Trump has promised a sweeping overhaul of the US tax code to protect US exporters. However, the Republicans cannot make up their minds on what to do. Meanwhile, with no leadership from Trump, divisions in Congress are widening.
Please consider Trump Muddies the Waters on Import Tax Plan.
Donald Trump’s refusal to take a clear position on a controversial import tax is perpetuating uncertainty over tax reform and underscoring divisions in the administration and Congress over policies rooted in economic nationalism.
In his speech to Congress on Tuesday, Mr. Trump voiced the “America first” complaint that US exports were taxed more than imports coming into the country, but he declined to say how he thought that problem should be solved.
The ambiguity did not stop both sides of the debate over the import tax — also known as a “border adjustment” in a plan devised in the House of Representatives — from spinning his remarks as a positive signal for themselves.
Kevin Brady, the Republican lawmaker in charge of the plan, said the president was “obviously on the same page” as himself. Retailers, which face potentially devastating tax bills as big importers, said Mr. Trump seemed to be hinting at the case for targeted tariffs, not a new tax.
Rohit Kumar, a former aide to Senate majority leader Mitch McConnell who is now at PwC, said: “I don’t think the vagueness or lack of specificity on border adjustment was an accident. These were well-planned, well-executed remarks. I think they did what they sought to achieve.”
Similar divisions have emerged within the Trump administration. Wilbur Ross, commerce secretary, and Peter Navarro, head of a new National Trade Council, are in favour of a border adjusted tax. Gary Cohn, head of the National Economic Council, is against it.
Mish Suggestion
An import tax is a bad idea. It will raise consumer prices and do little for exports because countries will retaliate. It’s also againt WTO rules.
I have a simple suggestion: Cut the corporate income tax rate to zero and be done with it. Instead of US corporations rushing to do business elsewhere, foreign and domestic corporations will seek out the US as a place to do business.
Mike “Mish” Shedlock
I would like to know exactly what he meant by saying our exports are taxed more than imports coming into the country? Are these other countries applying tariffs to our exports already? If so why isn’t that against WTO rules.
Many nations use a VAT that on the surface taxes imports
A VAT is legal under WTO rules because it is across the board
What Republicans want to do – some of them – is not quite the same
The Paul Ryan plan subsidies wages of exporters
A VAT does not do that
http://greenwatchbd.com/us-protectionist-border-tax-plan-likely-wto-illegal/
http://www.borderadjustmenttax.com/2017/01/an-argument-that-border-adjustment-tax.html
Mish,
reducing the Corporate Income Tax to zero is a winner. Businesses already pay zillions in taxes, fees, permits, and so forth. The corporate income tax generates very little cash for Washington but creates enormous dead weight losses in distorted economic behaviors.
Just make it zero, and watch 100,000 economic flowers bloom. $2.4 trillion of offshore corporate cash would flow quickly back to the US to be invested in creating jobs.
The bizarre distortion of taxing dividends but not interest would vanish. Capital Allocation could be made based on what generates returns rather than what avoids taxes.
I agree with a slight, but significant correction.
Businesses do NOT “pay zillions in taxes, fees, permits, and so forth.” CONSUMERS do. No business on the planet simply absorbs the “costs of doing business.” They are passed on in the prices for their products and/or services.
If you make the difference between personal and corporate income taxes too wide, you’ll just end up with even more ridiculous distortions of “business expenses,” as “everybody” “incorporates.” Not that cutting corporate taxes to zero wouldn’t still be good. Just cut personal ones to zero right alongside it. They’re both abominations in anything even pretending to be a free society anyway.
As I keep harping on, tax land and levy A tariff on imports. The latter across the board, not in any way “targeted” to maximize the return on lobbying. Just straight up 10% of land value, 10% of the value of inbound goods flows.
Neither of the above requires any spying and ratting out, above and beyond what governments are directly charged with monitoring in the first place. Both are hence self enforcing. hence efficient as heck, with virtually every penny going straight to the treasury at low expenses, low distortions of activity, no “unfairness,” no openness for backroom deals nor cheating. IOW ideal as means of revenue collection.
In addition, and this will become more important in the future, neither complicates things wrt transnational crypto currencies. Even if you make all your money, and do all your spending, anonymously in Bitcoin, if you want the government to protect your house and/or let a container that needs to be checked for nuclear warheads cross the border, you have to let the government know about it. Then just pay them for the service you expect from them.
And as in “who gains who looses”, who in the heck cares? The tax code was never meant to be some sort of beggar-thy-neighbor redistribution-from-you-to-me racket to begin with. If whatever you do require lots of land, or lots of imports, you’ll just have to pass the costs along to your customers.
So, just as with any other tax that is extremely general in nature (hence reasonable and justifiable), the final impact will be borne economy wide, not solely by the specific entities who serve as nominal conduits for collecting it.
IOW, an ideal tax scheme. Which no other realistic proposal I’ve ever heard gets even close to.
Of course they are tariffing our exports disproportionately. Try to send something across the Canadian border and not pay a tax. I purchased a $600 sander from a Canadian manufacturer and after a few months determined it to be crap. The manufacturer told me he would take it back but would have to charge an import fee to do so.
This is what Trump is complaining about. Our trade deals are not fair, which I would THINK a $800 billion trade deficit would demonstrate. 100% tariff on Harley Davidson? Fair? WTO, fair???? For whom??? I understand that protectionism is a dirt dirty word, like illegal immigration control, or self defense weapons, but if WE don’t protect ourselves, who will? Those given this responsibility have FAILED. We should be looking for alternatives to current policy, but NO. Just do more of the same because it’s working so beautifully.
Perhaps he is trying to put out the message that he remembers his campaign promises, but is acting on them a piece at a time to maximize the press. There seems to be limited coverage of Congressional CRA resolutions, of which the House has passed I gather around a dozen and the Senate somewhat fewer, and which Trump is signing. History will eventually record whether things are taking a while to fall into shape, or whether for all his talk he is indecisive.
Instead of a BAT, a remittance tax to pay for the wall has been floated as a possibility.
Please explain… if you cut the corporate tax rate to 0 and income tax revenue is only going down as more and more jobs are eliminated due to automation, where does the government get the funds it needs to do its basic functions?
the US Federal Government, in common with all monetary sovereign governments, do not have to fund their expenditure. Their spending is always with new debt- free money. So when there is an invoice to pay the customer’s account within the Fed gets marked up by the requisite amount. All done! no worries. The Fed can never go broke in its own money. It can buy any and every debt right up until inflation gets out of hand. Never having to save or borrow is the way it is!
This is true EXCEPT that it would completely destroy the notion of our currency being back by the full faith and credit of the government. As is, they can create all the money they need, but must launder it through banks and the Fed to create legitimacy, just like all other criminal enterprises do. This government seeks legitimacy above all things, which is why it is so desperately trying to destroy Trump’s legitimacy every minute of every day, in the belief that they are enhancing their legitimacy through the destruction of his. They are wrong. They are destroying the legitimacy of the entire government, its policies AND people.
Agree. Superstition comes into play where money is concerned. The fact that debt free money is allowed by the constitution is not enough. Apparently we can’t handle the truth, [as Jack said]. Mainstream economics is all about superstition. It’s models are based on it and the politicians run with it, to the great detriment of fairness and equality in society.
Imports are benefits, exports are costs. We pay for imports with numbers in account [$]s, usually in the Federal Reserve bank. Our exports receive numbers in accounts [$] as payment. It’s not without collateral damage as well, such as losing job opportunities, but overall we benefit from imports more than we lose.
[I lost the link that explained it in more detail]
Imports are a benefit if we don’t have to pay for them with the cost of exports. Exports are how we pay for imports, not with money. Money is a debt instrument, an IOU, that will ultimately be traded for something of value we hold. If not, those notes become worthless along with the ones we still hold (as few as they might be).
We can simply keep creating dollars and spending them until they inflate to infinity, or people just stop accepting them before then, understanding that there is very little they can buy with the.
It’s the foreign banks that have been creating “dollars”, not the Federal Reserve. Banks in China, Japan and Germany are counting on the Federal Reserve to bail them out with swap lines to supply them with the dollars they need to replace the “dollars” that they created out of thin air. This is how surplus countries have been funding their exports to America, and taking American jobs as a consequence. Sorry to say, but all this “free trade” talk is just academic poppycock. Foreign banks have dug themselves into a deep hole in order to hoist their exports on America, and now they’re counting on America to bail them out. The sad part is, the Federal Reserve will probably bail them out, in order to fulfill America’s “responsibilities.” Our children better start to learn the meth trade, because by the time Janet Yellen is through, there won’t be any non-Wall Street jobs left.
No, we use money each time. Your exchange would be barter. The book keeping compares them of course. Yes money is a debt instrument.It mandates a debt to be created first, being ,as you say, an IOU.
I don’t see how you could create dollars to infinity as you have to have debts first and there has to be the resources for sale. It’s safe to spend as long as inflation doesn’t get out of hand. The limit is known as the output gap. Someone has to work out what that might be and then the government can plan its spending. It’s a big number. In 2012 the White House said the output gap was $1.8 trillion. It would be much bigger today.
Your definition of what money is is straight out of the economic textbooks. But the banks don’t go by those rules. They are much more creative,. But it’s true that they can’t create “dollars” (really dollar denominated debt) forever. That’s why they’re in so much trouble now.
Yes, banks are “creative” but more about how to finance loans. For example Today loans are not related to deposits. Previously with fractional reserve lending they were. Now the banks only have to be considered solvent and they can create 100% of the loan sum out of thin air. AKA credit creation theory – endorsed by the BoE.
How does the Mish plan work for an S corp?
This wouldn’t seem fair to smaller businesses that are organized in this mannered the are stuck with the top personal rate.
S corp not affected
My tax rate would not change
There would be little advantage in having an s-corp then. Better to have a c-corp.
If Congress cuts the corporate income tax to zero, the result could be a higher, not lower, tax burden. To my understanding, the Byrd Rule, as applied in reconciliation would require the loss of revenue from reducing the corporate income tax to be offset by matching spending cuts, or marginal increases of other taxes. Which is less offensive? However, the absence of the federal corporate income tax would certainly also have the effect of encouraging states that do not already have them to enact corporate gross receipts or “business and occupation” taxes. These sales taxes paid by the seller are popular with the legislatures as a reliable source of revenue.
Notwithstanding the many ways it is possible to shift the tax burden, I am more than reasonably certain that if the feds give up the corporate income tax, the states will rush in to grab the lost revenue, thank you. But yet, someone needs to pay the bills. I do think that doing something by shifting tax burdens around could end up being better than doing nothing. Action on taxes is better than inaction.
Mish how about this for an investment incentive? Tax earnings at zero but tax global retained earnings. If corporation invest money to make more money then they are not taxed. Sit on it or use for stock buybacks and get taxed. This way companies become the lead for job growth not govt spending
Cut the corporate tax, but where will the missing 300 billion come from? As it is the individual taxpayer is paying too much. How about we switch the tax equation – corporations pay 2.6 trillion in taxes and the individual pay 300 billion. Then we might see a more realistic and balanced Federal budget.
the missing $300 billion would be quickly generated in the zillions of other taxes that would get paid by the vast economic growth this would unleash.
Well large corporations have always been net job destroyers, not creators. Better to cut the personal income tax to zero so that people could start small businesses and grow them. That’s where jobs come from.
And let’s just pretend that American consumers are NOT paying these corporate taxes already. Evidently corporations get their tax money from heaven….just like I do.
Given our MASSIVE trade deficit, I think it’s a fair assumption that foreigners are not paying our taxes.
What would be nice is transparency where we knew exactly what taxes we were paying, and when and where. The opposite of what we have today where taxes are levied on businesses in every imaginable way, KNOWING that they will be rolled silently into the cost of goods sold. I used to think how sneaky this all as until I realized we LIKE it that way. We don’t WANT to know. We roll our property taxes into our mortgage so we won’t “feel” it as much. Same with our income taxes withheld. Of course we consider this a convenience, like all the other conveniences we love that are eroding our liberties.. Can’t wait for the arguments for the convenience of digital currency.
Ultimately, it is the convenience of believing others will protect OUR interests, SO WE DON’T HAVE TO, that will take everything from us.
The key to tax reform will ALWAYS BE in finding new ways to believe that they are being paid by someone else.
Tax corporations and businesses that employ us and of whom WE are their customers.
Tax RICH people who own these businesses as well as ultimately make the rules we all live under.
Or tax foreigners.
The Martians are in for a rude surprise when they finally show up.
Trump inherited a festering mess (Obama’s most natable “success” was the doubling of the national debt under his watch).
* tax receipts? DOWN by >10%!
* organizations are resisting change – no way will a new president change a lot in a short period of time (the stock market seems to disagree and it’s trading the FUTURE)
* The tax code has been written for the rich, period.
* The LSVA (labour share of value added) remains under threat globally, not just in the U.S. as machines replace humans. (Even the cumbersome registration of vehicles in germany has been improved by IT. I recall queuing for HOURS after buying a car. New plates, different windows, … Last time in 2016, it was done pdq. It took about 30% of the time. They made the plates at the counter, in the same building (Laupheim). In the past, one had to seek out a shop doing that etc. // In the UK, the plate stays on the car and the tax authority does NOT collect the road tax. This nonsense will cost hundreds of millions in Germany alone. But hey, those 5.25 million civil servants are “JOBSWORTH”.
Simplifying things for ordinary people would go a long way.
GS was paying 1% last time I checked – what’s up with that? CHARITY for the corporations! While small businesses remain the back bone, JMHO.
Value is being created by countless small businesses which are hiring people.
My conclusion is that the system is beyond change. Those promises cannot be possibly kept without bonds tanking and the national debt exploding.
To quote David Stockman:
“A Ponderous Potpourri of Platitudes, Pandering and Profligacy
By David Stockman. Posted On Wednesday, March 1st, 2017
We could just call the Donald’s maiden Congressional address a ponderous potpourri of platitudes and pandering and move on. But we can’t get over the profligacy part. Trump promised more Big Government practically everywhere—-the Pentagon, infrastructure, border control, education, veterans, crime, child care, medical tax credits—–with nary a word on how to pay for it. ” Hear, hear!
More military spending?!? Good night, America.
There seems to be a program to maximize the government harvest of income from people like me. In the 80’s when my income was entirely from wages there was a doubling of the social security tax. In the 90’s when my meager savings were growing through capital gains the special lower cg tax rate was not in effect. The level or declining market of the 2000’s brought back the lower cg rate just when it wasn’t needed. Combining that with the massive increase in government spending to devalue what I was able to save through inflating the price of everything I needed to buy. More recently the ACA insurance price support program tripled the my premiums for insurance.
I predict the magic extra new taxes will never show up from the government tax cuts to their friends. The congress will continue to walk away from their responsibility to prioritize and debate spending. The next step will be to offset the revenue loss by wiping out what I receive from social security / medicare. Sadly that will not be enough at the rate they are going. Hope my kids are learning their second languages well as they may become the next refugees of the world..
I like the idea of eliminating corporate taxes. It would encourage businesses to move to or expand in the US and it would lower costs of goods and services. I think the increase in income taxes due to the increase in overall income would more than offset the loss. Maybe states could follow suit and do the same.
Reps are so brave when they’re in the minority and won’t actually get what they’re griping about. When they’re in the minority, they’re timid little mice.
Majority.
And for whoever is the majority the amount you personally have to spend decreases and the amount the government gets to spend increases. The party principles are just talking points to sell the brand. It’s been working that way for 40 years..
To eliminate double taxation, you can either eliminate the corporate tax or wealth taxes.
The advantage of eliminating the corporate tax is that decisions within the company are no longer biased toward tax avoidance. Theoretically, the lost $300 billion in revenues will be reflected in positive valuation of securities, resulting in higher tax revenues from that source. However, there are significant timing delays for capital gains tax revenues. An additional advantage is that lower tax burden should result in lower consumer prices. One significant disadvantage is that owners of corporations will drastically cut salaries to themselves to take advantage of the zero corporate rate. Personal tax avoidance schemes will proliferate.
The advantage of eliminating wealth taxes is tax simplification for individuals and an enormous increase in investment capital, as the US becomes the world’s tax haven. From a tax collection perspective, it is far easier to collect from businesses than from individuals. The elimination of wealth taxes is also a first step toward tax simplification via a flat tax. Broadening the tax base with a flat tax should also lower the corporate tax rate.
Either choice has its merits. The current plan of lowering the corporate tax rate is the worst of the three alternatives.
“…Personal tax avoidance schemes will proliferate….”
you act like that’s a bad outcome
I assume your point is that individuals should pay the lowest tax possible. I agree. However, a well designed tax code should leave little opportunity to game the system. The effort expended is zero sum, in that tax rates will be raised to compensate for lower revenues. Better low tax rates for all than higher rates, active lobbying, and high fees for tax accountants.
“I have a simple suggestion: Cut the corporate income tax rate to zero and be done with it.”
…
Never_Going_To_Happen.
A Million Accountant March would descend on DC. Besides putting out of work one of the more influential lobbying groups, corporations likely not in favor. A zero tax rate would flatten the playing field … creating more competition. The LAST thing the crony cartel large corporations want. Much better that your corp pays a low rate (courtesy of creative accounting and inserting loopholes into legislation that favors your company) while the OTHER guy pays “full retail”.
Any tax cut must be paid for and this one depends on the eliminating the deductibility of interest on borrowing. Corporate America will never agree to sacrifice this deduction because they’re levered to the hilt. The real effective corporate tax rate is closer to 20% already after deductions. Cutting it to 20% and eliminating deductions is a wash. This whole debate is utterly pointless. The market’s run up in the light this tax break is insane. The repatrioted money is already here, as in sitting in American banks. Apple’s $250 billion cash hoard is being managed by a small office in downtown Reno.
Our system punishes earning money, yet only lightly punishes spending money (sales taxes are lower than corp/individual income taxes). Our system rewards those who work the least (benefits, little or no income tax). Any wonder why the economy is slowing down?
Taxes are collected at various points in the production process and at point of sale. The fact that you only see the sales tax on your receipt does not mean that all other production taxes are not embedded in the price. It is the consumer that ultimately pays these taxes.
There has to be some way to stop companies from performing wage arbitrage. Companies should not just be able to choose to produce something in one country where wages are lower and ship them to countries where wages are higher. It has destroyed our middle class while it has enriched the ruling class. We cannot just wait until labor rates equalize between countries – which seems to be the current plan. Our country will be destroyed by then. I regularly sit in meetings where it is decided that we will use labor in lower cost countries because it is cheaper to do so. It is not because these other countries have some skill we do not have – in many cases they are less productive but we can hire 2 of them to every one of us and still be “ahead”. It is not because we do not have enough labor here to do the work here. It is soley based on the lower wages we can pay in another country. These are not just unskilled manual labor jobs – these are skill based white collar jobs requiring extensive training and education. This has to be fixed. Please don’t tell me that robots will take over all these jobs anyway. You have to give people good work that they can feel good about doing or you risk revolution. There has to be a solution other than wait until everything equalizes and let the market decide. Lowering the corporate tax rate is not going to do anything about wage arbitrage. You will just have more companies based in the US deciding to offshore good jobs to lower wage countries.
Obviously, you like paying higher prices.
Or do you want wages and price controls too?
By the way, how many manufacturing jobs do you expect to save? Any?
You seem to think that these companies which do business globally have some allegiance to the US. They don’t. They are just doing what they are supposed to be doing, looking for the lowest cost of doing business to maximize value for their shareholders. Until the US provides the lowest cost most efficient place for doing business, companies will look elsewhere to places that provide the greatest value.
Companies are maximizing value for customers first, then shareholders. I want companies to find the lowest priced source of materials with the highest quality.
Hmmm. Here’s an idea from Washington State.
1. A federal business and occupancy tax (based on Washington state’s model – rates subject to modification)
2. A federal personal property tax/rendition (also based on Washington state’s model – rates subject to modification)
3. Federal Use tax (yep, also based on Washington state’s model – rates subject to modification)
4. Elimination of all existing federal income taxes, deductions, credits (corporate and personal)
5. Small capital gains tax (<15%) for investments held greater than 10 years; otherwise 33%; no deductions for losses!
6. A federal import tax that is 1.5 times the sum of 1 thru 5 and applied to retail sales price (also, all sales are retail sales, no exemptions for resale).
7. No deductions or exemptions allowed for any tax payments made to a foreign government, or withheld to pay a foreign government, for any transaction – yes, effectively double taxed. If the foreign government doesn't require a tax, then twice the US federal tax is applicable.
Done.
Next problem.
A corporate tax rate of zero would eliminate the need for lobbyists. Now maybe politicians would start to listen to citizens instead of corporations.
Great point!
Two questions: If corporations have the rights of individuals, shouldn’t they have the obligations? They can’t be drafted, though I admit I’d have loved to have seen the entire Halliburton management team sent to fight in Iraq. Second, if corporations get a pass on taxes, why shouldn’t individuals incorporate? They could say they are selling their labor to employers, as a B2B transaction? 0% tax rate, right? I guess my question is, why the respect for capital and the hatred of labor? Why is the former so privileged over the latter?
Corporations do not have the rights of individuals. The two major features of corps are 1) pooling of capital and 2) shielding owners from being sued for the acts of the corporation.