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  • DATVF.PHLCHI
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  • DATVF.VEU
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  • DATVF.VNU
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  • DATVF.VSU
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  • DATVF.VWU
    1.553
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  • ITVI.USA
    9,385.190
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  • OTRI.USA
    6.800
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  • OTVI.USA
    9,385.780
    -15.500
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  • TLT.USA
    2.740
    0.000
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  • WAIT.USA
    156.000
    -2.000
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  • DATVF.ATLPHL
    1.743
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  • DATVF.CHIATL
    1.978
    -0.165
    -7.7%
  • DATVF.DALLAX
    0.916
    -0.086
    -8.6%
  • DATVF.LAXDAL
    1.446
    -0.049
    -3.3%
  • DATVF.SEALAX
    1.006
    0.021
    2.1%
  • DATVF.PHLCHI
    1.069
    0.000
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  • DATVF.LAXSEA
    2.100
    0.056
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  • DATVF.VEU
    1.597
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  • DATVF.VNU
    1.444
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  • DATVF.VSU
    1.181
    -0.068
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  • DATVF.VWU
    1.553
    0.038
    2.5%
  • ITVI.USA
    9,385.190
    -18.330
    -0.2%
  • OTRI.USA
    6.800
    -0.320
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  • OTVI.USA
    9,385.780
    -15.500
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  • TLT.USA
    2.740
    0.000
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  • WAIT.USA
    156.000
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American Shipper

BAT faces headwinds

There’s far from consensus in and out of Congress that a border adjustment tax is a good, or legal, approach

   A major plank of corporate tax reform floated by House Republicans that adjusts treatment of goods crossing the border is running into crosswinds that could jeopardize the entire reform effort.
   The border adjustment tax (BAT) would substantially raise the tax liability for corporations from imports and eliminate them for exports, which proponents say is needed to level the playing field for domestic manufacturers and boost exports. Critically, the proposal raises about $1.2 trillion over 10 years, by some estimates, to help offset the lion’s share of corporate and individual tax cuts envisioned by Republican lawmakers.
   But the BAT has drawn mixed support in the business community, pitting some domestic manufacturers against retailers, and skepticism in the Republican-controlled Senate. Now fissures are beginning to show in the House ranks too, as questions grow about the measures’ potential negative economic impact.
   So far, no corporate tax reform legislation has been introduced in the House. The BAT simply is one of many ideas presented in last summer’s “Better Way Forward” plan by Speaker Paul Ryan, R-Wis., and Ways and Means Committee Chairman Kevin Brady, R-Texas, to grow the economy.
   According to the Republican blueprint, imports and exports would be taxed based on net revenue at destination rather than by income based on a firm’s headquarters’ location. The authors say it counters the price advantage other nations gain by rebating their domestic value-added taxes from exports.
   Under the House tax plan, corporate rates would be slashed from 35 percent, the highest in the industrialized world, to 20 percent. Importers would then pay 20 percent on nearly all of a product’s sales value because any input costs associated with importation, such as overseas production and transportation, could not be deducted to calculate taxable income as they are today. On the flip side, exports would not be taxed and companies would retain all associated profits.
   Put another way, domestic revenues minus domestic costs would be taxed at 20 percent. Companies that produce entirely domestically, therefore, would face a lower tax rate. Companies that import everything would face the full 20 percent and companies that use imports as components in domestically produced goods would face a tax somewhere between those two.
   Leading the anti-BAT charge is a coalition of more than 200 retailers, business groups and other importers called Americans for Affordable Products (AAP). It is mounting a full-court public relations and lobbying campaign to convince lawmakers the BAT will harm the economy. The AAP and many analysts say border adjustability would raise consumer prices because retailers would be forced to pass on cost increases to consumers. They also contend that prices for domestic-made products would also rise because manufacturers would have an incentive to export as much as possible unless the domestic sales price equalized the tax advantage from export transactions.
   An average family of four could end up paying as much as $1,700 in higher prices for staple items such as groceries, clothing and gasoline, according to the National Retail Federation, which put out an infomercial spoof of the BAT earlier this month. And retailers that import a large portion of their merchandise would experience huge tax increases, potentially forcing some of them out of business and jeopardizing many jobs, it says.
   The petroleum industry would also take a hit because the United States still imports a lot of oil and motorists could pay 30 cents or more per gallon at the pump, according to several analysts. A BAT would also raise the price of intermediate goods and disrupt global supply chains that depend on cross-border sales of parts and materials, opponents say.
   The conservative Taxpayer Protection Alliance argues the BAT protects many large corporations that already take advantage of loopholes in the tax code, while small businesses would suffer. And those firms, the advocacy group says, already receive what it views as corporate welfare in the form of export financing through the Export-Import Bank, which provides working capital lines of credit, loan guarantees to overseas customers and insurance on receivables that acts as a backstop against non-payment by foreign customers.
   “There are also more effective ways to revitalize the manufacturing sector of the economy than by instituting a complicated new tax that will hurt the very blue collar workers whose jobs the Trump Administration is focused on protecting,” Taxpayer Protection Alliance President David Williams said in a Dallas Morning News op-ed. “President Trump’s commitment to regulatory reform and new pipeline construction will lower energy costs and make it more competitive to build things in America again. But it doesn’t do a factory worker any good if his or her spouse ends up losing a retail job because of senseless Washington tax policy, or if the family must pay more at the gas pump because of the misguided BAT.”

Not getting much attention is the fact that a stronger dollar would further dampen exports by making them more expensive overseas, thereby undercutting one of the BAT’s main arguments.

   The pro-BAT argument. On the other side is the 21-member American Made Coalition (AMC), which argues that the overall benefits of corporate tax reform will create incentives for manufacturing investment, grow the economy and create jobs. The House tax blueprint also calls for immediate expensing of capital purchases, eliminating the deduction for net business interest expense, and changing to a territorial tax system that would eliminate the worldwide tax on income earned overseas. Businesses view that mechanism as a form of double-taxation and a reason not to repatriate profits.
   AMC members such as Boeing Co., GE and Dow Chemical are importers and exporters, but their imports are inputs for products produced in the United States and sold to domestic and overseas customers, and so would benefit from a BAT on balance.
   Conservative advocacy groups and others say low corporate taxes will make the United States a more attractive location and go a long way to stem off-shoring without a BAT.
   “U.S. manufacturing output is at an all-time high right now,” Benjamin Powell, an economics professor at Texas Tech said on Fox Business Network. “We already are very productive. We’re not being out-competed by foreign countries. Ultimately the focus needs to be on the U.S. consumer. If the price for our intermediate goods and imports for consumption go up it’s going to make Americans worse off.”
   Peter Morici, his counterpart at the University of Maryland School of Business, said the BAT is needed to counter the tax exemption for exports in many other countries and called retailers’ criticism “disingenuous because if Walmart has to pay a little bit more for imported goods it’s not going to be at a disadvantage vis-à-vis Target since they all are going to be facing the same tax. Second, it’s on the wholesale, not the retail. So it’s not going to be a 20 percent increase. And if we start to shift production of middle-range goods back to the United States then there will be more income, there will be more GDP, they’ll have more customers.”
   He said the best solution would be to scrap corporate and individual taxes altogether and move to a 12 percent VAT, adding that Republicans don’t want to do that because they think Democrats will continually try to push up the rate.
   A CNBC survey this week of 50 economists, fund managers and financial strategists shows 60 percent opposition to the BAT, up from 45 percent in the prior survey. 
   Brady and other analysts say the BAT would strengthen the value of the dollar, thereby increasing the purchasing power of importers and offsetting their tax liability. Many economists say that trying to predict the direction of the dollar in volatile currency markets, especially if the Federal Reserve raises interest rates, is difficult and that the BAT is risky because it introduces so much potential for unintended consequences.
   Former U.S. Treasury Secretary Larry Summers predicted on CNBC that a BAT would trigger a substantial rise in the dollar, which would cause financial problems all over the world because dollar debtors will be hugely burdened. He dismissed the idea that the proposal would give the United States a big competitive advantage.
   Not getting much attention is the fact that a stronger dollar would further dampen exports by making them more expensive overseas, thereby undercutting one of the BAT’s main arguments.
   “I think everyone should be concerned because it’s a venture into the unknown,” Summers said. “The dollar will rise, but it won’t rise enough to fully protect the importers and if you’re operating on a thin margin and the dollar rises 20 percent instead of 25 percent that can be enough to destroy 100 percent of your profit margin even if your tax rate is going down. If you don’t have any profits it doesn’t matter what your tax rate is.”

   Is It WTO Legal? Many also question whether the BAT would comply with U.S. obligations under the World Trade Organization (WTO), which prohibits signatory nations from subsidizing exports or domestic goods, or treating a domestic product more favorably than an imported one for tax purposes.

Proponents say the exchange rate will adjust. My experience from trying to forecast exchange rates for 40 years is that nobody knows how foreign exchange rates will adjust.

   “There’s no possible way that it [the BAT] can be done that’s WTO consistent,” Matt Gold, an adjunct professor of law at Fordham University and former negotiator in the Office of the U.S. Trade Representative, said last month at a seminar on the North American Free Trade Agreement organized by the Washington International Trade Association. “It would violate both export subsidy rules and rules for national treatment of taxation.”
   Economist Uri Dadush, a non-resident scholar at the European economic think tank Bruegel and senior fellow at the OCP Policy Center in Rabat, Morocco, added “this is a massive distortion of the U.S. economy. Proponents say the exchange rate will adjust. My experience from trying to forecast exchange rates for 40 years is that nobody knows how foreign exchange rates will adjust.”
   Lawmakers are concerned about potential WTO violations and also have to bear in mind that trading partners might retaliate with similar versions of a BAT, Capitol Hill insiders say.
   Thomas Vilsack, who served eight years as President Obama’s secretary of agriculture and now heads the U.S. Export Dairy Council, agreed at a recent panel discussion in Washington that Mexico likely would react to a BAT by increasing barriers on U.S. agricultural products.
   “Why are we doing this?” he said. “Are we doing it because it’s a convenient way to raise revenue so you offset tax cuts in other areas? Is it being driven by tax policy or trade policy? The concern is that there could be significant ramifications and reactions to it that would be adverse to agriculture.”
   Passage of the BAT could spark a huge trade war and likely would lead to the largest dispute settlement case in WTO history because it would involve all imports and exports, not just a specific commodities or companies.
   But Brady insists the BAT is an indirect tax on cash flow and, therefore, legal. Trade attorneys say the difficulty with that argument is that the tax is calculated on a company’s revenue rather than being applied to the product being traded, as is done with a value-added tax.
   As Caroline Freund of the Peterson Institute for International Economics explained in a YouTube video, the WTO only allows indirect taxes such as sales taxes to be applied to imports and in countries with value-added taxes everyone faces the same tax regardless of where it was produced.

   Republican Schism. Republicans are fully behind the need for corporate tax reform, but there is less unanimity when it comes to the BAT.
   President Donald Trump initially criticized the BAT as too complex, but the administration has sent mixed signals in recent weeks after an apparent attempt to redefine threatened import tariffs on Mexico as part of the 20 percent BAT when Trump ran into difficulty trying to force Mexico to pay for a proposed border wall aimed to stopping illegal flows if immigrants. Treasury Secretary Steve Mnuchin has said the administration likes certain aspects of the BAT and has concerns about others, but ultimately will negotiate a unified plan with the House.
   Larry Kudlow, a conservative commentator and economic analyst who helped write Trump’s campaign tax plan, tweeted that the BAT is a bad idea. Stephen Moore, a Heritage Foundation economist who also assisted the Trump campaign, says he supports the proposal because it would be better than Trump’s call to slap import tariffs on countries as a way to equalize bilateral trade deficits.
   Even Grover Norquist, the powerful anti-tax crusader who for years has exacted pledges from conservative lawmakers not to vote for tax increases of any kind, and Club for Growth President David McIntosh, have not endorsed the BAT. Last month on Fox Business Network, Norquist said it would be better for the economy to raise the money for tax cuts through spending restraint or entitlement reform.
   In a recent CNNMoney interview, Glenn Hubbard, the top economic adviser in George W. Bush’s White House and now a dean at the Columbia University School of Business, raised serious questions about the BAT.    
   “I would be very careful about making a change that large,” he said, because the only countries that have tried anything like it are very small and far less complex than the United States.
   Steve Forbes, chairman and editor-in-chief of conservative business magazine Forbes, says Congress should cut taxes without replacing one tax with a brand new tax that subsidizes multinational exporters, and by extension, helps foreign consumers. He recommended Congress pass a simple corporate tax cut that he said will stimulate the economy and increase tax collections because of greater productivity.
   Arthur Laffler, who sat on President Ronald Reagan’s Economic Policy Advisory Board, said on Fox Business that the BAT is “a huge bureaucratic mess” that “would have the same effect as devaluing the currency, which would lead to domestic inflation. But if you look at it, there will be all sorts of nuances, all sorts of political grab bags going on in the process and I just think they should just do tax rate reductions, get rid of this pay-for-notion and don’t touch a border tax adjustment.”

So any time we start talking about how we’re going to regulate products going out and products coming in, we better darn well know what the impact on the economy is before we start making major changes.

   These conservative pundits contend the BAT amounts to a hidden tax that will hit low-and-middle-income families the hardest.
   Brady has not secured full Republican support within his own committee, Bloomberg BNA reports. Several members have doubts about the bill, especially ones with retail headquarters or oil refineries in their districts, or with statewide ambitions. Rep. Patrick Meehan, R-Pa., has floated the idea of exceptions to the border tax, but Brady has ruled out that option.
   Rep. Jim Jordan, R-Ohio, the founder of the House Freedom Caucus, a discussion group of conservative Republicans, said in an interview with Bloomberg that he has “some concerns” about the BAT because it is a new revenue stream with the “potential for abuse down the road.” Rep. Mark Meadows, the current chairman of the 35-member Freedom Caucus, has publicly declared he would prefer to do tax reform without the border adjustment tax on imports.
   Rep. Steve Womack, R-Ark., recently warned Republicans that trying to push through a BAT that drives up costs on consumers would become their version of Obamacare that would drive grassroots anger and threaten the party. 
   In the Senate, Finance Committee Chairman Orrin Hatch last month said he wanted to know a lot more about the impact of the BAT, how the impact could mitigated for certain industries and whether it was legal under international law before taking a position. Hatch will play a big role in determining the outcome of tax reform since all tax bills must go through his committee.
   GOP senators Mike Lee of Utah, Mike Rounds of South Dakota, Tom Cotton of Arkansas, Jeff Flake of Arizona, Susan Collins of Maine, Tim Scott of South Carolina and David Perdue of Georgia have criticized the BAT, with Lee writing in a column for The Federalist that the BAT “could ravage huge swaths of our economy.” He argued for a “pro-worker” zero corporate tax rate and a hike in the capital gains and dividends tax rate, which would attract large amounts of foreign and domestic investment and result in higher pay for workers that companies otherwise would turn over to the government.
   “You’re really talking about a major change in the United States in terms of who pays the bills,” Rounds, said in an interview on CNBC. “So any time we start talking about how we’re going to regulate products going out and products coming in, we better darn well know what the impact on the economy is before we start making major changes.”
   Walmart, a member of the AAP coalition that opposes the BAT, is headquartered in Cotton’s state.
   “A tax on imports is a tax on things working folk buy every single day—and I’m not talking about caviar and champagne,” Cotton said in a speech on the Senate floor. “I’m talking about T-shirts, jeans, shoes, baby clothes, toys, groceries. I’ve heard from thousands of Arkansans who are already struggling just to get by. Why would we make the stuff they get at Walmart more expensive?”
   Responding to the argument that the BAT will strengthen the dollar and therefore the buying power of importers, Cotton said: “This is a theory wrapped in speculation inside a guess. Nobody knows for sure what will happen—no one can know for sure because currency markets fluctuate daily based on millions of decisions and events. Just because an economist slaps an equation on a blackboard doesn’t make it real. So I’m more than a little concerned that these predictions won’t pan out—as the old joke goes, after all, economists have predicted nine of the last five recessions. But if that happens, it won’t be economists, intellectuals, and politicians in Washington and New York left holding the bag—working Americans will get stiffed again.”
   Flake also took to the Senate floor to say the BAT will have negative consequences for middle-class families, global supply chains and international trade relationships.
  “Whether its raw materials or specialty parts, roughly 50 percent of our nation’s imports consist of inputs for U.S. production and manufacturing. . . Cheaper inputs mean lower production costs for U.S.-based businesses, which in turn allows those companies to expand production and reduce prices. What will happen if we placed a new 20 percent tax on all imports?” Flake said.
   Ultimately, the BAT’s fate could rest with Trump, who could use his political clout to get reluctant Republicans on board if he chooses.

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