Paul Ryan Seriously Misleads About Foreign Tax During CNN Town Hall

Speaker Paul Ryan tonight demonstrated either a lack of mastery of his topic - taxes - or something much worse, less trustworthy.

Ryan gave a Town Hall on CNN tonight in which he addressed his plan for tax reform [6:05-11:00].  In this short segment, Ryan makes his pitch for a border adjustment tax, heavy with heart tugs over closed factories that make obsolete products. He concludes with this sentence:  "The point I'm trying to say is . . . by [taking] our tax off our exports and plac[ing] it on our imports, we are leveling the playing field and then at the end of day, we're making China pay for our tax reform."

Whoa, whoa, whoa.  Ryan, perhaps inadvertently, admitted the truth - he plans to stick China with the bill for his tax reform.  Watch the tape - it's at the end of this section of the Town Hall. Actually, I think he wants to stick importers with the bill, and by virtue of that, stick it to China. This is rank politics playing to the uncomprehending masses, but it's bad and dangerous policy.  

Ryan's description of foreign tax is more than flawed - it's uncomprehending.  He is not the only one telling this story, either.  Kevin Brady is also wont to mislead on this subject.  

Here's how it really works:

There are TWO kinds of taxes imposed in other countries - consumption taxes (VAT) and income taxes. China has both, the EU has both, many places have both.  The U.S. has income taxes, but not a VAT.  We have local sales taxes, too.  

Most Americans have little experience with VAT and don't really understand how VATs work. Essentially, at each level of distribution, a "value added tax" (VAT) is paid, and the seller is entitled to remit the difference between what he/she paid and what he/she collected.  The seller therefore functions largely as a tax collector, not a taxpayer.  The last guy in the chain effectively pays the whole bill.  A company in the middle pays nothing - and VAT would not appear on its financial statements anywhere.

An example of VAT math:  A sells a widget to B for $20 plus 20% VAT ($4).  B pays $24, leaving A with his $20, plus $4 for the government which is then remitted.  B sells the widget to C for $40 plus $8 VAT.  B makes a $20 profit ($40-$20) on his widget sale and has $8 from C in hand.  He is entitled to net the VAT proceeds with his $4 VAT expense, so he retains $4 and remits $4 to the government. At this point, B has incurred no tax expense itself. C sells the widget to a consumer D for $80 plus $16 in VAT.  C retains $8 in VAT reimbursement and remits $8 ($16-$8) to the government.  None of A, B or C has paid any net tax itself, but the government has collected $4 plus $4 plus $8 = $16, the same sum as paid by D..  D paid the full VAT bill as the person who consumed the widget finally. The requirement that A, B and C pay in their net VAT at each distribution stage makes VAT less subject to cheating, and hence VAT is very attractive to tax collectors.

When Paul Ryan or Kevin Brady talk about "border adjustments" in other countries, they are referring to the fact that if C had exported the product to the U.S., he would have charged the U.S. buyer $80 (same price as to the local buyer) but not collected the $16 VAT.  His rebate would be for his $8 expense paid to B.  This means, A paid in $4 received from B, B paid in $4 received from C, C came out even (paid $8 to B, but received $8 back from the government), D paid nothing (he's gone) and the Chinese government also ended up with nothing ($4 plus $4 minus $8).  This is PRECISELY THE SAME as the consumption taxes paid by a competing American manufacture (none).  We don't pay consumption taxes.  And when a U.S. manufacturer exports into a VAT jurisdiction, yes, a VAT is imposed on the importer for the purchase.  BUT the importer would ALSO pay VAT on a product purchased from a local manufacturer.  So the treatment is equitable - the product exported into that market bears exactly the same VAT burden as a local product and tax provides no incentive to direct purchases to anyone except the best supplier.

Where Ryan and Brady really mislead is by implying that there is no income tax.  As you may realize, we pay income tax here.  We pay a hefty share of our income to the U.S. government so it can buy shiny new Cruise Missile.  In the case of Learning Resources, Inc, we are proud to pay a meager 43.6% tax rate to the Feds and State of Illinois.  Ouch. What do they pay in other countries?  China 25%.  Germany is 29.72%, Ireland 12.5%, Canada 26.5%, U.K. 20%, Switzerland 17.92%. The U.S. has the third highest top marginal corporate tax rate in the world, only exceeded by the UAE and Puerto Rico.

So what's really going on here?  VAT does NOT prejudice any good ole' American manufacturers, and no one is losing sales because of it.  Imposing a border adjustment tax does NOT repair some form of tax injustice.  Do you honestly believe we have been taxing ourselves in a defective manner, putting the American Way of Life at risk since 1913, and we only found out when the estimable team of Paul Ryan, Kevin Brady, Alan Auerbach and Douglas Holtz-Eakin figured it out?  Please dear G-d, tell me you don't believe that. . . .

What Ryan and Brady would strongly prefer is that you not notice or think about the real problem - namely that the U.S. has really high corporate tax rates. Those rates are uncompetitive and are the reason U.S. companies play games with taxes and look for opportunities to invert or cheat. Foreign competitors enjoy a cash flow advantage because their governments don't soak them as much as ours does.  Ryan and Brady want to fix that, and see the border adjustment tax as their funding mechanism.  The rest of their story is just spin.  And they don't care if this change in law kills my company.  

Sadly, they are prepared to engage in high stakes gambling with our economy and our livelihoods to fund their planned tax cuts.  It's irresponsible and untrustworthy.  We must hold these people to account.