It's Not the Ides of March
because our webhost is down I am resending this blog. the webhost is not in snowy New York City but in sensitive Salt Lake City and we pay the company for hosting which it has failed to provide for two days.
Despite what we learned in our Shakespeare class, today is not the Ides of March Julius Caesar was warned about. The Ides is the last full moon before the Vernal Equinox and varies from year to year. But it will be the date when the Fed again raises interest rates, scheduled for 2 p.m.
Today's blog will be mercifully shorter than yesterday's because I caught up on lots of news. Please note that some of us—including me—never go the e-mail edition at all because of internet issues probably related to the blizzard. If you do not get your daily blog in your mailbox, just log on to www.global-investing.com to read it on the site.
Russell Jones, an economist with Llewellyn Consulting in London today took on the matter of US corporate tax reform, before the full terms and conditions have been revealed, presumably to stop some of the terms which he writes are “misguided” and “bordering on folly”. Jones, who is British, notes that the US tax system does need reform, although taxes are not actually high compared to those in other developed countries (despite what the US Republicans say.) The total tax revenue (Federal, State, and local) comes to just 26.4% of gross domestic product (GDP), vs an average for the OECD countries of 34.3%. (The OECD is the Organisation for Economic Cooperation and Development, HQ's in Paris, which groups the most developed economies.)
Of course that is not to say that the system makes sense.
As Jones writes, “the US currently has the highest statutory corporate tax rates and the 2nd highest marginal effective corporate tax rate.” Moreover, the US taxes are high on personal income and profits which produce 40% of total tax receipts, while the other OECD countries only take in about 23% of taxes that way.
And then there are the loopy loopholes so the corporate tax systems “leaks like a sieve.” US companies shift profit to low-tax foreign sites and in the end they paid only an average of 2% of GDP while the OECD average “take” was 3%. US multinational corporations hold overseas about $2.6 trillion in profits—equivalent to nearly 14% of US GDP, and they will not repatriate that loot unless they get a tax holiday for doing so.
It is against this background that the US Ryan-Brady plan is proposing a “destination-based” corporate tax which would be easier to administer and reduce taxes and the incentive to stash the cash overseas. It includes a cut in the statutory rate to 20% from 35% but based on cash-flow, meaning revenues minus purchased inputs including capital spending, plus wages. This would offer 100% depreciation for capex. It would also remove the incentive to borrow by ending the deductions for debt interest payments.
Households would pay taxes on dividends at 6%, on interest at 12.5%, and on capital gains at 16.5%. The make-up corporate alternative minimum tax would be repealed.
Profits earned abroad would not incur US corporate taxes. Repatriating foreign cash caches would incur taxes at 8.75% and the companies would be able to stretch out payments over 8 years.
All this can be justified but then the Republican plan tries to figure out how to make up for the missing revenues. Here is where it starts going wrong, at the border. The cash-flow deduction for purchased inputs would not apply to imports and it would be exempted for US corporate exports. What companies pay in tax would depend on the destination of their eventual sales under a border tax adjustment (BTA) system. If they cross the border into the US they would be taxed but if they cross it out of the US they would be exempt. Imports costs would be taxed at the company's tax rate while exports would be subsidized at the same rate.
There are plenty of problems with border tax adjustments, among other things because they are “too complicated”, according to Pres. Trump who does support tax reform. Of course he may tweet something else tomorrow.
But there are also technico-political problems, as pointed out by Jones. Areas he cites include oil refining, a favored industry in the US even if the crude is imported. What of US hotels and restaurants serving foreign tourists? Or universities where foreigners study.
Then the huge blow to retailers would create a political opposition. Moreover importers of parts for assembly—like the auto industry, computer and cellphone manufacturers, or chemical producers—would be heavily taxed, and they are among the most technologically advanced sectors.
Medium- to low-income Americans would suffer the most under BTA because they consume most of their income. Richer people don't.
Then there is the risk that wage income can be transformed by richer Americans into business income.
What will happens to companies which export so much they would have a negative tax liability. Will they be paid by the IRS?
The main point about BTA taxes, of course, is that they violate the World Trade Organization rules which means US exporters would face countervailing duty under WTO rules. Despite what BTA supporters say, the Value-Added Tax systems in foreign countries do not discriminate against imports or domestically-made items, and both pay at the same tax rate. The impact of the Ryan-Brady tax reform plan on business, households, and world trade is almost unpredictable but would certainly cause great upheaval and dislocation—and possibly a world trade war.
Today we have news from Britain, Canada, Brazil, Finland, Israel, India, Mexico, Germany, and Denmark including an annual report.