19 Jan, 2017 19 Jan, 2017

Now that the Republicans are finally in charge of the White House and both houses of Congress, it is time to reform taxes. After years of facing down tax inversions and other tax dodges, Congress now seems intent on sealing the loopholes that allow certain taxpayers to avoid paying their fair share. So what’s wrong with that?

Part of the plan being advanced by House Republicans is something called a Border Adjustment Tax (BAT), and it could kill our company.

Under the BAT, taxes will be assessed only on U.S. consumption, and imports will — unlike other business expenses — no longer be deductible for tax purposes, essentially imposing a massive surcharge on those imports. Some companies’ current tax bills will multiply to more than their actual profits. Some tax cut!

I wonder what we did to deserve this.

Our family business, Learning Resources, Inc., develops educational toys in our two U.S. offices. We design them here; we happen to manufacture them overseas. Though we have looked for ways to make them in the U.S., the cost is prohibitive. We are, in that sense, similar to many other American firms.

Our products are innovative, high quality, safe and priced to sell. We haven’t raised prices in two years. We sell our toys all over the world, shipping from our warehouses in Chicago and in England. We touch millions of children’s lives every year — perhaps yours, too.

And under the BAT, our tax bill will go to 165% of our earnings.

This is a problem. I am starting to lose sleep.

The BAT is supposed to solve tax injustices in foreign countries. Politicians point to rebates that U.S. exporters receive in value-added tax (VAT) countries.

VAT refunds, however, are only refunds of previously paid VAT and aren’t a source of profit or subsidy. Foreign exporters still pay corporate income tax, just like we do. This is not a tax injustice.

Ironically, the BAT compounds the problem by subsidizing U.S. exports. Under the new law, U.S. export revenue will not be taxable. The design of this plan likely violates World Trade Organization (WTO) rules and may result in serious sanctions on the U.S. The speculation is any WTO decision will take years, and by then it will be “too late.” That is, unless other countries choose to retaliate rather than wait for the wheels of justice to turn at the WTO.

Imagine every other country subsidizing exports, too. This is called a trade war, Mr. Smoot and Mr. Hawley. Not the best idea.

Some economists argue that the new law will induce a revaluation of the U.S. dollar, bringing great savings to importers like us. Most U.S. importers have dollar-based costs, so savings from a rising dollar requires renegotiation of existing contracts.

This is no slam dunk. If the economists’ fantasy does not happen, importers will have no choice but to pass on the tax cost to you, the consumer. This is happening in England right now after the dollar rose against the Pound in the wake of Brexit. Rising import costs will hurt the American consumer.

So what is the real tax injustice that must be remedied?

U.S. corporate tax rates are the third highest in the world, behind the United Arab Emirates and Chad. While our company pays 39.6% in Federal taxes as an “S” corp, Irish companies pay only 12.5%.

Can you think of any reason American companies want to move abroad? It might be something besides the weather.

We want to save our business, keep creating jobs and help kids learn. A lower tax bill would help.

Congress needs to rethink its new tax plan and target the real problem — namely, high corporate rates. With the right fix in place, the U.S. economy will accelerate, and growth in the tax base will fill the government’s coffers in time.

Rick Woldenberg is CEO of Learning Resources, an educational toy company based in Vernon Hills, Illinois.  Learning Resources was founded in 1984 and employs 150 people in the U.S. and overseas.  Rick’s blog can be found at www.BorderAdjustmentTax.com.

Steve Forbes Tells it Like It Is - The BAT is Bad Policy

Steve Forbes, perhaps not surprisingly in an article in Forbes Magazine, makes the case that the BAT will lead to higher consumer prices, as well as unfair tax results (where exporters that make big profits are effectively exempt from paying taxes, but actually accumulate losses that can be used to gobble up companies like ours - but luckily we're not for sale!).

Forbes notes:  "Prices for everyday items, such as socks, shoes and household appliances, will go up. So will tech devices like the iPad, not to mention automobiles and trucks. Gasoline? Millions of Americans will pay an additional 30 cents or more per gallon at the pump. Lower-income and struggling middle-class Americans will get hit the hardest."  

In other words, the BAT is a regressive tax because the costs will be passed on to consumers.  I will delve into this issue in a future blogpost, but the point is that the BAT tax will fall on the least able to handle it (it is "regressive" because the highest tax burden falls on those with the lowest income).  It will also disable companies like ours, which I consider to be a pretty high cost.  What have we done wrong?

The loopy argument that this tax proposal will lead to prosperity and growth is dubious, but the price argument is among the most troubling aspect of the lies being told by politicians and economists. 

-     Here is Douglas Holtz-Eakin's pablum:  "According to Douglas Holtz-Eakin, a Republican economist, some of importers’ concerns are overblown, and they aren’t factoring in the benefits they would get from stronger economic growth and the rising dollar. Companies and analysts looking only at what the corporations pay in taxes are analyzing the plan incorrectly, he said. 'Your cost of doing business won’t change,' Mr. Holtz-Eakin said. 'It will consist less of the cost of imports, which will be cheaper, and more in taxes.'”  

-    CNBC reports the conclusion of unnamed economists:  "But economists who support the tax say the policy would lead to a sharp rise in the value of the dollar — anywhere from 20 percent to 25 percent. As a result, retailers' costs will go down so much that it will be a wash to consumers, they say."

-    Rep. Peter Roskam dismisses this as whining by retailers:  "'You move from the stated objections from the retailer community to everybody else,' he said. 'There’s no way to do tax reform in a format that doesn’t run into some objections.'”  [Available on Politico Pro in article called "Roskam defends 'border adjustment' tax-reform plan".]

-     Rep. Kevin Brady from today's The Hill:  "We know that pro-growth tax reform is a major priority for the president-elect. We are eager to work with the incoming Administration to deliver a 21st century tax code that delivers the fairness, economic growth, and international competitiveness that Americans deserve."  In other words, prices aren't going to move.

I will publish an article later today with real world data to substantiate that the BAT will cause prices to rise.  It's not in doubt.  One can question the motives of the folks who are pushing the spin that the BAT will be good for consumers.  

If only we could ask Mr. Smoot or Mr. Hawley what they were thinking, as well . . . .