A while back, I praised House Speaker Paul Ryan’s plan for a Border Adjustment Tax (BAT), calling it nationalistic, without fully explaining myself. Today, I’m going to go into a little more detail on that. I don’t very often agree with the GOP leadership on anything, so this is kind of a special occasion.
I’m impelled to do this because of the somewhat inconclusive conclusion to my last posting. I rather pessimistically concluded that the ethnic and other divisions in the American polity likely can’t be overcome, and that we’re probably due for many more years of the kind of political dysfunction and disarray we’re enduring today. However, I did briefly suggest that these problems could maybe be “mitigated.” And since a way of doing that might be for our national politicians to propose nationalistic measures and explain them to the American people in nationalistic terms, the BAT comes to mind as the sort of thing that could be considered.
Let me be very clear: by “nationalistic measures” I don’t mean starting a war or putting dark-hued folks in concentration camps. I simply mean policies that are within the normal framework of what countries do nowadays, but that indisputably benefit the American people as a whole – and will therefore give us something that perhaps we can all agree on. If these policies simultaneously impose costs on foreign entities, so much the better: it’s a visible sign of the advantage of being us.
So what’s the BAT? It’s a little complicated, and I have the feeling that a lot of people are against it simply because they don’t understand it. The House Ways and Means Committee elucidates – hypes – the idea here and here, and in a previous post I recommended a site that explains the concept in rather more measured tones, but still favorably. I’ll summarize.
The U.S. corporate tax is now levied in the following way. Imagine an American firm – we’ll call it The Company – that manufactures widgets. Some are exported, some are sold domestically. The Company is taxed on the profits from foreign and domestic sales alike. To make widgets, The Company needs thingamajigs, which it imports from a foreign firm – call it Das Kapital aus dem Fremde. The U.S. doesn’t tax those imports in any way; indeed, The Company takes their cost as a deduction. It’s kind of obvious that this system, in effect, subsidizes imports – i.e. it may be that Das Kapital aus dem Fremde is able to undersell American producers only because domestic companies have to pay the corporate tax, while foreign businesses don’t.
Under a Border Adjustment Tax, the U.S. doesn’t tax exports, so The Company pays the IRS nothing on its sales abroad. However, it still owes the tax on profits from domestic sales, and it won’t get the deduction for its imported thingamajigs. In other words, it’ll be paying corporate tax on profits earned from the sale of those items in this country. Imports will no longer be subsidized – which might induce The Company’s Board of Directors to consider purchasing their thingamajigs from a domestic firm, or possibly even producing their own in-house. Currently, because of the tax advantages, American companies often set up foreign subsidiaries to produce items they need back home, and a BAT would eliminate the incentive to do that. Jobs will be created here in America, which a nationalistic policy always aims to do.
The main advantage to a BAT, however, is the effect on governmental revenues. The U.S. will stop taxing exports and start taxing imports. Since our country nowadays imports more than we export, we’re giving up a smaller tax base for a larger one. This is why the BAT will raise an additional $1.1 trillion of revenue over ten years – making Speaker Ryan’s proposed reduction of the corporate tax rate, from 35% to 20%, fiscally more responsible. I’ve previously stated my doubt that the corporate sector truly needs this windfall, but if you’re determined to give it to them, coupling it with a BAT at least mitigates the harm, and provides some collateral benefits.
The humongous retailers like Walmart claim they’ll have to raise prices on their made-in-Vietnam wares, but the economists give us plenty of reason to doubt this will happen. With a BAT, American exports will receive a boost, the dollar will get stronger, currency exchange rates will readjust accordingly, and everything eventually balances out. Anyway, think of this: is it in the long-term interest of working class Americans to flood our markets with cheap products from foreign sweatshops, or rather to promote better-paying employment in this country? I know what I think.
Here’s the bottom line: from a revenue standpoint, the system of taxing exports but not imports – as we do today – favors nations that are net exporters, like Germany, while a system utilizing a BAT favors the nations that are net importers, like us. By not having a BAT, we’re benefiting our trading “partners” at our own expense. If we adopt one, we’ll encroach on what other countries might consider to be their tax base. Maybe they’d squawk. I hope so – our people would learn that our government, for once, has done something that benefits only us.
Policies like this might start to accustom Americans to the notion that they have common interests. We’ll see if the politicians are up to it.
# # #