Our Tax Code Is a Mess. So Will Be the Battle to Change It

Control of the White House and both chambers of Congress are viewed by Republicans as a once in a generation chance to revamp the tax code. But much as they stumbled on the complexity of reaching consensus to repeal and replace Obamacare, they are sure to find tax reform presents another magnitude of disagreement and difficulty.

In what seems to be a rush to get something big on record before his first 100 days elapsed, President Trump demanded a “massive” tax cut “bigger, I believe, than any tax cut ever”. He wants the corporate rate slashed from 35% to 15%, further complicating a dispute already dividing Republican circles. And he wants it to apply even to businesses that pass through profits to their owners, such as his
Source: Bloomberg/BusinessWeek.
own, such that his tax rate would drop from a maximum of 39.% (plus 3.8% Obamacare surcharge) to 15%.

The U.S. tax rate for corporations is the highest among the Group of 20 Nations. There has been a global competition by countries to attract corporations. That has encouraged American corporations either to use accounting legerdemain to park trillions of dollars of profits offshore, or to take the more troubling step of moving to low-tax countries.

During the campaign, Trump spoke repeatedly of his intention to lower the corporate tax rate to 15%, but as reality — namely, the needs of financing the U.S. government — set in, he began to speak of cutting the rate to 20%. Now, with the failure to eliminate Obamacare and its costs, the proposed rate spoken of is 28%. That, says Grover Norquist’s Americans for Tax Reform, is apparently the lowest the corporate rate can go while by some unstated alchemy remaining revenue neutral. Revenue neutral makes the rate reduction eligible under Senate rules to be passed under “reconciliation”, which needs only a 51% majority and nixes filibustering by Democrats who traditionally want to soak corporations irrespective of foreign competition.

But House Republicans, led by Paul Ryan, still have their sights on a 20% rate for corporations. To fill the crater left by what would be a 43% reduction from today’s 35%, and get to the revenue neutral needed to qualify for reconciliation, they have fastened on their newest great idea, long championed by Texas Republican Kevin Brady, a 20% “border adjusted tax” (or BAT) levied on imported goods. That, they estimate, would bring in what they estimate to be $1.1 trillion over a decade. But if it works, if it discourages imports, wouldn’t the revenue decline in parallel?

For U.S. companies that import goods, the tax is meant to offset the cost advantage of producing in low-wage countries. Not only would the goods cost 20% more, but importers would not be allowed to deduct any of their cost as a business expense. The revenue from selling the goods in the U.S. would be deemed all profit — a phantom profit fully taxed.

The deal is turned on its head for companies that export goods produced in this country. They would pay no border tax, of course, but neither would they pay any tax whatever on the profit arising from the sale of those goods. The belief is that the favorable tax treatment on exports would render pointless the “inversions” whereby corporations have merged with or been acquired by foreign firms so as legally to move their domicile to a low tax country.

uproar

American exporters — such as Boeing, Dow, Caterpillar, the pharmaceuticals — are ecstatic. Importers — such as Walmart, Best Buy, Nike, all retailers — are apoplectic. Corporations that depend on imports, ranging from clothing, to automakers, to refiners would have to raise prices to pay for the import tax and watch sales drop sharply.

Economists’ doctrine recited by Republicans says that the BAT would cause the dollar to strengthen — and enough to negate the the 20% tariff on imports, a bit of wizardry that goes unexplained. For exports, that stronger dollar makes U.S. products more expensive — more of a foreign currency is needed to convert to each dollar the exporter charges — and that hurts sales. That’s the reason, say Republican advocates, for charging no tax on the profit of the export and, as an extra incentive to manufacture hear, allow immediate expensing of capital purchases such as machinery, displacing years-long depreciation. Together, the exporter is given a fatter margin for lowering prices to make products less costly in foreign markets.

Lost in the argument seems to be whether the corporate tax code would be swept clean of the myriad of loopholes and exceptions that serve to bring down the effective average rate that business pays to more like 18% rather than the 35% posted rate that has spawned so revolutionary a scheme. But that much lower average is poorly distributed. Retailers, for example, with all their sales in the U.S., are exposed to the full rate.

upheaval

The BAT amounts to the so-called territorial method of business taxation by another avenue. Most countries tax only domestic activity; they don’t touch whatever a multinational company earns in other countries. That the U.S. reaches its tax tentacles everywhere — not at once, only when overseas loot is brought home — makes basing international companies in the U.S. unattractive. The question of whether this country should adopt the territorial scheme, coupled with the lure of bringing home the accumulated trillions in profit of our multinationals at some deeply discounted tax rate, has been a topic for discussion, but so far no more than that. Along comes the BAT to do the same job. It basically tells an exporter that the U.S. doesn’t care about whatever profits a business makes overseas. Better to keep the companies home, producing here, providing jobs.

But on the import side, what is the rationale behind disallowing the entire cost of imported goods from treatment as a business expense? What justification is there for this doubling down on imports instead of just charging the border tax? Thanks to globalization there are so many products we do not make any more and perhaps have forgotten how to make. And with the long decline of manufacturing, there are no longer enough factories to keep up with America’s insatiable demand.

at ringside

Ryan has already shown his rigidity by attempting to ram through his cherished version of repeal and replace without changes. We can probably expect the same from his passion for the border adjustment tax. Whether that will persuade Donald Trump is unpredictable. Steve Bannon is for the BAT as part of his plan to isolate the country and has the President’s ear. Back in February, though, Trump called it “too complicated”.

He’s spot on with that. In contrast, a tax reform plan that removes loopholes, adjusts rates, trims regulations, tunes what is already in place is one thing — that is, if Congress could ever be resolute against lobbyists fighting removal of every loophole and exception. But it is quite another to turn inside out the web of laws, accounting practices, reporting requirements and the corporate infrastructures that know how to deal with it all.

So pronounced a split between corporations — those stunned by so prejudicial an idea versus those who see Christmas year ’round — should tell Congress what a system revolution the border tax would be. Wouldn’t this invite a raft of legal challenges by other countries at the World Trade Organization or retaliation against us at their borders that could make the whole upheaval a waste? Would it be smart to replace our entire corporate tax structure with an experiment so far proven only by chalk board hypotheticals? Arkansas Republican Senator Tom Cotton calls the border adjustment tax “a theory wrapped in speculation inside a guess”.

Against Bluster, China and North Korea Hold the Hot Hands

Fearful that economic collapse would bring a flood of refugees, China has for decades been North Korea’s principal source of support, which we covered in “North Korea Threat of War Heightens, As U.S. Options Diminish“. China’s view is that America’s aggressive posture — troops stationed in South Korea for the 64 years since the Korean War ended, joint military exercises the U.S. conducts with the South — forced Pyongyang to develop nuclear weapons in defense of its existence. China wants the U.S. to resume the six-party talks that ended in 2009 when the North Koreans walked out and expelled all nuclear inspectors from the country. They advise that we take steps to make the North Koreans and their volatile ruler feel more secure. Secretary of State Rex Tillerson said in March that the U.S. would not engage in talks unless North Korea first abandon both its missile and nuclear programs. That bossy stance — and pre-conditions in general — was a mindless guarantee that there will be no talks.

Instead, Trump has opted for bellicosity by sending an “armada” — Trump’s word — led by the carrier USS Carl Vinson to take up station along the North Korean coast, a standard U.S. show-of-force maneuver lacking in any indication of what it can accomplish against missiles and nuclear facilities in impenetrable caves, and missiles that are now solid-fueled and free to roam. But the carrier group does include Aegis cruisers with anti-missile weaponry. Possibly the plan is an attempted shoot down of ICBM tests. That is, once the armada gets there. Last seen, it was headed for Australia.

On the first day of his 10-day swing through the Far East, Vice President Mike Pence went to South Korea to assure the country of U.S. support, and to the edge of the Demiltarized Zone between the two Koreas for a photo-op. He looked across sternly at DPRK (Democratic People’s Republic of Korea) troops snapping photos of him, while at home the President, strolling the White House lawn amid the traditional Easter egg roll, said Pyongyang “gotta behave”. Pence grandly decreed what the DPRK absolutely will not do.

“President Trump has made it clear that the patience of the United States and our allies in this region has run out and we want to see change. We want to see North Korea abandon its reckless path of the development of nuclear weapons, and also its continual use and testing of ballistic missiles is unacceptable.”

China accounts for 90% of North Korea’s trading with the outside world. The U.S. has urged China to cut the lifeline as the strongest way to bring North Korea to heel. China’s only gesture has been to end importing coal from North Korea, a commodity that has been a major provider of hard currency for Pyongyang. This is no hardship for China; they can get coal elsewhere. More indicative of their indifference to Kim’s threats against the U.S. is that China just announced that the trade that supports the North ran 37% higher in the first quarter compared to a year ago. A network of some 600 Chinese companies keeps the northern dynasty in power, providing both goods and 40% of the currency it needs to trade with the world beyond.

Which is to say that China has not been helpful. It protested when the U.S. installed its THAAD anti-missile system in South Korea. Far from accommodating the South’s need for protection from the lunacy of Kim’s threats to turn Seoul into a “sea of fire — the capital is only 35 miles from the border — China cancelled contracts with prominent South Korean companies in retaliation. Their concern is that THAAD‘s radar could penetrate the border and spy on whatever China is up to. This latest flare-up could not have occurred at a more insecure moment for South Korea, which just impeached and removed its president on corruption charges and awaits an election for her replacement in May. It is extremely anxious that the headstrong Mr. Trump might initiate some action without first gaining the South’s consent.

trading places

When Trump says after his meeting with Xi that, “We have a very good relationship. We have great chemistry together. We like each other”, thoughts return to G. W. Bush thinking he saw into Vladimir Putin’s soul. This is the same Xi Jinping who — playing on world alarm at America’s choice of Donald Trump — gave a “well-received” speech at the annual gathering of world potentates in Davos, Switzerland, in which he made the case that China should now be the power to “guide economic globalization”, not the U.S. He lectured America that it was walking into the “Thucydides trap” that befell the Spartans for their failure to accommodate the rising power of the Athenians.

Kim Jong-un’s claim of last year that one of North Korea’s underground tests was of a hydrogen bomb was met with international skepticism, but recently an online ad offering 22 pounds of lithium 6 for sale every month by North Korea’s third secretary at its embassy in Beijing was an eye-opener for intelligence networks. For the North to have an excess of lithium 6, which can boost an atom bomb into a hydrogen bomb, “magnifying its destructive power by up to 1,000 times”, says they are at work on a hydrogen weapon. There was concern that Kim would order the sixth nuclear test to coincide with the mid-April celebration of the 105th anniversary of the birth of Kim Il-sung, the country’s founder. Instead, on the morning after caissons bearing the country’s repertoire of missiles rolled by on parade, North Korea launched yet another ballistic missile. It exploded just after liftoff, leading to renewed speculation that the U.S. may have infiltrated the North’s systems with malware as the cause of so many failures. But few doubt that Mr. Kim’s engineers will achieve the objective of a missile capable of reaching the West Coast of the United States.

islands in the sea

China has built out 3000 acres on rocks and reefs in the South China Sea. The rights to all are contested by other bordering countries, but China claims those it wants, even when hundreds of miles from China’s coastline and close to a rival country. A short time ago it had enough manufactured real estate to lay down airstrips capable of handling the largest aircraft. Now, three of the islands have room enough for fighter bases comparable in size to those on the mainland and for the 17,000 personnel of an entire fighter division. With President Obama at his side at the White House in September 2015, President Xi had said “China does not intend to pursue militarization” of the artificial islands, a promise broken by the recent installation of anti-aircraft batteries. They are “primarily for defense and protection, and this is proper and legitimate”, states the website of the Defense Ministry. “If someone was at the door of your home, cocky and swaggering” — that would be the U.S. merely sailing by, patrolling international waters — “how could it be that you wouldn’t prepare a slingshot?”.

“We’re going to have to send China a clear signal that, first, the island building stops. And second, your access to those islands also is not going to be allowed.”

Rex Tillerson said that in January during his confirmation hearing. Apart from how that manifesto could be enforced other than by war, how do we enlist China’s aid against North Korea with that ill-considered provocation still aloft in the sea breezes?

China is building its navy, which it has not done for 600 years. Its ships have begun to roam far from home. There are anguished voices in America that decry how we have allowed our navy to shrink to so few ships. Others call them captives of history who imagine a bygone world in which the outcome of a war could turn on set piece ship-against-ship battles.

This is an age of technology in which a shower of the low-cost missiles that China has been developing could send one of our Nimitz class nuclear carriers to the bottom with its 5,000 souls on board and its 90-or-so planes. The Chinese have concentrated on long-range anti-ship missiles. By 2010, a Chinese program to pack conventional explosives into a nuclear ballistic missile, converting it into a carrier-killer that would descend from space at hypersonic speed, had reached “initial operational capability”. Other anti-ship missiles can be delivered from aircraft, guided-missile destroyers, fast patrol boats and submarines. We have known for five years of China’s building an anti-ship ballistic missile base in southern China’s Guangdong Province from which its missiles are capable of reaching the Philippines and Vietnam.

Our navy, which for decades has performed the service of maintaining the safety of these shipping lanes through which pass half the world’s cargo tonnage and 80% of the oil destined for China, is now told in a number of confrontations to “leave immediately”, that our passage through these waters is “provocative behavior”. That unless America stopped objecting to the island-building, war would be “inevitable”. And in the grip of China,
dependent on them as we are for stemming the North Korean threat, conceding that the South China Sea is to become a Chinese lake is what we might have to do.

next, the pacific

Appropriation of the islets and reefs and the equally artificial surrounding economic zones of the South China Sea is only the beginning. With its rapid naval build-up, China intends to project its power ever outward. Successive lines on their planning maps embrace successive island chains as shown on this map, such that ultimately the intention is to dominate well into the Pacific Ocean — as far as America’s Guam in the 2nd Island Chain, and then beyond this map to a 3rd Island Chain where the United States currently has unchallenged naval supremacy. The final chain begins with America’s and Russia’s Aleutian Islands; in unofficial Chinese military literature the line extends southward to include the Hawaiian Islands.

Trump’s Circuitous Route to Striking Syria

President Trump was genuinely horrified at what can only been assumed was the latest atrocity of the murderous madman who is still the president of Syria.

“These heinous actions by the Assad regime cannot be tolerated…That attack on children yesterday had a big impact on me.

When you kill innocent children, innocent babies, babies, little babies, with a chemical gas that is so lethal, and people were shocked to hear what gas it was, that crosses many, many lines, beyond a red lines, many, many lines.

And I will tell you, it’s already happened, that my attitude toward Syria and Assad has changed very much.”

A fair question is what did Donald Trump think of the Syrian president before, while he was destroying the nation’s largest city, deliberately bombing every hospital and slaughtering his own people with barrel bombs? That his response to Syria was a ban to to block desperate refugees from entry into this country “indefinitely” says that he was entirely indifferent to their plight. Perhaps that will now change.

whatever

Revealingly, just days before, Trump had abandoned the Obama administration policy of the last five years that, however weakly, sought Bashar al-Assad’s removal from power. “With respect to Assad, there is a political reality that we have to accept”, Sean Spicer announced at the end of March. Advocacy of Assad’s removal was no longer “a fundamental option”.

“The United States has profound priorities in Syria and Iraq, and we’ve made it clear that counterterrorism, particularly the defeat of ISIS, is foremost among those priorities”.

Secretary of State Rex Tillerson confirmed the new policy. Asked by a reporter, “About President Assad, should he stay or should he go?”, Tillerson answered, “I think the status in the longer term of President Assad will be decided by the Syrian people” — a people that, with some half million dead and five million refugees is in no way able to decide in an election that will never take place. So his meaning was baffling.

How did those signals not turn Obama’s red line into Trump’s green light, telling Assad that from the U.S. standpoint, he was free to do as he wished without repercussion?

Yet Trump, who has an aversion to accepting blame, went out of his way to make the gas attack the result of Obama’s failure to act in the Syrian civil war, much as he had tried to make the costly raid in Yemen Obama’s plan gone wrong. After a perfectly apt renouncement of the attack, Trump attacked the former president:

“These heinous actions by the Bashar al-Assad regime are a consequence of the past administration’s weakness and irresolution. President Obama said in 2012 that he would establish a ‘red line’ against the use of chemical weapons and then did nothing”.

It is just such weakness and irresolution that Trump had repeatedly advised “very foolish leader” Obama to follow in an extensive series of tweets in September, 2013, when the Obama administration was considering military action against the Assad regime after a horrific sarin gas attack two weeks earlier in August, and about a year after Obama had drawn his figurative red line. Trump had then repeatedly stressed to Obama that he do nothing. “Syria is NOT our problem”, he wrote. Two of the tweets expose Trump’s attitude and transactional view of foreign policy, devoid of concern for a brutalized people:

In now faulting Obama for not doing what he then urged not be done, Trump was either unaware that his tweets live on for years and that he’d be caught out, or is confident that his followers look no further than what he says today. There were many more such tweets, 16 of them dredged up at Mother Jones

Obama’s failure to act in Syria early on, to at least identify a rebel group to support with supplies and weapons, as well as his neglect of the growing North Korean problem for eight years (as did his predecessor for another eight), are viewed as Barack Obama’s most serious foreign policy failures. When his red line was actually crossed, he stepped back from it. That’s the weakness that Trump would have heard repeated endlessly on Fox News, except that those on the right had no taste to embark on another war, preferring the easier course of talking tough. If Obama was reluctant, as accused, partly he was concerned for having no right to attack another country. That right belonged to Congress. The Authorization to Use Military Force (AUMF) adopted moments after 9/11 restricted military action only against those elements such as al Qaeda that had been involved in the attacks.

Obama wanted to get Congress to revise the AUMF to give him the latitude to take action in Syria. Congress wouldn’t touch it. He would have had to go it alone — one man declaring war backed by no one, and with 63% of Americans against in agreement with Trump’s tweets.

That is when Putin extracted a pledge by Assad to remove Syria’s entire stock of chemical weapons. Obama was “rescued in humiliating fashion”, but it was the better solution.

the difference a day makes

Mr. Trump had nowhere mentioned the Russians in his initial comment or at his Rose Garden news conference with King Abdullah of Jordan alongside, and he avoided any red line of his own in response to a reporter, saying,

“Militarily I don’t like to say where I’m going or what I’m doing. I’m not saying I’m doing anything, one way or the other”.

Amb. Nikki Haley at the U.N.
Russia refuses to acknowledge that Assad had committed the massacre with the preposterous claim that Syrian aircraft must have hit a rebel store of chemical weapons.

That left it to Ambassador to the U.N. Nikki Haley to show the nation’s mettle at an emergency meeting of the Security Council. She held up gruesome photos of the victims and warned:

When the United Nations consistently fails in its duty to act collectively there are times in the life of states that we are compelled to take our own action”.

And it was she who attacked Russia in no uncertain terms:

“They chose to close their eyes to the barbarians. They defied the conscience of the world. How many more children have to die before Russia cares? If Russia had been fulfilling its responsibilities there would not even be any chemical weapons left for the Syrian regime to use.”

But a day later, there was much astir and the strong hint of action. Asked now about Assad, Tillerson replied, “There is no role for Assad in governing Syria and Russia should reconsider its support of him”. Asked if the U.S. is organizing a coalition to remove the Syrian leader, he answered, “Those steps are underway”.

On Air Force One en route to meet with China President Xi Jinping at Mar-a-Lago, Trump said:

I think what Assad did is terrible. I think what happened in Syria is one of the truly egregious crimes…and it shouldn’t be allowed to happen…is a disgrace to humanity and he’s there and I guess he’s running things, so something should happen”.

Defense Secretary James Mattis had also gone to Florida to discuss military options, with speculation running between cruise missiles aimed at Assad’s chemical weapons capability, to risking American pilots against Russia-installed surface-to-air missile batteries to take out Syria’s air force, with the risk of hitting Russian planes and maintenance crews on the ground. NBC’s Richard Engel, who said he had been talking to military officials, said “this could develop very quickly, perhaps even in the next several hours”.

He was right. Within two hours of that prediction, the cruise missiles flew. Commentators left and right, and most likely the American people at large, praised Trump for finally doing something against the Syrian dictator after Obama idly watched the carnage for five years.