I spent most of Tuesday morning watching the hearing put on by the House Ways and Means Committee on the Border-Adjustment Tax (BAT) proposal. As I mentioned Monday, the BAT proposal is the main obstacle to uniting the conservative and free-market movement on tax reform. But what struck me was that it is unclear that a tax-reform plan that includes a BAT could even get out of the Ways and Means Committee.
What a counterproductive distraction. There isn’t the support necessary for the BAT to pass it — but the House Leadership seems unwilling to look at alternatives. Instead, they had a hearing where Representative Devin Nunes peddled the good old “Made in America Tax” argument about the unfair treatment of U.S. companies due to other countries’ tax codes. I am sure Nunes learned about this reading the Ways and Means memo that I mentioned yesterday. Unless, that is, he learned about it reading former Bush White House CEA director Larry Lindsey’s testimony. Lindsey wrote in his testimony:
Under the current system, when we produce something and ship it to Germany, we tax its production here, and the Germans tax its sale in Germany. Alternatively, when something is produced in Germany and shipped here, Germany rebates a portion of the tax on its production, and we impose no tax on its sale in America. Our exports are taxed in both countries, while their exports are taxed in neither.
“While their exports are taxed in neither”? You’ve got to be kidding me. I have corrected him before but I feel I must do it again: Actually, Mr. Lindsey, the German exports are taxed in Germany with a corporate-income tax. That’s right, the Germans have a corporate-income tax like we do. Their Value Added Tax is rebated when the German goods are shipped to the U.S. But you know what? U.S. goods don’t need to have their VAT rebated because the U.S. doesn’t have a VAT. In other words, there is no Made in America Tax due to other countries’ tax codes — despite what some Republicans like to say and Larry Lindsey likes to repeat.
In fact, there is a level playing field in term of tax treatment. A U.S. good competing in Germany with a German good is taxed at the corporate level in the U.S. and at the consumption level in Germany, while the German good is taxed at the corporate and consumption levels in Germany. The German good sold in the U.S. is taxed at the corporate level in Germany, and the U.S. good sold in the U.S. is also only taxed at the corporate level in the U.S. See the parity? But for some reason, there are still plenty of people willing to say things such as “their exports aren’t taxed in either country.”
Lindsey wasn’t the only one making that weird claim. Juan Luciano, chief executive officer of Archer Daniels Midland Co., said that “the U.S. income tax system has no offset for exports” and that “this systematically disadvantages our own producers.” Oh boy. Other countries don’t offset their exports with the income tax. They rebate their consumption tax — i.e., their VAT. The United States doesn’t have a VAT so there is nothing to rebate. I will say this again in the hope that it will eventually stick: Other countries rebate their VAT on exports, but companies are still hit with a corporate-income tax.
Incidentally, it was also stunning see Lindsey assure the committee that the World Trade Organization would never dare punishing the U.S. for a BAT, because the Europeans have their own border tax. He had to be reminded by Democratic Representative Levin that a Value Added Tax, which the Europeans have and is okay under WTO rules, isn’t the same as a BAT.
As expected, Chairman Kevin Brady made an argument normally associated with leftists that destination-based taxes are good because they undermine tax competition.
Companies will no longer gain by moving their headquarters to Bermuda, their manufacturing plants to China or their intellectual property to Ireland.
First, the best way to create an incentive for U.S. companies to stop avoiding taxes by relocating abroad is to lower the corporate-income tax rate and end the U.S.’s punitive worldwide tax system. It is not, as the chairman implies, to put in place an untested tax system that exempts exports and hammers imports. Second, while this may not be the end of the world when the tax rate is 15 or 20 percent, it is a big, fat deal when the rate is 30 percent or more (as some are already calling for).
Also, as I predicted yesterday, the Peterson study was mentioned. Chairman Brady even asked that it be introduced into the record. This study doesn’t say what the chairman thinks it says. It certainly doesn’t provide a ringing endorsement of the BAT at all.
Finally, in order to explain why it was risky for the committee to bet on currencies adjusting fully and quickly to offset the punishing effect of a tax on imports, Brian Cornell, the CEO of Target, reminded us of a great quote from David Woo, the head of global rates and FX strategy at Bank of America. He is currency trader — his job and pay are based on observing and predicting the changes in a $5.1 trillion-per-day currency market — and he said the following: “The FX market is the most difficult thing to forecast, and to build an inter-generational tax reform based on the assumption of what the FX market will do is a laughable notion.”
I am hoping that now that we’ve got this hearing out of the way we will be able to focus on a tax-reform plan that can unite rather than divide us. Wishful thinking?