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:
KEN KIES:
[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."
