Saturday, January 21, 2017

A Tax Reallocation is Not a Tax Cut and Will Not Stimulate the Economy

The "tax neutral" Brady Plan tax reform package includes a term, the Border Adjustment Tax, which is purportedly worth $1.2 Trillion over ten years.  The folks who are bringing this wonder to you claim that the plan will "fix" our defective tax system, address "tax injustices" and stimulate growth.

Let's unpack this, shall we?

Does the Brady Plan fix the defective tax system?  I have pointed out that the United States corporate tax rate is FAR higher than comparable tax rates in other countries (except the U.A.E. and Chad). This is the fundamental issue in our corporate tax system and explains the attraction of tax jurisdiction inversions.  The new lower corporate rates, on their face, would seem to address this problem, but under the plan, some folks will pay nothing and others will get slammed in an unprecedented way.  This may not constitute actually "fixing" the defects in the corporate tax system. It seems to create new defects that will be fatal to many.

 Does the Brady Plan address "tax injustices"?  I have previously shown the math, again and again, that proves that there are NO tax injustices implicit in VAT systems. Consequently, we have no reason to add an ersatz VAT system to address the fact that other countries have VATs. We should thank Congress for not imposing a VAT so far, despite the foolishness of other countries in doing so.

I want to remind you that the United States has been a signatory to GATT since 1947.  We are protected against "tax injustices" under this agreement.  If there were actual tax injustices, whatever that is, we have the means and resources to address them, legal, procedural and practical.  This is a basic function of our federal government.  It is ridiculous to contend that House Republicans "discovered" some sort of tax injustice that, while entirely out in the open, no one knew about for 70 years.  Common sense and a reasoned understanding of the workings of the world informs that it could not be true.  Let's just say that Ryan and Brady are "mistaken".

So what gives?

They want the money to pay for the rest of the plan.  It's a funding mechanism, not a principled attack on a common enemy.  That's the reality and that's why they will defend it up and down the line.

And now to the payoff question . . . .

 Will the Brady Plan stimulate the economy?  I rather doubt it, and believe the math backs me up. The Brady Plan is "revenue neutral".  This means that the tax revenues don't change.  Hence, if some people are going to pay less, other people are paying more. In this case, a lot more.

[It is worth noting that this concept of "tax neutrality" is somewhat simple-minded, in that it posits that the folks with much higher tax bills will continue to generate and pay them.  The Brady Plan creates a HUGE incentive to reshape your business to avoid the new taxes. More manufacturing jobs in this country is only one possible outcome. I have previously written about how to take taxes down to zero by buying tax losses. The massive effective tax rates on importers will lead to rampant tax avoidance, and I assume that tax revenues under the Brady Plan will therefore disappoint.]

Under this "tax neutral" plan, no additional money is being put into the economy.  I think a basic concept of supply side economics is that putting more cash in the hands of capital allocators (us) leads to stronger growth.  This plan does NOT involve more money in the hands of the public.  It shifts money from certain pockets in the public (Group A taxpayers, including our company) to the pockets of other taxpayers in the public (Group B taxpayers).  This is a reallocation of tax revenues, a shifting, but not a tax reduction.

Should we care?  Yes, I think so.  An interesting short article from 2008 (Joseph Isenbergh, "The Tax Mirage") makes clear that tax payments are only current payments against public spending.  National debt represents the cumulative difference between tax revenues and Federal spending, and thus, represents a transfer of burden from today's taxpayers to tomorrow's.  In fact, only "Real taxes" matter.  "Real taxes" are federal spending as a percentage of GDP, or in other words, the burden of government as borne by the public.  Our taxes are just current payments against that bill.  The Real taxes record was set in 1945 (19.79%), nearly reached again in 2000 (19.69%) and has been steadily rising back to that level today (from a recession low of 14.45% in 2010 to 18.02% in 2015).

In other words, the Brady Plan is a head fake.  It doesn't address the real problem, spending, and kicks the can down the road by pretending to fix how we fund ourselves.  The Brady plan is complex and goes into uncharted territory, and has been labeled "bold" to put you off the scent. In fact, it's reckless, and it's feckless, too.  As Martin Feldstein himself admits, " . . . there is good reason to believe the deadweight loss of increased tax revenue is likely in many cases to be as large or larger than the direct revenue cost itself.  A dollar of government outlays may have a total cost, including the deadweight loss (or marginal excess burden) that exceeds two dollars."  Feldstein defines "deadweight loss" as "resource misallocation that we economists think of as the true cost of raising taxes."

Whoa.  The implication is that a plan that shifts burden from one set of taxpayers to another, but does not cut spending, does not relieve high costs, may itself create high costs and delivers low value. This is a losing proposition, and the economists who proposed it know it.  So why are they pushing it?

They want the money.

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Friday, January 20, 2017

You Know, It's Not Just Me . . . .

I want to be clear.  In setting out the case against the Border Adjustment Tax proposal in terms of our company, I am not arguing that the law should change to protect me or our company.  I am not trying to make you feel sorry for me, for our company. for our employees or for our customers.

 Rather, I think you should be worried about your standard of living, the prices you pay for goods and services, the availability of products you depend on, and your ability and your family members' ability to get a good job.  Our company stands as an example of the carnage to come. We are but a convenient example. I just happen to know a whole lot about this particular example, which makes it easier for me to explain it to you with insight and accuracy.

 In fact, the number of companies affected by this proposed law is practically uncountable, at least by me. The industries likely affected goes far beyond the obvious examples that may pop immediately into your head.  Sure, toys and apparel, those are obvious examples. Retailers, too (and they are hardly in the strongest financial condition these days).  But other industries will be affected.  Automobiles have a lot of foreign content, both parts sourced from outside the U.S. as well as inputs in components sourced from domestic as well as foreign suppliers. Consider this list of top ten U.S. imports:
  1. Electronic equipment: US$332.9 billion (14.4% of total US imports)
  2. Machines, engines, pumps: $329.3 billion (14.3%)
  3. Vehicles: $283.8 billion (12.3%)
  4. Oil: $201.2 billion (8.7%)
  5. Pharmaceuticals: $86.1 billion (3.7%)
  6. Medical, technical equipment: $78.3 billion (3.4%)
  7. Furniture, lighting, signs: $61.2 billion (2.6%)
  8. Gems, precious metals: $60.2 billion (2.6%)
  9. Organic chemicals: $52.1 billion (2.3%)
  10. Plastics: $50.2 billion (2.2%)
Ummm, can you see this affecting you now?  Electronic equipment (TVs, stereos, phones), machines (the equipment used in U.S. factories), cars (forget that cheap Prius), oil (speaks for itself), furniture (no more bargains at the local furniture store), gems (weddings just got more expensive - there are no American diamond mines), plastics (do you ever use anything made out of plastic?).

There are no banana plantations in the U.S.  Bordeaux wine, Corona beer and Scotch whiskey aren't made here.  A lot of hardwood comes from Canada.  We import fruit and nuts by the boatload.  Marble comes from overseas.  Footwear is from China (Nike makes a huge percentage of its products overseas).  Medical technology equipment and lab supply equipment comes from Germany, Japan and many other Western countries.  Metals, including aluminum, plus rare metals and key elements needed in high tech manufacturing come from elsewhere.  Get it yet?  The United States is part of an integrated, global supply chain.

In fact, global supply chains are not only part of our daily lives, but they are also a deterrent to war.  You have to think twice about bombing your good supplier.  Mutual dependence on international trade makes it very costly to unsheathe your sword.  In other words, we enhance our national security by trading with many partners and by helping them build wealth and create jobs. Nothing and nobody exists in a vacuum.

And do you think Learning Resources is the only U.S. small business??  According to U.S. Census data, there are 5.73 million employer firms in the United States, but only 99.7% are considered "small businesses" under Federal standards.  If you take into account the 23 million non employer businesses in the U.S., 97.9% of all businesses employ less than 20 employees.

I think it is critical to evaluate the Border Adjustment Tax in light of facts, not supposition or surmise.  Our company, Learning Resources, is not a rounding error. The self-justifying economic theory undergirding the BAT will be cold comfort if any of our employees lose their jobs to fund excessive Federal taxes. Their mortgages will go unpaid, their pension plans will go unfunded, their college savings will dry up and blow away.  This matters a great deal to them, to their families and TO ME. Smug macro theories hardly make these effects meaningless, and my opposition is certainly not about my personal well-being.  

We are in this together. This is our home and our Federal tax system is a critical means of funding the benefits we enjoy in this society.  Let's not minimize or marginalize these issues. If we gloss over these problems, somebody will pay the price.  I know I will among them. And I feel confident you will join me.  

Let's not go down that path.
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Border Adjustment Tax News Clips 1-20-17

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Thursday, January 19, 2017

Border Adjustment Tax News Clips 1-19-17

As noted, some links may not be accessible without a subscription.
  • Politico, Treasury Weighs In & Elsewhere in Wonkville, 1/19/2017

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My Op-Ed on Breitbart.com

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



by Rick Woldenberg


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.
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Wednesday, January 18, 2017

Kevin Brady is WRONG - Twice - About VAT and Border Adjustment Taxes

Rep. Kevin Brady continued his misinformation campaign today with dueling Ways and Means Committee Press Releases contending that we Americans are subject to foreign tax injustices, and asserting that he is here to save us.

 PLEASE BE ON ALERT when Congress screams that we are all in danger, and that they are going to save us.  This usually means they are running for reelection, not that you are facing any real peril.  

 In one press release, Mr. Brady informs us that the United States is among the very few countries not assessing a "border adjustment tax".  To make the point, he includes a map and notes that we have the company of "North Korea, Cuba, Syria, Iraq, and Afghanistan".  Are you sold yet?  Mr. Brady then misleads with the following:

 "So, if a product is made in America, our nation’s antiquated tax code forces U.S. businesses to pay a “Made in America” export tax when that product is sold abroad. Not only does this increase the price of American-made products relative to those made in other countries, it serves as a direct incentive for businesses to move jobs, operations, and investments outside the United States."

 This is flat out WRONG.  In the United States, we do not have a value-added tax.  That is nothing to cry about.  A VAT makes everything more expensive, and also pushes tax expense onto the poor unfairly.  We enjoy a higher standard of living because we don't have a VAT.  The fact that those other countries don't have a VAT isn't evidence that our system is dysfunctional.  Look around you - does this country remind you of North Korea or Afghanistan?

 We do have a corporate income tax, and that's what Mr. Brady seems to be calling an "export tax". It couldn't be anything else because there is no export tax in our country, period. Did you know our corporate income tax is an "export tax"?  I didn't.  In fact, as I have covered several times here, U.S. Federal corporate tax rates are the third highest in the world, behind the U.A.E. and Chad.  Other countries, like China, the U.K., Canada, Ireland, you name it, ALSO apply corporate income taxes, but their rates are much lower than ours.  So if Mr. Brady is referring to the fact that we have a corporate income tax, that is not a penalty on our manufacturers because everyone pays one.

 If Mr. Brady is admitting that our corporate rates are uncompetitive, he found a funny way to express himself. That is, however, the real problem.  He goes on to assert something puzzling:  "America’s major international competitors stopped taxing their own exports a long time ago – and for good reason."  If he is saying they don't have corporate income taxes, he's wrong (or worse).  If he is referring to VAT border adjustments, see below.  Also wrong.

 Not content to leave it at that, Brady then released another press release heralding his words on CNBC.  In this interview, he repeats the tall tale that VAT is somehow an export subsidy.  [He does not explain how this is possible under the WTO rules we agreed to.  That would be interesting.]  He said:

 “Because we know what our competitors do. We know China, Europe, Mexico, Canada, others all border adjust their taxes. We don’t. But, we’re about the only country left that doesn’t, of major size. As a result, today, Chinese steel has a tax advantage over American steel. Mexican beef and autos has an advantage over American beef and autos. Foreign oil over U.S. oil. That can’t continue. This border adjustable tax is a very simple tax, but it’s powerful in the way it works.”

 The math proves Brady WRONG.  [I have also proven that the BAT is an illegal subsidy on U.S. exports, which will trigger retaliation.]

A - Domestic manufacturer
B - Reseller who exports a product purchased in the local market.
C - Foreign manufacturer
D - Foreign buyer

 VAT Zone Domestic Item Export Transaction (20% VAT):

 A sells to B for a price of $20 plus $4 VAT
A keeps $20 on which he pays corporate income tax on his profits.
A remits $4 in VAT (received from B) to the government. 

 B sells (exports) to D for $40.  D does NOT pay VAT as a foreign buyer.
B keeps the $40, and pays corporate income tax on his profits ($40 - $20 - other costs)
B receives a $4 rebate of VAT previously paid to A. The government pays the rebate. B nets out at zero in VAT, as does A, as does the government.

 The rebate paid to B is the so-called "export rebate" that Brady is complaining about.

 VAT Zone Foreign-sourced Item Export Transaction (20% VAT):

 C sells to B for a price of $20. Put differently, B imports from C for a price of $20.
C keeps $20 and pays corporate income tax in his home country on his profits.
B remits $4 in VAT to the government. 

 B sells (exports) to D for $40.  D does NOT pay VAT as a foreign buyer.
B keeps the $40, and pays corporate income tax on his profits ($40 - $20 - other costs)
B receives a $4 rebate of VAT previously paid to the government.  B nets out at zero in VAT, as does the government.

 As you can see, the two scenarios are the SAME.  There is NO tax injustice done to the domestic manufacturer, the foreign manufacturer, the reseller or the foreign buyer..

 Brady goes on to drop one more whopper:  "We’re working with importers, for example, to design the transition on border adjustability, to make sure we’re accommodating their concerns."    Ummm, he hardly seems to be on a listening tour . . . .

 It does NOT make sense that we have been taxed this way since 1913 and been a signatory to the WTO General Agreement on Tariffs and Trade since 1947 but it was only Kevin Brady who figured out that VAT is a subsidy other countries pay to their manufacturers to gain a trade advantage.  It also doesn't make sense that this has been going on for years, but we enjoy the highest standard of living in the world, have the strongest currency and economy, and are generally the richest nation on Earth.  So how can anyone contend that we have done this with an arm tied behind our backs?

 That SIMPLY is not true, and Kevin Brady needs to put his math where his mouth is.  It's easy to go on TV and spout off. Next time, Mr. Brady, bring your white board and educate us on the numbers.  We already know our geography, so you can skip the map. SHOW US YOUR NUMBERS.  

 Put up, or shut up.
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Border Adjustment Clips (1-18-17)

As previously, some of these links may be closed to you because of subscriptions.

Ways and Means Committee Blog:  To Compete and Win Worldwide, We Must End the “Made in America” Export Tax

Other Articles:

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