Monday, May 22, 2017

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.

Friday, May 12, 2017

Chaos in Washington . . . but a Few Thoughts on the BAT Anyway

The repulsive degradation of national leadership in the last few days certainly sapped my energy. Nevertheless, despite the downward spiral of the Trump Presidency and its implications for the prospects of the BAT, we are not out of the woods, and must keep the pressure up.

A few tidbits of news for you:

Ways and Means Hearing Set for Thursday: Kevin Brady and Peter Roskam called hearings for May 18th on tax reform. Let's not do cartwheels yet. This is something like a Soviet show trial. The outcome of the "hearing" is known in advance. Please don't mistake the hearing for an actual interest in dialogue or fact finding. This is about creating a record to justify what they always wanted to do. In any event, Steven Mnuchin tweeted his approval, noting the need to "emphasize economic growth". As previously noted here, the anti-growth aspect of the BAT kills it for the estimable Trump Administration.

House Majority Leader Kevin McCarthy Admits the BAT is not going well. McCarthy actually said it will be "very difficult" to get through. See the video:

Frankly, tax reform seems remote given the controversy paralyzing Washington right now. Let's not forget that health care must come first, then a budget, then tax reform. And the Trump plan imposes ridiculous financial stress on the American economy with skyrocketing fiscal deficits, something this Congress is highly unlikely to approve. Then what? Who knows.

An interesting next shoe to fall is when Congressional Republicans start to turn on Mr. Trump. He may have started this process with the Comey firing. In my book, that all but ends tax reform and with it goes the BAT.

Follow up on Canada: In my last post, I noted that the imposition of the BAT on Canadian imports into the U.S. will generate about half of the expected value of the BAT. Whoa. Please note, however, that the BAT proposal also eliminates tax on all U.S. exports to Canada. With $266 BB in 2016 exports to Canada, the elimination of income tax on those sales will be quite a shot in the arm for U.S. exporters' competitiveness in Canadian markets. Think they'll notice?

To put this in perspective, please remember the hullabaloo over the 20% tariff recently imposed on Canadian softwood-lumber exports to the U.S. That sudden move spurred an immediate series of interactions between the U.S. and Canada, including calls between Justin Trudeau and Trump. And how much was at stake? $1 BB in tariffs on $5 BB in U.S. imports. This absolutely pales in comparison to the shocks that the BAT would impart on both Canadian imports here and U.S. exports into Canada. One billion dollars is just chump change by comparison. Yet the BAT continues to enjoy the support of House Republican leadership. Does not compute. Does not compute at all.

More to follow, no doubt.

Tuesday, May 9, 2017

Peter Navarro's Star Fades but that Doesn't Mean the BAT is Dead

The WSJ notes that Peter Navarro, Trump's far out adviser on trade, has been marginalized in the White House after a power struggle with less heart-of-darkness Administration officials like Gary Cohn. According to the WSJ article, Navarro is now in charge of a staff of two, including himself, and has a 15 minute weekly window to meet with President Trump. Many of his wackiest (read, most dangerous) ideas have been tabled, discredited, abandoned (you get it).

All of this is good because it reduces the likelihood that the White House will somehow turn around and favor the BAT. Navarro was the most vocal of White House officials behind the BAT, and with his star fading away, it seems unlikely that the collection of actual business people in the White House will take the risk of supporting the dangerous and ill-conceived Border Adjustment Tax.

Then again, they do want our money. So it's not over yet.

An interesting way to understand, yet again, how dangerous and unpredictable the BAT would be is to consider the integration of our economy with Canada. That issue gets most of its air play in discussions of NAFTA. However, the indiscriminate BAT does not care about NAFTA. Everything from Canada would be taxed under the BAT. Canada is the U.S.'s number two trading partner, to the tune of $544 BB per year (2016). This is just shy of China, if that gives you a sense of how gigantic the trade flows are. Canada is the third largest exporter to the U.S. ($278 BB) behind China and Mexico. The 20% bill under the BAT for importing from Canada will be a cool $55 BB per year, about half of the net raise expected under the BAT. Think about how well that will fly in the Great North,

Another aspect of this is to consider the on-the-ground impact of this law on Canadians. It may surprise you to learn that 75% of Canadians are estimated to live within 100 miles of the U.S. border. Other estimates suggest as many 90% live by the border. The folks that live near the U.S. are very often involved in business activities with the U.S. Goods (and components) go back and forth across the border, as do services, and many businesses are active on both sides of the border. The scale of this activity is mind-boggling. With so many folks living right up against the border, it can be anticipated that a BAT in the U.S. could devastate the Canadian economy. Much more than a "shock".

If this is true, how could it be in our interest to "restructure" our "broken tax system" to expose the world's leading economy to this risk? We are also the strongest economy. Yes, it's crazy and yes, it's unimaginably irresponsible. The response of economists, where they reassert the theoretical underpinnings of the BAT proposal, is completely unresponsive to this known risk. Theory aside, how do we make such a proposal workable, under any circumstances, when so many people will be instantly whacked? This has dramatic foreign relations implications, and unknown economic and legal consequences. The likelihood of serious and immediate (or preemptive) retaliation also seems very, very high.

I think I read that in "Duh" Magazine.

You can add to that the ripple effects on the U.S. economy from the BAT's impact on Mexico. Trade deficit hawk and notorious paranoid Peter Navarro might assert that it is in our best interest to issue these shock waves. Hence the good news that he is working out of a White House closet these days. Let's hope he stays there.

Frankly, this is a sad, sick joke. The politicians should hang their heads in shame for even proposing it. It's malpractice. But then again, they're politicians. What do you expect???

Sunday, May 7, 2017

Border Adjustment Clips May 7, 2017

National Review: Why the Effort to Push theBorder-Adjustment Tax Further? 5-4-17

Politico: Freedom Caucus crafting tax reform plan 5-4-17

Washington Post: If retail politics doesn’t kill this $1 trillion tax, the Supreme Court should 5-3-17

Quartz: Apple’s amazing cash pile shows the flaw in Donald Trump’s corporate tax cuts 5-3-17

Myrtle Beach Online: Proposed ‘import tax’ would hurt South Carolina 5-3-17

Michigan Radio: Those auto manufacturing jobs are not coming back 5-2-17

Bloomberg: Ways and Means Still Seeking ‘One Voice’ on a Tax Package 5-2-17

American Action Forum: Bernanke and Border Adjustment 5-2-17

Washington Examiner: Arthur Laffer: Trump's tax plan should follow the Reagan model 5-1-17

Washington Examiner: Ryan-linked outside group begins spending on tax reform ads 5-1-17

Naples Daily News: Commentary: Border adjustment tax could harm Florida 4-30-17

Bloomberg: House Tax-Panel Chairman Still Committed to Border-Adjusted Plan 4-30-17

Fox News: Give Trump 130 days: President's tax plan is his biggest test (and biggest opportunity) 4-29-17

Barron’s: The Trump Tax Plan: The Good, Bad, and Dumb 4-29-17

Forbes: Why the Border Adjustment Tax Is Likely To Sneak Back Into Trump’s Plan 4-28-17

Washington Post: House GOP working with White House on tax plan — for now 4-28-17

Global Trade: Trump Tax Plan: No Border Adjustment 4-28-17

Bloomberg: Border Tax Foes Keep Up Pressure Pointing to Impact on States 4-28-17

ExecutiveBiz: Boeing CEO Dennis Muilenburg Backs Tax Reform, ‘Border Adjustment’ Tax 4-28-17

The Monitor: NAFTA likely to live on, but border tax likely dead 4-27-17

Wichita Eagle: White House unveils tax plan that’s broad on goals, short on specifics 4-26-17

Washington Times: Mnuchin pledges ‘biggest tax cut and largest tax reform’ in U.S. history 4-26-17

Vegas Voice: BAT Tax Would Punish Seniors (pg 28) 5-2017

Texas Policy: IMPACT OF A BORDER-ADJUSTMENT TAX ON THE TEXAS INSURANCE MARKET 5-2017

Wednesday, May 3, 2017

Opposition to BAT Still Strong. Anti-growth Argument Gaining Traction.

It is hard to know how to interpret current affairs in Washington. Trump has so scrambled the usual indicators that almost nothing follows logically. Today, we are told that there will be a vote on health care legislation tomorrow. After Rep. Fred Upton came out against the latest version of Obamacare repeal, he suddenly reversed course after he submitted an amendment protecting some folks with pre-existing conditions. Upton's change of heart seems to have tipped the balance, if you believe what you read in the papers.

The vote on Obamacare repeal is both a test of House Republicans being able to get anything done . . . at all, and a vote of questionable significance. One reason it has been hard to corral 216 votes is that House Republicans worry that if the law does not survive in its present form after being rewritten by the Senate, the vote will be a death warrant, particularly for moderates. Voting to disenfranchise 24 million people from health insurance right before a midterm election has to give most Congressmen pause. And if said bill won't become law later, it is nothing more than a "sense of the House" bill, good for election fodder but not much more. Republicans fear creating the conditions for either strong Republican opposition in the primaries, or strong Democratic opposition in the general election, or both.

What a plan.

And after healthcare passes out of the House, they will turn to a full year budget and then taxes.

And the Trump plan, however it gets changed, will need some funding sources. I think it is political suicide, not to mention economic suicide, to even think about huge deficits right now. I like candy as much as the next guy but this makes no sense. Soooo, if they need money to make tax reform "work", the BAT remains an attractive option, particularly if you don't care what happens next.

[Side note: When is a tax cut not a tax cut? When it is revenue-neutral. Don't be fooled by tax reallocation being marketed as a tax "cut". If the revenue is neutral, that means every dollar of tax "reduction" is matched by a like tax increase. Hence, revenue-neutral. This hardly makes sense, and perhaps will explain why so many people are screaming about the BAT (it's the Republicans' tax increase part). The folks who see their tax bills melting away are very eager for the plan, damn the consequences, and the rest of us (including consumers) are screaming bloody murder.]

Putting aside the Senate as firebreak, the BAT has another fatal flaw. It is not part of the Trump plan because the White House (rightly) fears it is a growth suppressant. The premise behind the Trump plan is that we have no fix for our economic problems unless we have sustained higher rates of growth. The BAT was bounced on the rationale that price hikes and economic dislocation will dampen the hoped-for 3%+ growth. The anti-growth aspect of the BAT is a fatal flaw in the economic reasoning of Mr. Trump, and will therefore be rejected.

Who knows whether this will make it more or less difficult to gather votes. Washington is such an odd place today. One would think this idea, particularly if it gets some air time, will weigh on the conscience of Congressmen making decisions on whether or not to support a future tax reform plan. Nevertheless, it is in the background on this debate, and increasingly important in understanding which way the wind is blowing.

And if the growth argument doesn't prevail, Ted Olsen argues in today's Washington Post that there are serious Constitutional issues with the BAT. Darn!

Stay tuned. I know it's like a slow motion train wreck, but none of us can afford to turn away yet. Ryan and Brady have to concede first, something that seems to be far away.