Border Adjustment Tax - Comments and Observations

Investor’s Business Daily: Boeing May Have Negative Tax Bill Under GOP Reform 1-27-17 [Boeing has 59% export revenue, so it won't pay tax under BAT despite being wildly profitable. No wonder they like it!]

USA Today: Trump To Propose 20% Mexican Border Tax To Pay For Wall 1-26-17

Seeking Alpha: The Border Adjustment Tax - A Very Bad Idea Whose Time May Be Rapidly Approaching 1-26-17

Los Angeles Times: Trump's Plan To Tax Mexican Imports Will Create A Whole New Set Of Winners And Losers, Possibly Including Consumers 1-26-17

Hot Air: Spicer: We Can Pay For The Wall With Our 20% Border-Adjustment Tax On Mexican Imports 1-26-17

Politico Pro: Trump Links Tax Reform, Border Wall In Speech 1-26-17

Politico Pro: 'Premature' To Say Border Adjustment Tax Plan Violates WTO Rules 1-26-17

Politico Pro: How A Tax Could Make Mexico Pay For The Wall 1-26-17

Politico Morning Tax: Is That An Endorsement?

CNBC: Trump Appears To Be Inching Closer To Backing GOP's Complex Border Adjustment Tax 1-26-17

The Atlantic: The Trump Administration’s Not-So-Internal Monologue On How To Pay For The Wall 1-26-17

Wall Street Journal: Trump’s Little Mexican War 1-27-17

Reuters: U.S.-Mexico Crisis Deepens As Trump Aide Floats Border Tax Idea 1-27-17

US News: Trump Administration Floats 20 Percent Mexico Tax To Fund Wall 1-26-17

Wall Street Journal: It’s Not Just Mexico: U.S.’s Import Tax Proposal Has Asia Quaking, Too 1-27-17

NPR: Trump's Suggested Import Tax Would Mean Americans Pay For That Wall 1-26-17

Washington Post: Tariff? Border Tax? Why It’s So Hard For Donald Trump To Make Mexico Pay For The Wall. 1-26-17

Washington Examiner: Top Republican Praises Trump's Stance On Border Tax 1-26-17

Washington Examiner: Trump Forces GOP To Rethink Trade Policy 1-27-17

Slate: Trump Is Not Actually Planning To Pay For His Wall With A 20 Percent Tax On Mexican Imports (Yet) 1-26-17

Dallas Morning News: White House Floats Tax On Mexican Imports That Would Force Americans To Pay For Wall 1-26-17

The Economist: The White House Hints That Tax Reform Could Pay For The Border Wall 1-26-17

American Enterprise Institute: Fear The BAT (But Not Too Much) 1-26-17

CNBC: Squawk On The Street 1-26-17

CNBC: Power Lunch 1-26-17

CNBC: Closing Bell 1-26-17

Fox News: Fox & Friends 1-27-17

MSNBC: Morning Joe 1-27-17

Bloomberg: House Tax Chief Pitches Border-Adjusted Plan That Trump Snubbed 1-26-17

Financial Times: CorporateAmerica Split Over Radical Import Tax Plan 1-26-17

National Review: Ending the ‘Made in America Tax’ 1-25-17

Forbes: Trump And House GOP's Business Cash Flow Tax Could Actually Reduce Investment 1-25-17

Politico: Brady Adamant 'Border Adjustability' Will Be Part Of Tax Reform

American Action Forum: Tax Topics: Border-Adjustments And Off-Shoring 1-25-17

Roll Call: Oil Refiners Raise Concerns Over House GOP Tax Plan

Axios: Doubts On Tax Reform?

Politico: Good Morning From Philly: What Republicans Want To Know From Trump -- White House Staff Cheat Sheet -- Ryan Briefs On Legislative Schedule -- Overheard On The Acela: Transpo Chairman Bill Shuster 1-26-17

Taxpayer Protection Alliance: TPA Agrees With Steve Forbes: Congress Should Look at Spending Cuts Instead of Border Adjustment for Tax Reform 1-26-17

Fox Business: Will President Trump's Tax Reform Help Retailers? The Devil Is In The Details 1-25-17

Investor’s Business Daily: Investors Would Pay For Corporate Tax Cut In New GOP Plan 1-25-17

My San Antonio: TPP Is Gone, But ‘Border Tax’ Is Not 1-25-17

CNBC: This Automaker May Benefit From TPP’s Demise. Hint: It’s Not American 1-26-17

Politico: Trump Heads To Philly To Charm Congressional Republicans 1-26-17

Real Clear Markets: Trade Wars In the 21st Century: Faster, Bigger, Worse 1-26-17

Bloomberg: Trump Border Tax Seen As Questionable Catalyst For Dollar Gains 1-26-17

Newsmax: From Ringling Brothers To Cirque Du Trump 1-25-17

CNBC: Tom Barrack On Closing Bell 1-25-17

CNN: Trump Floats 20% Tax On Mexican Imports To Pay For Wall, But Considering Other Options 1-27-17

NY Times: White House Sows Confusion About Plan For A 20% Import Tax 1-26-17

Slate: The GOP’s Deficit Hawks Have Flown Into Trump’s “Wall” 1-26-17

Business Insider: Trump Press Secretary Says The Administration Is Considering A 20% Border Tax On Mexican Imports To Help Pay For The Wall 1-26-17

MarketWatch: White House Says Tax On Imports Would Pay For Mexico Border Wall 1-26-17

Bloomberg: Trump Floats 20 Percent Border Tax As Mexico Feud Deepens 1-26-17

Chicago Tribune: Trump Proposes 20 Percent Tax On Mexican Imports To Pay For Border Wall 1-26-17

Los Angeles Times: Trump Idea To Fund Border Wall With A GOP Tax On Imports Could Raise Prices For Consumers 1-26-17

Politico: How Trump's Wall Could Beckon A Global Trade War 1-27-17

Boston Herald: Atkins: U.S. Taxpayers Ultimately Will Pay Price For Border Wall 1-27-17

New York Magazine: The 20 Percent Tariff On Mexico That Wasn’t 1-26-17

Bloomberg: GOP Tax Plan Will Raise Prices: Former Senate Budget Director 1-25-17

Fox Business: Fred Smith On BAT 1-24-17

Washington Examiner: GOP Tax Writer: 'Severe Consequences' If Congress Scraps Border Adjustment 1-24-17

Morning Consult: Brady Warns of ‘Consequences’ From Blocking Border Adjustment Tax 1-24-17

Reuters: U.S. Republican Ties Lower Business Tax Rate To Border Adjustment 1-24-17

Reuters: U.S. House Tax Chief: Lower Tax Rates Vulnerable Without Border Adjustment 1-24-17

Washington Examiner: Grover Norquist Blesses GOP Tax Plan With Border Adjustment 1-24-17

CNBC: The 'Border Adjustment Tax' Idea Just Gained A Very Powerful Supporter 1-24-17

The Hill: Norquist Open To Border Adjustment In 'Significant' Tax Package 1-24-17

Newsmax: Grover Norquist Backs GOP Plan for Border Adjustment Tax 1-24-17

Washington Times: GOP’s Border Adjustment Tax Divides Conservatives, Pits House Against Trump 1-24-17

CBS News: How A "Border Adjustment Tax" Would Affect Americans 1-25-17

MarketWatch: How A Republican Border Tax Proposal Could Boost U.S. Oil Production And Prices 1-24-17

Financial Times: US Tax Policy Chief Kevin Brady Vows To Push On With Import Levy 1-24-17

CW San Diego: Rep. Scott Peters States Opposition To Trump’s ‘Border Tax Adjustment’ 1-24-17

The Hill: The US Must Avoid This Untested Approach To International Taxes 1-24-17

ICTSD: Proposed Border Tax Adjustments Risk Violating WTO Rules 1-24-17

Forbes: Paul Ryan And Kevin Brady Need To Drop The Cash Flow Tax 1-24-17

Newsmax: Hugh Hewitt: Dems 'Digging Their Own Graves' Fighting Trump 1-24-17

Retail Dive: Trump Vows 'Very Major' Border Tax If Manufacturing Moves Abroad 1-24-17

Washington Post: Lawrence Summers: It’s Time For Business Leaders To Wake Up About Trump 1-24-17

US Consumer Coalition: ICYMI: What is a Border Adjustment? 1-24-17

ValueWalk: BoA: Border Taxes Will Not Have A Negative Impact On Trade 1-24-17

CNBC: John Harwood On Kevin Brady And Border Adjustability 1-24-17

PBS: Hugh Hewitt On Border Adjustment Tax 1-24-17

CNBC: Squawk Box Discussion Of Border Tax 1-24-17

Fox Business: The Intelligence Report With Trish Regan 1-24-17

The Hill: GOP Lawmakers Set For Packed Schedule At Philly Retreat 1-25-17

CNBC: One Industry Is Holding North America Together, No Matter What Happens With Trump 1-24-17

CNBC: Disrupting Global Trade Will Hurt America's Economy, Former US Diplomat Says 1-24-17

Washington Post: Trump Is Going After Republican Orthodoxy. How Will Paul Ryan Adapt? 1-24-17

Politico: 5 Things To Watch At The Trump-Hill GOP Confab In Philly 1-25-17

BBC: Will Donald Trump Mean The End Of Global Trade? 1-25-17

Milwaukee Journal Sentinel: Trump And The Scrambled Politics Of Trade 1-24-17

Tuesday, February 7, 2017

Border Adjustment Tax Clips (Lots of Them) 2-6-17

Monday, February 6, 2017

What Kind of Jobs Will be Left after the Border Adjustment Tax is Implemented?

If Kevin Brady gets his way and we must endure the noxious Border Adjustment Tax, what will happen? When the Brady vision becomes our life, will you and your relatives be able to get good jobs?

I think it's fair to say that not every American is qualified for a high tech job. Just think about how easily you or your family members can fix your PC, deal with Comcast, adapt to the latest trend in social media. Is it easy? And none of that qualifies you for a tech job.

Retail jobs are going to be laid to waste by the BAT. One in four jobs in the U.S. is in Retail according to the National Retail Federation. Those jobs are open to all Americans and are a gateway to the Middle Class. Given the dramatic negative impact of the BAT on Retail in this country, and the weakness across Retail generally, it is not a far throw to expect many of those jobs to go away. Retailers also have an incentive to automate to save labor costs. It's a matter of survival, and besides, they face devastating competitive pressures. Consider this novel Amazon.com store:

There appears to be one person working in this store, making sandwiches.

And here's another store in San Francisco, a coffee shop, with no employees:

There actually is a guy there to make sure the robot doesn't break. I suppose that counts. As the WSJ puts it to the robot attendant, how does it feel to work for a robot?

Good times.

And then there is the bounty of manufacturing jobs that Brady asserts he will bring back. And what are those jobs, exactly? The poster child for these jobs is car manufacturing. Perhaps the politicians and economists have Henry Ford's assembly lines in mind but that's not realistic today. Again, a hyper-competitive market, several recessions and the march of technology have made manufacturing highly automated and efficient, and as a result, shop floor jobs are very technical and hard to get.

Consider this video of a Mercedes-Benz A Class assembly line. It's more than 12 minutes long and pretty ,mesmerizing. It's fun to watch and displays cool technology. Of course, the first human to appear on the assembly line is at the 7:09 point. Don't worry, a human snaps the Mercedes logo onto the car. That job can't be automated for some reason.

If we realistically assess the skills and educational background of the retail workers who will be fired as a result of industry weakness compounded by a terrible tax law, how likely is it that they will find work in the manufacturing sector? Will manufacturers for some reason go backwards in time and create lots of labor intensive processes to employ these folks? Or will they have to (HAVE TO) remain competitive on a cost basis, and instead, build factories that look like the Mercedes-Benz factory above? I know what I think.

Perhaps we should ask Mr. Brady. No doubt he'll become a job creator himself. As a starting point, I hope he already needs more people to answer the phones . . . . if you catch my drift.

Sunday, February 5, 2017

Border Adjustment Tax - The Tax That's Set After the Year is Over

Business folks like certainty. Actually, they not only crave certainty and predictability, but the very existence of their businesses depend on it. Businesses need to finance their operations, which requires certainty to attract capital. Businesses need predictability to attract talent with the prospect of financial growth and wealth building. The decision to invest also mandates a clear vision of the future.

That's why business is called investing, not gambling. Business was never meant to be a game of chance.

However, under the BAT, business becomes a game of chance. Let's examine the five elements in your business' results that will affect your BAT taxes:

1. Net Taxable Income or "Economic Profit": This term is well-understood by accountants and business people alike. What profit will your company make in a period, such as a year? Many businesses rely on budgets or plans to predict profits, and spend according to the plan. Obviously, these plans are also used with lenders to attract financing. Although many decisions are rolled up in this line, it represents the difference between revenue and expense (including amortization of CapEx based on the then current law), by and large. A basic concept understood by all.

2. Net Interest Expense. This is an add-back to Net Taxable Income under the BAT. This number can be projected for most businesses.

3. Domestic CapEx: Capital Expenditures are generally a controlled and predictable (planned) expense. A predictable add-back.

4. Imported COGS: This sum cannot predicted precisely but will trace revenue trends pretty closely in most businesses. Revenue, however, is NOT that easily predicted. Many businesses find revenue the most difficult line item to predict in large part because they don't control it. Customers control it. In any event, each dollar of imported COGS will add $0.25 in additional tax, so each dollar stings. Since customers dictate sales, the more you sell, the more you owe - whether or not you actually make an economic profit. Unpredictable effects.

5. Export Sales Deduction: Again, customers control sales, so export sales can swing wildly from plan depending the arbitrary timing of sales. Thus, tax relief from export sales depends entirely on timing, most likely not in your control. Unpredictable.

Today's planning processes involve certainty because we only owe a percentage of Net Taxable Income. It will not rise above 39.6% for the Federal piece. So no matter what falls to the bottom line, you can easily predict and prepare to pay your taxes. They will never exceed a certain percent of income and will never exceed income. Thus, you are always assured of the ability to pay this most critical bill.

Under the BAT, you have no such assurance. The factors that drive our tax bill up to 165% based on 2016 results will generate a different set of numbers for a different company with the exact same revenue, profit and import percentage. The "rate" (or size of tax invoice) is not knowable until after the year is done. Even if you are raising prices in the hope of generating enough cash to fund the bill, you will never know if you've raised enough until AFTER the time period to raise the money HAS ELAPSED.

Ugh.

Let me illustrate how this could happen.

Consider two companies, with the following economic attributes in common. I am going to simplify the illustration by ignoring the interest rate and CapEx effects (deeming them immaterial).

Company A and Company B generate the following results:

Revenue $25,000,000
COGS (100% imported) $15,000,000
Net Taxable Income $ 2,500,000
Pre-BAT Fed. Tax Rate 39.6%
Post-BAT Fed Tax Rate 25%

The only difference is that Company A exports 15% of revenue and Company B exports 60% of revenue. These numbers can swing wildly at the end of the year, of course.

Our fearless leaders, Paul Ryan and Kevin Brady, intone that export jobs are better than import jobs. I have no idea why this is, but presumably, that point of view would favor Company B, the larger exporter. However, please note that otherwise, these companies are identical. They both make all of their products overseas, and presumably both stock in this country for redistribution. One company found a larger market outside the U.S., the other serves the U.S. more than other countries, perhaps because of its product category.

The Federal Tax bill for the two companies vary wildly:

Company A

Net Taxable Income $ 2,500,000
Add back COGS $15,000,000
Deduct Export Sales ($ 3,750,000)
Adjusted Tax Base (sum) $13,375,000
Federal Tax Bill (25%) $ 3,437,500 (137.5%)

Company B

Net Taxable Income $ 2,500,000
Add back COGS $15,000,000
Deduct Export Sales ($15,000,000)
Adjusted Tax Base (sum) $ 2,500,000
Federal Tax Bill (25%) $ 625,000 (25%)

This, apparently, is the new concept of "tax equity".

And if you are employed by Company B, you keep your job and get a bonus. Good year!

And if you work for Company A, start looking for a job. Too bad most jobs are being filled by robots now . . . .

Thursday, February 2, 2017

Economists' Fantastic Vision, or Shallow Thinking and Analysis

Visionary economists Alan Auerbach and Douglas Holtz-Eakin ASSURE us that we need not worry, little darlings, because when the Border Adjustment Tax becomes law, the dollar will immediately skyrocket by 25% and our costs will plunge sufficiently to pay our enormous new tax bills. Hence, presto chango, no prices will rise and no American company will be out a penny. Okay, screw companies in other countries, but no Americans will suffer.

The theory makes no mention of pigs learning to fly but I think it's also assumed.

Some people, like me in this space, have openly scorned this fantastic vision, both for the low likelihood that it will actually come true, and for the "wisdom" of basing a new Federal tax regime on what amounts to a speculation. Who on Earth bets a tax system on somebody's stupid guess?

Kevin Brady and Paul Ryan, by all appearances.

Anyhow, I happen to be at the Nuremberg Toy Fair right now and have asked a few vendors to share a little intel. I asked them to break down their revenue dollars into two parts: (a) local content plus profit, and (b) imported content. Local content is largely labor in most cases. Vendors in some countries are able to buy some locally processed content (such as plastic stock), and vendors in other countries are largely dependent on foreign supply chains for high quality inputs. Item (a) is denominated in local currency and would float down in dollar-based cost as the dollar rises. Item (b) would float up in dollar-based cost as the dollar rises. Thus, the sum of these effects is the actual cost change experienced by one of vendors as the dollar rises.

Our vendors cite a range of 30% - 60% for imported or foreign content (i.e., oil, plastic, paper, etc.).

Using the projected 25% Federal tax rate for "S" Corps and assuming a 25% increase in the value of the dollar (as predicted by Frick and Frack), please consider the following examples per dollar of vendor cost:

Vendor with 30% foreign content:

Local content: $0.70/1.25 = $0.56

Foreign content $0.30 x 1.25 = $0.375

Total new cost $0.56 + $0,375 = $0,935 (down 6.5%)

Vendor with 60% foreign content:

Local content $.0.40/1.25 = $0.32

Foreign content $0.60 x 1.25 = $0.75

Total new cost $0.32 + $0.75 + $1.07 (up by 7%)

The average is no savings.

You can make up your own examples to see a further range of outcomes. The only scenario Auerback and Holtz-Eakin seem to consider is where all content is local. This would even include oil, gasoline, you name it. And if EVERYTHING that goes into the product has nary a direct or indirect trace of foreign content, yessiree, the cost for our vendors goes down 25%. Okay but that is never going to be the case. So what then?

I have previously disclosed that I must recover 16-19% of my COGS (depending on the assumptions made about exports after BAT and the promised sharp rise in the dollar) to net out the same cash flow after BAT as the cash flow under current law. I have also disclosed several different reasons, including our historical achievements through various business cycles, to be skeptical that anything near 16-19% can be achieved. Frankly, we think 16-19% is a (bad) joke.

So this analysis suggests YET ANOTHER reason to doubt Frick and Frack. The cost of foreign content in our vendors' supply chains will rise with the dollar and will negate the cost reductions experienced in the local content. They are basically offsets.

Add the fantasy of exchange rate-driven cost savings to the list of BAT untruths. You can decide if the people telling the untruths just don't know what they're saying, are mistaken, can't do math, have never run a business . . . or something worse. None of the choices make feel good about the planning and administration of this country. In any way, shape or form.

Greed-Motivated and Self-Interested Group of 25+ Exporters Stand Up to Defend Border Adjustment Tax.

A largely unspecified group of 25+ greedy large companies formed a coalition of the willing to stand up for reducing their taxes to zero while hammering 182,000+ small business importers to pay for their tax break. The innocuous-sounding coalition, the American Made Coalition (www.AmericanMadeCoaltion.org) does NOT list its members on its website or Facebook page (at this point) and its press release issued today makes no reference to its members by name..I guess they are standing tall together in the name of self-interest, but behind an invisibility cloak.

According to the WSJ, the coalition includes Dow Chemical, Lockheed Martin Co., GE and Pfizer Co. It also may include Raytheon and United Technologies.

Oh, pity these poor companies! Get out your hankies, here's the awful news. They need HELP, and small businesses must be prepared to go bankrupt to rescue them:

- Dow Chemical's effective tax rate ranged from 21.62%-29.22% over the past three years.

You can get the same info for the other companies at this site. (PFE 22.2-27.4%, LMT 28.23-31.27%, GE (see below), RTN (26.3-29.31%, UTX 25.48-32.64%).

- 2-27-12 "Over Last 10 Year s, General Electric’s Effective Tax Rate Was 2.3 Percent" See also this link. GE apparently paid no taxes in 2014.

By contrast, our company Learning Resources, a 150-person small business importer, has paid 39.6% of worldwide income in Federal Taxes (plus another 4% State tax) for years without interruption and would see its tax rate balloon to 165% of earnings under the Brady Plan.

ONE-HUNDRED-AND-SIXTY-FIVE PERCENT OF EARNINGS. I bet the new coalition is feeling better already.

So I really feel sorry for this list of self-interested and greedy multinational monolithic corporations. They are sitting on piles of cash and would very much like to DUPE you into supporting a scheme to let them skate by tax-free . . . forever. Kevin Brady and Paul Ryan want it for them, and to heck with the rest of us.

Small businesses imported $643 Billion in 2014. Most small businesses are "S" Corps, so let's assume a 22.5% tax rate under the Border Adjustment Tax proposal (average of 20% for "C" Corps and 25% for "S" Corps under the Brady Plan). The small business importers are therefore due to pay 22.5% x $643 billion. That's $144.7 Billion in import taxes. Yowza.

Pathetic. These monster companies should be ashamed of their avarice and anti-community behavior. I hope you can see through it. It's transparent and shameless.

Wednesday, February 1, 2017

Pressure Mounts on House Republicans as Americans for Affordable Products Forms to Stop Border Adjustment Tax

On a day when Senator Orrin Hatch noted concerns over the impact of the Brady Plan's Border Adjustment Tax provision in a speech at the U.S. Chamber of Commerce, and acknowledged the serious concerns of several Senators over the plan, a new coalition formed in opposition to the Border Adjustment Tax plan. The new coalition, named Americans for Affordable Products (www.KeepAmericaAffordable.com) [updated link] includes 120 organizations and trade associations, including our company Learning Resources, Inc.

The Mission of this organization says it all:

"The Americans for Affordable Products is a coalition of job creators, entrepreneurs, and business leaders united against higher prices on everyday necessities. We oppose any Border Adjustment Tax (BAT) because it will increase the cost of clothing, food, medicine, gas, and other essential items that Americans rely on. Consumers shouldn’t bear the burden of this new tax while some corporations get a tax break. We fight for consumers by protecting their pocketbooks and ensuring access to affordable everyday products. We support comprehensive tax reform and encourage Congress to implement policies that helps businesses of all sizes, ensures the protection and creation of jobs, and promotes prosperity for all Americans."

Notwithstanding the overwhelming cries of protests from across the economy, and the documented fact that small businesses are squarely in the bullseye of this terrible proposed law, Chairman Kevin Brady remains "very adamant" about proceeding on this provision according to Hatch. He wants your money - and doesn't care about the jobs he will be callously endangering..

Brady is not listening to us or to you. The new coalition is going to amp up the pressure, but you must also share your voice. Tweet out this blog and call your Senator and Congressman to protest. Everyone needs to hear from us - or Brady will launch his inflation firestorm on your family.