2/19/17

Readers of this blog know that I believe that the <em>WSJ</em> is the best media outlet by far, without peers.

One of their regular columnists (who I am not usually very fond of) is Holman W. Jenkins, Jr. Even his name smacks from pomposity. His columns do too. I consider myself a man of above average intelligence and command of the English language, yet I often find myself unable to follow his columns and, at times, do not understand high-brow words that he uses. It is good that a columnist is intelligent, but he needs to write his columns so that most people will be able to understand them. Having said that, I admit that he is very sophisticated and generally correct in his columns. He writes mostly on economic matters and, like me, in this area he seems to be a libertarian.

His column on Sunday, February 17, 2017, “What’s Behind the Border Tax Kabuki,” was simply brilliant. I hope that law makers will pay attention to what he is saying.

For a change the column was not as sophisticated and detailed but pretty simple and, indeed, missing in my view. For a few months now I’ve been following the argument about the “border adjustment tax” (BAT) and absolutely no one—no media outlet, no law maker NO ONE, NADA—actually explains the logic behind that proposed tax.

The proponents of this tax are highly intelligent, knowledgeable, “in the weeds” type people like Speaker Ryan and House Ways and Means Chairman Brady, who appear many times in the media to discuss the BAT, and yet, NOWHERE will you find an explanation of what is actually going on.

I understand what the tax will do, that’s pretty simple, but WHY? What is the justification for it?

Listening carefully to Ryan and Brady, they keep referencing the fact that US exporters are taxed at the border when they export to other countries. The only thing that this comment can refer to is the Value Added Tax, VAT.

VAT is used in the vast majority of countries around the world, excluding the US. Indeed, if you export anything into a country using the VAT system, your product is charged VAT at the point of entry. So, I suppose this is what they are referring to, but it is incorrect to equate VAT to the proposed BAT, which is why I am seeking someone to provide some explanation, some justification, explain the logic.

First of all, Ryan and others make the case that VAT puts US manufacturers at a disadvantage compared to their worldwide competitors, but it really does not. A local manufacturer selling his product in his home country is also charged VAT. Therefore, charging the US competitor trying to export a competing product the same VAT as the product comes into that country equals out.

When competing against an exporter from a third country, a US manufacturer trying to sell to country A is again on equal terms, as both exporters into country A will be charged the same VAT on entry into country A.

So, what is all the brouhaha about?

The only sense I can make of it all—and I repeat that no-one actually tries to explain it—is that it revolves around the issue of sales tax. No other country uses sales tax, and the traditional view is that VAT is a form of sales tax; they are both tax on consumption. A US manufacturer pays sales tax and when they compete against manufacturers from other countries who do not pay sales tax that is, indeed, a disadvantage.

However, if I am correct, then the proposed BAT is still totally unjustified for two reasons:

  1. The proposed BAT is effectively at 20%. The sales tax paid by a US manufacturer is, I estimate, at most 3%. Rates of sales tax vary but I believe that using an average of 10% is conservative. Very few places around the country have sales tax of more than 10%. Also, the sales tax is paid only on some things. The cost of a product sold by US manufacturers includes raw materials, parts, labor, cost of capital, overheads, marketing, profits, etc. I estimate that maybe a third of the sale price of any such product, on average, is represented by things on which sales tax has been paid. So, how can a 20% BAT be justified if it is supposed to compensate for sales tax but sales tax is only, on average, about 3% (10%X30%) of the cost of the product??
  2. More important, sales tax in the US is paid to state and local authorities. There is no Federal sales tax (by the way, there should be, but that is a totally different discussion). In the vast majority of other countries, and especially all developed nations, there are many, many local taxations and fees that are paid to local authorities that have nothing to do with VAT, are not rebated in anyway and are, indeed, very comparable to sales tax in terms of cost burden on manufacturers in those countries.

Therefore, I do not see the basis to justify the BAT and am quite convinced that it would be found to be in breach of the US obligations under the World Trade Organization, will cause a major trade war and is a bad idea.

All the above analysis was absent from Jenkins’s column—and he is the one columnist whom I would have expected to delve into the details and try to explain the issue here. Why do I believe that his column is so important? Because he is offering a brilliant alternative to the BAT.

The BAT idea was born in order to generate revenue to justify corporate tax rate reduction. While I belong to those who believe that the correct rate on corporate profits should be zero and that this tax is tax on consumers anyway (corporations raise their prices and keep their costs, payroll down to fund this tax), I understand that under the arcane rules of the Congress, Republicans are trying to find a way to show that the proposed tax reform will not cause budget deficits and the BAT was supposed to generate $100 billion a year. Jenkins’ suggestion is to instead impose a carbon tax, which he calculates will be in the range of about 6.5% on the cost of a gallon of gas to generate the missing revenue and, at the same time, cancel all “Green” initiatives that are costing money to the taxpayer. I will add here that the package deal should also include withdrawal from the stupid, nonsensical, very costly Paris Agreement (French: Accord de Paris). That may make the package a bit more attractive to “purists” on the Republican side.

My strong objection to the “church of climate change” and the costs involved in the so-called fight against climate change are a matter of record on this blog. However, I was always in favor of carbon tax and that, too, is a matter of record on this blog. In the past, my suggestion to impose a carbon tax was complicated, but meant to ensure that whatever is collected under such tax is repaid in full every year to the citizens of the US as specific refund in equal amount to each citizen. The reason I was and still am in favor of carbon tax is that while I do not believe that the need to take any action and change our lives to prevent global warming has been proven by any stretch, I never once suggested that there is no warming or that mankind does not contribute to it. It is all a matter of degree.

Carbon does pollute the air and this DOES have a cost to society. So why not charge for it? Why do we charge royalty for every barrel of oil extracted from our land but are not charging “royalty” for the cost of the damage done to our air? I am a libertarian on economic matters and my belief in the free market is very strong. The ONLY correct way for governments to impose and collect tax is to do in a way that affects the allocation of resources in the economy in the least possible way, i.e. natural. Carbon tax does that and, because it has a cost to us, it should be charged.

Jenkins’ idea to use that tax to reduce other taxation—corporate or personal—is brilliant. As I obliquely mentioned above, I am a strong proponent of tax on consumption as opposed to taxes on income. Carbon tax is a tax on consumption.

Is there any hope that Republican law makers and sophisticated technocrats like Ryan and the newly appointed OMB Director, Mick Mulvaney, take this idea and run with it? The chances are probably close to zero, which is very disconcerting. That is the kind of out of the box (but absolutely correct) thinking that I would have expected from a Trump administration.

If not for this type of business-NOT-as-usual did we elect him, then for what?