On Global Trade & Investment
Published Three Times a Week By:
The Global Business Dialogue, Inc.
Washington, DC   Tel: 202-463-5074
No. 22 of 2017
FRIDAY, APRIL 14, 2017

Click here for Tuesday's quote from Clayton Yeutter.


"If the President comes out wildly in favor of the BAT-[Border Adjustment Tax]-it will be in the House bill and it will pass. ... If he doesn't, I predict, it doesn't even go into the House bill."

Kenneth J. Kies
March 29, 2017

 Ken Kies is the Managing Director of the Federal Policy Group, LLC, and a former Chief of Staff of the Congressional Joint Committee on Taxation. On March 29, he was one of three panelists on at the GBD colloquium on Border Taxes: The Background, a Proposal, and the Challenges. Today's featured quote focuses on the likely fate of the anticipated border tax adjustment component of the House Ways and Means Committee's Blueprint for tax reform.

GBD is all about trade, and so it makes sense for us to focus on the blueprint's proposal for a border adjustment tax and its implications for trade. That said, we might just as well have led off with a comment on the totality of the blueprint, as Mr. Kies did in his presentation last month. " The Blueprint," he said, is a bold tax proposal. It is possibly "the boldest change in individual and business taxation-both corporate and pass-through business-clearly since '86 and possibly ever."

We are not tax experts, but we assume Mr. Kies is right on that point. And it is, obviously, a big one. From what we have seen, for example, even those sectors and companies who are strongly opposed to the BAT are not opposed to lowering the corporate income rate; to solving the inversion problem, that is U.S. companies transforming themselves into entities with non-U.S. national identities; to moving the U.S. to a territorial system of taxation; or to making it easier for U.S. firms to repatriate foreign earnings.

The problem is that they are all part of a package. The problem is money. The feasibility of the blueprint depends heavily on the revenue that a BAT could bring in, widely reported to be over $1 trillion, just as other elements of the blueprint are reported to offer $1 trillion in tax cuts. Mr. Kies put is this way:

The problem is [that] the blueprint is not a trillion dollar tax cut if you pull out border adjustability.   It's more like two and a half to three trillion... . 

[T]he question is, at what point is it [the cost of the new tax bill] too big to be able to get Republicans to vote for it.?

Mr. Kies and Peter Merrill, the two tax experts on the panel, provided a wealth of information on tax policy generally, much of it unfamiliar territory for those from other bailiwicks. Their full presentations and their comments in the Q and A session are well worth listening to. (See below for the links). Here, we will deal with just three of the issues Mr. Kies discussed, all related to the so-called border tax.

First, there is the question, What is it? If we understood Mr. Kies correctly, it is not a tax on goods per se. As he put it:

This is not a VAT. This is an income tax, which has a border adjustability feature bolted onto it.

Next up is, How does it work? Again, Mr. Kies:

It's widely been described as an import tax. It is not a tax imposed on imports. The mechanics are: ... if you import, like electronics from Germany to BMW, you don't get to include the cost of the electronics in the tax basis of the car for purposes of determining gain on the sale of the car.

And third, Will it pass muster with the international community? Probably not. We will return to this issue in the next entry, but we will give Mr. Kies the first bite at this apple with an extended quote:

[The BAT is in the House Blueprint] because [Speaker of the House] Paul Ryan believes the United States is currently in a situation that puts us at a competitive imbalance, and that we have been for 40 years, and it all stems from the fact that we agreed to a deal 40 years ago that said you can border-adjust indirect taxes [sales taxes] but you can't border-adjust direct taxes [income taxes]. ... What it means is that you can border adjust VATs and you can't border-adjust income taxes.

And I've heard Ryan give this example: he says, "You know, if Germany manufactures a Mercedes, they export it, they get all the VAT back at the border. If Cadillac imports a car into Germany, they have to pay the VAT at the border. And that's why you don't see very many Cadillacs driving around Germany."

So this is a competitive issue in the mind of Ryan.

And, I won't belabor this, but when it came out last June, and I see some trade lawyers in the room, there were a lot of trade lawyers running all over Washington doing what I would call "tut-tutting," that Paul Ryan is an ignorant boob from Wisconsin who bow hunts. And if anybody knows bow hunting, you climb up in a tree and you sit up there for hours at a time. So he can't possibly know anything about trade law.

This is not true. He understands perfectly that this may violate the WTO, and his view is, we'll defend it. And if we lose, we'll announce that we're renegotiating the deal that we cut 40 years ago that was a bad deal.

They are not going into this as a bunch of ignorant fools. You could argue they're fools, but they're not ignorant. They understand exactly what they're doing here. And I'll just offer up a word of advice to our European friends: The louder that you scream about how terrible this is, and that we're going to retaliate and so on, the more likely it is that the average member of Congress is gonna go "Gosh, this must be really good for us and bad for them." If I were advising the Europeans, I'd rely on the retailers to make my fight as opposed to making the fight yourself, but that's your business."

The hurricane of rumors, policy papers, and talking points about this issue tend to obscure the fact that there is no bill yet and no hard estimates. It is also an environment in which it is easy to become confused by different initiatives. This entry, for example, deals only with the destination-based cash flow tax being discussed as part of the House Ways and Means initiatives. This is completely separate from the trial balloon the White House floated back in January for a 20 percent import tax on products from Mexico and perhaps other countries as well.

As the saying goes, a week is a long time in politics. Not too long ago, health care reform was off the table and it was on to taxes. Then last Wednesday, in a Fox News interview with Maria Bartiromo, President Trump made it clear that healthcare reform is back on center stage and, further, that his strong preference is to get health care done first and then move on to tax reform.

In the same interview, Ms. Bartiromo asked the President about the proposal for a border tax adjustment. He could become "wildly in favor" of the idea at some point. There is still time for that, but he is not there yet. He is uncomfortable, he said, with the notion of a border tax "adjustment." Rather, he suggested, there may be merit in exploring the option of a "reciprocal" border tax-Whatever you charge us, we'll charge you.

We mention these things not to suggest that we know how these discussions will come out but only to underscore that the situation is still very much in flux. The BAT is still very much in the mix, but the larger question is: Can the Congress and the White House come up with a set of provisions-BAT or something else-which can a) help pay for the blueprint's proposed tax cuts and b) respond to the concern that the current rules on border taxes penalize America?


So, how shall we sum all of this up? With a quote of course. We could go for the Socratic Paradox, but we prefer the more lighthearted Woody Guthrie line:
"All I know is, I add up all I know, and I still don't know."

Enjoy the Weekend!

The Kies Presentation takes you to the MP3 recording of Mr. Kies remarks at GBD's Border Tax event on March 29.   Some of the quotes above are from his comments during the Question and Answer portion of that event. You can listen to those remarks yourself at the Q&A Recording. This latter recording begins with the opening remarks of Amelia Porges, who explained the foundation for the WTO cases that might well be filed in response to an American border adjustment tax.

An Interview with the President is a link to President Trump's April 12 interview with Maria Bartiromo of Fox News.

The Archer takes you to an article on this aspect of Speaker Ryan's life published by the Archery Trade Association.

About the VAT is the TTALK Quote of April 6 from Peter Merrill.

On the Tax and Trade Professionals is a link to the TTALK Quote of April 4 from John Magnus.

GBD is a link to the welcome page of the Global Business Dialogue website, with links to all of the recordings from the March 29 tax program.

Socratic Paradox is the Wikipedia entry on this famous confession of ignorance. As for the Woody Guthrie line, we read it long ago and have not been able to document it this afternoon. So, we are trusting our memory on this one.


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