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  • Don’t Ruin A Chance for Tax Reform with “Border Adjustments”

    Don’t Ruin A Chance for Tax Reform with “Border Adjustments”

    As part of an otherwise very good tax reform plan, House Republicans have proposed to modify the corporate income tax so that it becomes a “destination-based cash-flow tax.”

    For those not familiar with wonky inside-the-beltway tax terminology, there are three main things to understand about this proposal.

    • First, the tax rate on business would drop from 35 percent to 20 percent. This is unambiguously positive.
    • Second, it would replace depreciation with expensing, which is a very desirable change that would eliminate a very counter-productive tax on new investment outlays. This is basically what makes the plan a “cash-flow” tax.
    • Third, any income generated by exports would be exempt from tax but the 20-percent tax would be imposed on all imports. These “border-adjustable” provisions are what makes the plan a “destination-based” tax.

    I’m a big fan of the first two provisions, but I’m very hostile to the third item.

    I don’t like it because I worry it sets the stage for a value-added tax. I don’t like it because it is designed to undermine tax competition. I don’t like it because it has a protectionist stench and presumably violates America’s trade commitments. I don’t like it because that part of the plan only exists because politicians aren’t willing to engage in more spending restraint. And I don’t like it because politicians should not try to reinvent the wheel when we already know the right way to do tax reform.

    Heck, I feel like the Dr. Seuss character who lists all the ways he would not like green eggs and ham. Except I can state with complete certainty I wouldn’t change my mind if I was suddenly forced to take a bite of this new tax.

    Today, I’m going to augment my economic arguments by noting that the plan also is turning into a political liability. Here are some excerpts from a news report in the Wall Street Journal about opposition in the business community.

    A linchpin of the House Republicans’ tax plan, an approach called “border adjustment,” has split Republicans and fractured the business world into competing coalitions before a bill has even been drafted. …There is also global uncertainty: Other countries may retaliate, either by border-adjusting their corporate taxes or by challenging the U.S. plan at the World Trade Organization as too tilted toward American producers.

    And The Hill reports that grassroots organizations also are up in arms.

    Americans for Prosperity is stepping up its efforts to advocate against a proposal from House Republicans to tax imports and exempt exports, as lawmakers are increasingly raising concerns about the proposal. …AFP has hundreds of volunteers and staff who are making phone calls about the proposal. The group has about 100 meetings set up with Congress members and their staff for next week, while Congress is in recess.

    Meanwhile, the Economist reports that the plan is causing uncertainty around the world.

    To offset a border-adjusted tax of 20%—the rate favoured by House Republicans—the greenback would need to rise fully 25%, enough to destabilise emerging markets burdened with dollar-denominated debts. If the dollar stayed put and wages and prices rose 25% instead, the Federal Reserve would have to decide how to respond to an unprecedented surge in inflation. Why tolerate such disruption?

    Holman Jenkins of the Wall Street Journal has a devastating take on the issue.

    Like a European value-added tax, its cost would be deeply hidden in the price of goods, thus easily jacked up over time. Also, compared with the current tax structure, businesses would see less incentive to move abroad in search of lower taxes, eroding a useful pressure on politicians to be fiscally sane. And because the tax would alter the terms of trade, it would be expected to lead to a sharp increase in the dollar. U.S. holders of foreign assets would suffer large paper losses. Since many foreigners borrow in dollars too, a global debt crisis might follow. The tax might also violate World Trade Organization rules, inviting other countries to impose punitive taxes on U.S. exports.

    Last but not least, John Tamny outlines some of the political downsides at Real Clear Markets.

    …the House of Representatives…is aggressively promoting a…tax on imports. …When we get up and go to work each day, our work is what we exchange for what we don’t have, including voluminous goods and services produced for us around the world.  …Party members are proudly seeking a tax on our work. …Only the “stupid” Party could come up with something so injurious to every American, to the American economy, and to its growth-focused brand.  But that’s where we are at the moment.  The Party that attained majorities with its tax cutting reputation is aggressively seeking to shed its growth brand through the introduction of tax hikes meant to give politicians even more of what we the people produce.  If so, the majority Party can kiss its majority goodbye.  It will have earned its minority status.

    For what it’s worth, I think John overstates the case against the plan. The additional revenue from border-adjustable tax provision would be used to cut taxes elsewhere. Heck, the plan is actually a significant net tax cut.

    But John is right when you look at the issue through a political lens. If the DBCFT actually began to move through the legislative process, opponents would start running commercials about the “GOP scheme to impose new consumption tax on Americans.” Journalists (most of whom dislike Republicans) would have a field day publicizing reports about the “GOP plan to raise average family tax bill by hundreds of dollars.”

    Such charges would be ignoring the other side of the equation, of course, but that’s how politics works.

    All of which brings me back to one of my original points. We already know that the flat tax is the gold standard of tax reform. And we already know the various ways of moving the tax code in that direction.

    My advice is that Republicans abandon the border-adjustable provision and focus on lowering tax rates, reducing double taxation, and cutting back on loopholes. Such ideas are economically sounder and politically safer.

    Republished from International Liberty.

    Daniel J. Mitchell

    Daniel J. Mitchell is a senior fellow at the Cato Institute who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.

    This article was originally published on FEE.org. Read the original article.

  • The Congressional Budget Office Can’t Count

    The Congressional Budget Office Can’t Count

    The Congressional Budget Office just released their national debt prediction for the upcoming decade, and it’s not good. Assuming the government does not add any new costs, the CBO is expecting another $10 trillion to be added to the current debt, raising the total to $30 trillion.

    But as bad as that is, the reality will likely be even worse. The CBO has historically underestimated future debt by a huge margin. Judging by their past optimistic errors, the real debt in 2027 will likely not be $30 trillion, but $75 trillion.

    The next decade’s tax situation will be similar. The CBO is predicting that the government will collect $5.1 trillion in taxes in 2027, but, again, their tax predictions have been consistently wrong. The real number will most likely be closer to $4.1 trillion, which is a good thing for taxpayers but bad for the deeply indebted government.

    And it keeps going. Assuming interest rates don’t change between this moment and 2027, the government will owe about $2 trillion in interest alone. However, interest rates are already starting to go up, and the CBO thinks they’ll be much higher in 2027. Even if rates don’t rise above the historical average of 6 percent (versus our current rate of 2.5 percent), the annual interest rate will consume 75 cents of every tax dollar.

    A version of this story first appeared on US News.

    Antony Davies

    Antony Davies is an associate professor of economics at Duquesne University.

    He is a member of the FEE Faculty Network.

    This article was originally published on FEE.org. Read the original article.

  • So… What’s a Blockchain?

    So… What’s a Blockchain?

    I live in the world of blockchain and smart contracts. I hear people using terms that remind me of when we were building the Web back in the 1990s: they are talking, but they aren’t understanding each other because they don’t have a common understanding of the terms of a new technological order.

    The worst part is not that they don’t understand each other but that they think they do understand each other!

    Here, I’d like to offer a few basic definitions from my keynote speech that I hope will help people get on the same page and collaborate.

    What Is a Blockchain?

    There is tremendous confusion over what a blockchain is. Ask ten experts, you’ll get eleven answers.

    I will offer my definition, hoping it will help people understand a bit better:

    A blockchain is a shared ledger that everyone trusts to be accurate forever.

    Let me unpack that.

    First, it has nothing to do with blocks and chains. If you hear someone answer the question by talking about blocks and chains, I submit that this person doesn’t get it. Yes, we have blocks and chains today, but the blocks and chains don’t matter. When we have $500 billion in value stored on shared ledgers, I hope there will be no blocks and chains involved.

    The key is the shared ledger. What’s a ledger? It’s a record of transactions. That’s it. That’s the “one simple trick” for changing the world completely, from top-down hierarchical institutions to autonomy, freedom, and self-determination.

    How? Sharing a ledger means we don’t both keep our own books, but rather we share a common set of books. We trust each other to keep a record of transactions that we both believe represents the truth.

    Magically, this enables us to get rid of banks, insurance companies, most government institutions, and even media companies. I’ll expand on that a bit more in another essay, but you can read many of the use cases on my website.

    Building the Trust Machine

    I said everyone trusts this shared ledger to be accurate, and that includes people who don’t trust each other. So the blockchain and smart contracts are called “the trust machine,” because we no longer have to rely on third parties to help us conduct business.

    Make a list of everything banks do. It comes down to trust — right? The rest is mechanics. We trust them to help us manage our money.

    How well has that worked out? How many billions have the top banks been fined for screwing their customers to increase fees? Many. Every bank is now under heavy pressure to reduce headcount and improve profits. We can do all those things now without banks, thanks to the trust we have in smart contracts.

    Forever. Forever is a long time. We call the blockchain “immutable,” because it would take something like $1 billion to hijack the bitcoin blockchain today and start changing records of past transactions.

    While it’s not impossible to do, it is very difficult to see how you’d make any money on that $1b investment. Because it’s an impractical use of hundreds of millions of dollars, we don’t expect anyone to change the record. In the future, when billions of records are on the blockchain, and when the blocks and chains are all gone, we’ll use trusted systems to execute smart contracts that will be as commonplace as using PayPal or ApplePay today. The difference will be that there won’t be any large institutions or fees involved.

    What Can You Do with a Blockchain?

    Here’s a slide I show three times during my talk:

    I mentioned smart contracts, the short version of which is: smart contracts let us program the assets on the blockchain, from cryptocurrencies to gold to diamonds to land to stocks and bonds and many other valuable things.

    Thus, the blockchain represents programmable money.

    If you can program money, you can replace most white collar workers with software. At my new company, that’s exactly what we’re working on.

    Where to Go from Here?

    This isn’t meant to be a complete overview. I’ll talk about smart contracts and other terms in in the future if people are interested. For now, I invite you to four web sites I have built to help people learn about the decentralized revolution:

    DecentralStation.com — my online starting point for your deep dive into the world of blockchain.

    Twenty Thirty — my new company, which is completely run on volunteer power and we’re having a great time changing the world.

    BusinessAgilityWorkshop — this site is dedicated to helping people build a decentralized, agile mindset. There are plenty of essays and short videos here.

    The Culture Deck — A well-referenced essay on the 24 aspects of culture you can start changing today that will lead you to a more vibrant, autonomous culture that can thrive on change.

    I’m giving several talks in London the week of March 20th, including my big introduction to blockchain. Please come learn.

    Feel free to leave comments and ask me what you’d like to learn about. I believe that William Mougayar is correct when he says that all technological shifts are much more about attitude, culture, and business process change than they are about the actual new technology.

    Once you see the world from a more adaptive, agile mindset, you’ll see that the blockchain really is going to change everything forever.

    Republished from Startup Grind.

    David Siegel

    Entrepreneur, investor, start-up coach, and consultant – working to bridge the gap between perception and reality in business. See www.businessagilityworkshop.com

    This article was originally published on FEE.org. Read the original article.