From the comments, on the new Republican tax plan

by on January 9, 2017 at 2:02 pm in Current Affairs, Economics, Law | Permalink

The non-deductibility of imports is simply crazy. It will immediately increase inflation. Take IKEA, for example, they cannot source locally, they will increase prices immediately by 20%, or whatever the tax will be. At all effects, it is a flat tariff of 20% on every import. This guy seems to want to transform the US into North Korea. And think about the distortions: Boeing will become a purchasing company, making more money using the tax-credit to buy prosciutto and Camembert to sell to retailers at prices lower than the marginal cost, than producing planes.

That is Coasean reasoning from Massimo, there are other good comments as well.  For instance Bob noted:

There will be a huge move to asset based leasing. So Wal-mart, instead of borrowing money will sell thier real estate to a REIT and lease it back. They essentially can keep the deduction.

1 megamie January 9, 2017 at 2:08 pm

US tax reform is vital but Donald Trump’s plan is flawed
https://www.ft.com/content/7e5900ec-d401-11e6-b06b-680c49b4b4c0

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2 inertial January 9, 2017 at 2:09 pm

So all that separates USA from North Korea is a flat 20% tariff on import? Okay, fair enough.

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3 Borjigid January 9, 2017 at 2:41 pm

The context is trade. A flat 20% tariff send the US a long way towards autarky.

Like North Korea.

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4 Urso January 9, 2017 at 4:03 pm

A 20% tariff on furniture imports is not even close to anything resembling autarky, but even if it were this would remain an asinine comparison. The US economy is literally more than a *thousand times* larger than NK’s. (GDP $12 billion vs. $16 trillion). The planet Earth is an autarky. Does that mean we’re all living in North Korea?

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5 msgkings January 9, 2017 at 4:16 pm

Lower Martian tariffs!

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6 stephan January 9, 2017 at 5:27 pm

Let’s label IKEA a currency manipulator, it will be easier to slap the tariff

7 Dick King January 9, 2017 at 7:57 pm

Let’s take a look at the balance of trade.

We export several billion dollars in high tech goods to mars, mostly electric self driving cars and communication satellites, and import very little.

-DK

8 Borjigid January 9, 2017 at 5:52 pm

The 20% tariff under discussion is on ALL imports, not just furniture. Nor did I say it would be autarky, just “a long way towards” it. If you think a 20% tariff or equivalent wouldn’t have much effect, we can argue that. But misreading or misrepresenting what I wrote is not a good start.

The size of the US economy is irrelevant here, the question is how much the US will trade with the rest of the world. Again, context. Neither the original post nor me are comparing the US and North Korea on any dimensions besides trade.

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9 Urso January 9, 2017 at 6:19 pm

The size of the US economy is completely relevant because for a large enough economy, autarky becomes a meaningless term. Hence my flippant comment towards Earth itself being an autarky. It is, but so what.

10 Borjigid January 9, 2017 at 7:08 pm

Yet most economic studies continue to find that participating in the global market (read: a bigger market than America’s) is beneficial.

The things that drive economic growth- specialization and technological progress- show increasing returns to scale. So no, America is not “large enough” for autarky to be a meaningless term.

If we move towards autarky, we’ll be worse off. Trump’s tax plan is a step in that direction, and therefore poor policy.

11 4ChanMan January 9, 2017 at 7:52 pm

Looks like you just revealed yourself to be a major Cuckservative.

12 gregor January 10, 2017 at 11:07 am

@Borjigid For whom precisely is it beneficial? Is it more efficient in a Pareto or Kaldor-Hicks sense?

13 Urso January 10, 2017 at 11:33 am

Assuming that one believes that the appropriate societal goal is “economic growth,” measured on a gross scale, then your statement is indisputably correct.

14 Johnniac January 11, 2017 at 3:07 am

@gregor Kaldor-Hicks, because those made better off can hypothetically compensate those made worse off. For example job retraining is a form of hypothetical compensation that hypothetical people always hypothetically receive.

15 gregor January 11, 2017 at 10:45 am

Right, it’s Kaldor-Hicks so it really isn’t the BTFO that Borjigid seems to think it is, especially if the compensation is merely hypothetical and there are additional social effects.

16 Jamie_NYC January 9, 2017 at 2:16 pm

This is indeed an excellent comment, especially this part: “Ikea will immediately increase the prices by 20%, or whatever the tax will be”. Because you just have to buy your furniture at Ikea, othewise you will be short, just like in Nort Korea. It all makes sense now! It even rhymes: Ikea – North Korea!

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17 Anon January 9, 2017 at 2:23 pm

Make America short again ! Sounds like a great slogan.

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18 leppa January 9, 2017 at 2:22 pm

If the US imposes an import tariff, will not others react by adding additional tariffs for imports from the US ? What am I missing ?
Then Companies can only make money by value addition to materials that are sourced within the US.? Are we that self-sufficient ?

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19 8 January 9, 2017 at 2:36 pm

Other countries already have the same “tariffs” via favorable taxation policies and discrimination against foreign firms. This is a negotiation and trade deficits can fall by making it easier for Americans to export. Foreign countries can increase global trade by increasing imports from the United States, or making it easier for American firms to compete with local companies in the local market.

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20 anon January 9, 2017 at 2:24 pm

It is a good comment, but not because we will have a 20% Ikea tax but because it shows we won’t. Too crazy, too much disruption.

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21 msgkings January 9, 2017 at 2:26 pm

Here’s where my wait-and-see attitude on Trump meets the road. The proposal is indeed the start of a massive trade war, and I hope they aren’t too stupid to realize that.

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22 anon January 9, 2017 at 5:46 pm

The Kushner news isn’t too good for anyone looking for a regression to the mean.

One of the most powerful men in America, by marrying well?

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23 msgkings January 9, 2017 at 6:00 pm

Worked for Hillary Clinton. Sargent Shriver too.

Who’s to say those two, or Kushner for that matter, aren’t (weren’t) also talented in their own right?

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24 ConfirmationBiasIsAFemaleDog January 9, 2017 at 6:52 pm

Kushner’s subpar performance in high school and college (amply documented elsewhere) would seem to suggest he’s not particularly talented beyond winning the genetic lottery.

25 anon January 9, 2017 at 6:59 pm

No. Never has who you married been such a factor. Past parallels pale in comparison.

26 anon January 9, 2017 at 7:04 pm

And let’s remember that this isn’t about Kushner himself. This is about Trump’s closed circle, inability to identify and trust expertise, falling back, again and again, to his kids.

To repeat, we are so screwed.

Thanks again to every false equivalence bullshit artist, including the one just above.

27 Just Another MR Commentor, King of the Komments January 9, 2017 at 7:43 pm

I’m just waiting for Trump to fullfill his most important campaign promise: throwing Hillary in the slammer.

28 Post-Truth Politics January 9, 2017 at 8:39 pm

This is about Trump’s closed circle, inability to identify and trust expertise, falling back, again and again, to his kids.

Exactly. Trump is the Dunning-Krueger Effect on steroids. Complete ignoramus about economics and government. And completely unaware of how ignorant he is. He’s (supposedly but no tax returns realeased, so no one knows) a billionaire. And one of the U.S. cultural myths is that billionaires are perfect and know everything– even about fields in which they have zero training and zero experience. And both DT and his supporters believe that myth fervently.

29 Post-Truth Politics January 9, 2017 at 8:40 pm

To Just Another M R Commenter

He’ll have to wait until he declares himself kind to do that, since there is no evidence that HRC did anything illegal

30 Shane M January 9, 2017 at 3:17 pm

Market doesn’t seem to have a big view on this currently. Most retail stocks roughly flat on average.

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31 FE January 9, 2017 at 2:36 pm

Why can’t IKEA source locally?

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32 msgkings January 9, 2017 at 2:51 pm

Isn’t their thing selling Scandinavian stuff? They can’t just be another local retailer.

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33 Harun January 9, 2017 at 10:07 pm

IKEA makes virtually nothing in Scandinavia anymore.

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34 Johnniac January 11, 2017 at 3:13 am

Meet your new end table, “Clēētus.”

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35 Jeff R January 9, 2017 at 2:51 pm

I wondered the same thing. Is making cheap, shoddy furniture that needs to be assembled with a series of dow rods, allen wrenches, and pictorial instructions a job Americans just won’t do?

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36 Jan January 9, 2017 at 4:16 pm

Yes. I’ve told my wife that I refuse to put together another Brimnes.

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37 Urso January 9, 2017 at 6:22 pm

My (over?)reaction to this article may be colored by how much I hate Ikea furniture. It is junk, people

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38 Vivian Darkbloom January 9, 2017 at 2:52 pm

Exactly right. Pine and partical board are the main components. The re-sourcing would not happen overnight. More likely, the transfer price charged by the foreign producer and the related US retailer would change to shift more profit to the US. Over time, more product would be US sourced and / or consumers would shift to US competitors. Both results are actually goals of the tax system. Initially, measured inflation would increase, but this would be a one-time charge similar to adopting a VAT (query how many economists would be objecting to that?)

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39 AlanG January 9, 2017 at 3:05 pm

The American company Techline produces high end ‘Ikea’ type products. A fair number of years ago I assembled the bedroom furniture for the master and two daughter’s bedrooms using Techline products. I think they are now only doing office stuff these days. The Techline stuff really held up well and was not nearly as lightweight as comparable Ikea merchandise. Assembly was exactly the same in both cases.

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40 Harun January 9, 2017 at 10:08 pm

Sauder also makes furniture in a heavily automated plant in Ohio. Or they did a few years ago.

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41 Vivian Darkbloom January 9, 2017 at 3:05 pm

Re: inflation. The effects might be less dramatic than feared. First, foreign exporters to the US market would likely reduce prices (to the extent not taken care of by a stronger dollar) to preserve market share. Consumers may also switch to US products that are not affected by import duties. As noted above, transfer prices would likely be affected. Overall, inflation would likely see a one-time jolt, but much less than feared. Almost certainly less than a sudden introduction of a VAT which most economists seem to favor without mentioning any inflation “risk”.

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42 A Definite Beta Guy January 10, 2017 at 9:10 am

Ctrl+F “transfer price.” Only comment mentioning it. Good catch. IKEA creates a US subsidiary and says their crappy furniture only cost $1 to import, and sold for $100, total cost $80. They cannot deduct the $1, but can deduct the other $79, creating $21 of profit in the US.

This is using transfer pricing to encourage domiciling profits in the US, as opposed to now, where Apple can say its $700 iPhone had $699 of value created in China, which moves all profits to China, where it awaits a repatriation holiday.

Trump is also giving companies a tax-free repatriation holiday and immediate expensing of all capital expenses to build US production.

Don’t see the problem.

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43 Harun January 9, 2017 at 10:06 pm

IKEA does source locally. They even had a US manufacturing facility a few years ago, and they buy some from Sauder’s plant as well.

Notice how the writers never know the actual facts about some company, just a stylistic bit or two.

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44 Adam January 9, 2017 at 2:59 pm

There are many bad results from non-deductibility of imports, but higher inflation is not one. Inflation is not 20% higher prices for some goods.

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45 stephan January 9, 2017 at 3:14 pm

Destination based cash flow tax (DBCFT) . Alan Auerbach of Berkeley is a big proponent

https://www.taxpolicycenter.org/sites/default/files/destination-based-cash-flow-tax-proposal-and-development_0.pdf

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46 mike January 9, 2017 at 3:21 pm

WalMart already uses REITs to own most of its real estate.

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47 Thanatos Savehn January 9, 2017 at 8:15 pm

Stan Kroenke and his partners figured this out decades ago.

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48 Vivian Darkbloom January 9, 2017 at 3:27 pm

“There will be a huge move to asset based leasing. So Wal-mart, instead of borrowing money Will sell their real estate to a US REIT and lease it back. They essentially can keep the deduction.”

I fail to see how this is a “good” comment. Rather, it strikes me as a rather shallow.analysis.

There may be other good reasons to do this under existing law; however, have either Bob or Tyler considered the loss of an interest deduction to the REIT under the new tax regime? Financing that purchase from Walmart would be much more expensive and this is reflected in price. No free lunch here.

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49 A Definite Beta Guy January 10, 2017 at 9:16 am

That’s my fault as well, a lot of REITs are heavily leveraged and the entire business model would go-away. I get the idea that switching from debt-financing assets to leasing is preferable now, but the lessor still needs to finance, and needs to choose either debt or equity. I guess some bank can set up a US HQ and just funnel in retained earnings from a foreign branch to create an equity stake and finance in their home country….but I’m not an expert on this kind of arbitrage

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50 bob January 12, 2017 at 10:21 am

No. According to 2016 10-k Walmart owned 4,593 properties in the U.S. and leased 753.

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51 bob January 12, 2017 at 10:40 am

assume REIT’s will continue to exempt from corproate income taxes.

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52 derek January 9, 2017 at 3:44 pm

Does anyone know if Walmart borrows money to build stores, or do they use equity or cash flow?

REIT’s are another way of using equity to finance projects. If the REIT doesn’t have enough taxable profits to offset by the depreciation it would make no sense. Walmart would be able to depreciate their capital costs to lessen their tax. To take advantage of a tax saving mechanism you need income to offset.

This would also make spin off companies less attractive.

It also makes investment of profits in capital goods much more attractive.

Free trade in the 90’s was a way of forcing governments to rationalize, to remove subsidies and make their economies more competitive. It worked to a certain extent, but a different back scratching inefficient dynamic has taken it’s place. It required the availability of enormous amounts of credit to sustain consumer markets. And we have seen the effects of that, where the costs of regulation and government operations are detached from the ability of the economy to afford them. In a way this proposal brings the costs home; you can have zero carbon emissions at home but buy cheap from elsewhere. The taxation of import expenses will incite companies to invest in the US, and they will face the same barriers and problems that incited them to move offshore. What do you mean it is a 5 year planning process to put together a facility? I can do it in 6 months from start to production elsewhere. As open markets in the 90’s forced companies to compete, this will force the US political administration from top to bottom to compete. The places with a 6 month process from start to production will do extremely well, those who insist on maintaining high costs will get it from both directions.

A real tough reality for the US is that there isn’t anywhere to run to anymore. You have to make Detroit work because there isn’t a suburb to move away to where you can ignore the stink. This closes one avenue of escape.

Anyone willing to wager on who will respond well to these incentives, and who will not?

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53 The Anti-Gnostic January 9, 2017 at 9:16 pm

My understanding is that a wholly-owned LLP leases the stores from the Wal-Mart Real Estate Business Trust. If there’s a Walmart corporate attorney on-board, she can let us know.

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54 bob January 12, 2017 at 10:23 am

I don’t know waht Walmart does internally but Wal-Mart Business Turst is not a REIT. A corporation can not control a REIT. It must be independently owned.

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55 Alain January 9, 2017 at 11:44 pm

+1

Terrific comment.

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56 bob January 11, 2017 at 11:22 pm

As of the end of 2016 Wal-Mart had Property. Plant and Equipment of 166 billion and Long-Term debt of 44 billion. Interest expense was 2.5 billion. I think much of that debt was unsecured to buy back stock but it does not matter. By selling the assets to a REIT and leasing they effectively continue to write off the interest expense.

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57 Toby January 9, 2017 at 3:49 pm

I’m reminded of this paper every time I see a proposal for tax reform.

http://www.nber.org/papers/w1868

” This paper outlines a general set of principles for tax avoidance. Most of at least the common tax avoidance schemes can be reinterpreted as making use of one or more of these principles. Four such methods are described. In a perfect capital market, these methods would enable the astute taxpayer to eliminate all taxation on capital income. The fact that the tax system raises revenue is attributed to lack of astuteness of the taxpayer and/or lack of perfection of the capital market. Accordingly, models which attempt to analyze the effects of taxation assuming rational, maximizing taxpayers working within a perfect capital market may give misleading results.A full analysis of tax avoidance cannot be conducted within a partial equilibrium model; transactions which reduce one individual’s tax liability may at the same time increase another’s.We delineate tax avoidance schemes which reduce the aggregate tax liabilities of the participants. Much of the”general equilibrium” gain from tax avoidance arises from differences in tax rates, both across individuals and across classes of income. Our analysis is shown to have implications both for patterns of ownership of assets and the timing of transfers.”

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58 Martin January 9, 2017 at 8:47 pm

That was a fun read. Thanks!

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59 Vivian Darkbloom January 9, 2017 at 4:02 pm

Yes, the most simple arbitrage is regarding disparate rates. With that in mind, how much is a Wallmart deduction worth at the proposed 20 percent rate as opposed to the current 35% rate? What is the reduction in REIT/individual effective rate under the proposal? Does this make a sale/leaseback to a REIT more or less attractive than today considering also the proposed expensing rule on improvements?

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60 Vivian Darkbloom January 9, 2017 at 4:04 pm

In reply to Toby

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61 bob January 12, 2017 at 10:36 am

Walmart reported 2.56 billion in interest expense in their FY2016. For the purpose of this example assume it was all American, and not foreign debt (not true but I do not know the breakout). So Walmart will no longer be able to deduct this expense an see their tax bill increase by 512 million to pay for it.

A REIT is a company that is limited to holding real estate assets or mortgages. REIT’s can distribute income tax free. So if Walmart sells some of their existing store base to the REIT and leases it back all the lease cost will be deducted. All REIT income is tax free anyway. Other comments have stated Walmart will loses the benefit of the 100% depreciation. But the 1100% depreciation only applies to new projects. That’s why they would sell physical assets they already have.

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62 Urso January 9, 2017 at 4:08 pm

This kind of fevered doomsday rhetoric is both wearying and self-defeating. When somebody compares a 20% tax on particle-board furniture to Juche, it’s an immediate sign that I should ignore whatever this person has to say. And it leaves no room for complaints about actual problems – the media has already blown its wad by comparing a furniture tariff to North Korea, and tightened immigration checkpoints to the Holocaust.

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63 msgkings January 9, 2017 at 4:21 pm

OK set aside the North Korea comment. How does this not start a trade war? Perhaps that’s a feature not a bug but it seems inevitable.

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64 Urso January 9, 2017 at 5:04 pm

Trade war is a loaded term, but yes there will be consequences, some predictable and some less, and there will be winners and losers. I’d look forward to reading a nuanced discussion of that issue, rather than a histrionic screed comparing us to North Korea and claiming that Boeing is somehow going to transmogrify into a cured meat importing company (wtf?)

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65 msgkings January 9, 2017 at 5:16 pm

Urso, Massimo is an anarcho-libertarian nutjob. Let’s you and I discuss.

For me the biggest risk of Trump is exactly this, the start of a massive trade war (use whatever term you want). I was hoping his anti-free trade rhetoric would be like so much else he said during the campaign, total bullshit. Or maybe he’d do minor photogenic things like the Carrier deal and leave the big picture alone, with some tweaks.

We need corporate tax reform, and the idea of ending the deduction on interest is potentially revolutionary but not as scary as tariffs going up all over the world. Our living standards exist solely due to specialization, trade and technology. Without those we are living in 1800 again. Trying to make everything in the US is like using shovels to employ more people when a bulldozer is better. Tweak international trade, don’t kill it.

As far as winners and losers, my point is a huge increase in tariffs and trade barriers worldwide will create far more losers than winners.

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66 Jeff R January 9, 2017 at 5:55 pm

+1

67 Post-Truth Politics January 9, 2017 at 8:41 pm

“huge increase in tariffs and trade barriers worldwide will create far more losers than winners.”

Yes. +2

68 mgs January 10, 2017 at 11:46 am

Almost all other developed countries have a destination based, or border adjusted, VAT, which means that no deduction is provided for imports and no tax is levied on exports. So us imposing a similar tax doesn’t seem particularly controversial.

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69 msgkings January 10, 2017 at 12:34 pm

If that’s the case I’m less concerned then.

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70 Benny Lava January 9, 2017 at 5:36 pm

Why the knee jerk reaction to hyperbole? Are you the new mayor of literalville?

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71 oliver cairns January 9, 2017 at 4:31 pm
72 The Original Other Jim January 9, 2017 at 4:52 pm

Look at all these liberals, clamoring for corporations to keep their tax deductions! All because Trump proposed eliminating them! You guys are adorable!!

And you’re missing the point, as usual. Ikea doesn’t just get to ramp up their prices 20%. Ikea eventually gets replaced by a company that provides the exact same service but uses American suppliers.

Thus demonstrating that you can’t imagine a world without Ikea. But that’s your problem, not mine.

You couldn’t imagine a world where Hillary Clinton lost the deeply historic 2016 election, either… and look how well you can now!

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73 Anonymous January 9, 2017 at 5:11 pm

“Ikea eventually gets replaced by a company that provides the exact same service but uses American suppliers.”

Same with Detroit replacing all Japanese and Korean auto suppliers. Oh , we did have that once upon a time and couldn’t sustain it. Wonder why?

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74 Jan January 9, 2017 at 6:32 pm

Because not enough protectionism, clearly.

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75 AlanW January 9, 2017 at 5:19 pm

But even if it’s less than the full 20 percent, consumers will still end up paying more – and having fewer choices.

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76 4ChanMan January 9, 2017 at 5:20 pm

You hit the nail on the head – most of the commenters here are cucks

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77 4ChanMan January 9, 2017 at 5:29 pm

Of course, I’m the biggest cuck of all. Or I would be if I had ever had a girlfriend.

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78 4ChanMan January 9, 2017 at 6:06 pm

I can’t possibly be a cuck. Like all 4Chaners I am an anime-Nazi Incel.

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79 Benny Lava January 9, 2017 at 5:39 pm

Look at all these conservatives rejecting free trade just because Donald Trump does. What a bunch of beta cucks.

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80 Jan January 9, 2017 at 6:33 pm

Jim demands shittier, more expensive American stuff. And he demands it now.

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81 The Anti-Gnostic January 9, 2017 at 10:49 pm

Let me submit to you that you will pay welfare either at the cash register or to bureaucratic middlemen. The former seems less dystopic.

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82 Potato January 10, 2017 at 12:17 am

And this, gentlemen, is the real crux of the issue.

The negative externalities of McJobs replacing real work. Do they outweigh the risks of hard trade negotiation tactics, that is the question. How many fords do you see in Germany? How many GMs in japan? I’ve traveled the world, and to be honest most of the world believes in economic nationalism except for us.

You have two choices (trigger warning: simplification): efficiency or national cohesion. Choose wisely. Morally speaking , utilitarianism demands efficiency.

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83 Thinker January 10, 2017 at 2:21 am

How many people with Apple iPhones, eating McDonalds, coRporations banking with JPMorgan, people using AirBnB, Facebook, … do you see in Germany? A lot. Almost everyone uses these products.

Ford has about the same market share as BMW in Germany, it’s close to 10%.

Don’t pick on Germany. Remember they also host your military bases. When I lived there kids of military families could not be prosecuted for, for example, throwing boulders onto the autobahn killing innocent people.

By the way I’m not German and I don’t live there.

84 Andao January 10, 2017 at 4:52 am

1/3 of GM’s sales are in China

85 tjamesjones January 10, 2017 at 5:23 am

Thinker, you’ve peeled Potato with most of your points, but…… “Don’t pick on Germany. Remember they also host your military bases.”

Perhaps then we could also remember *why* Germany hosts US military bases.

86 gregor January 11, 2017 at 12:13 pm

@Thinker Yes, US domiciled corporations have a presence overseas. That is presumably beneficial to the (American?) shareholders of those corporations, but it’s less clear how beneficial it is for most American workers. Europeans use Facebook which provides a small number of tech jobs in the US and even those they try to replace with H1Bs.

87 hgfalling January 9, 2017 at 5:29 pm

I wonder if we called “exports > imports” a trade deficit and “imports > exports” a trade surplus if Trump would think we were the world’s biggest winners at trade.

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88 PeterG January 9, 2017 at 6:50 pm

A more appropriate example would be a well-connected hotel company selling the land under its hotels to a REIT.

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89 Zach January 9, 2017 at 7:07 pm

I’m confused. Doesn’t IKEA have a US factory in Danville, VA? What part of their product line has to be imported?

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90 Zach January 9, 2017 at 7:34 pm

I mean, if you tried to design a company that could quickly change the location of its factories, it would look a lot like IKEA. Wood cut to predetermined shapes, standard screws and joiners, printed instructions. I’m sure it would be a hassle for them, but I’m not sure what the stumbling block would be.

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91 Harun January 9, 2017 at 10:13 pm

To be honest, IKEA probably would do far better in this world than small importers who are used to outsourcing everything, including design to China.

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92 Harun January 9, 2017 at 10:11 pm

IKEA also buys from Sauder, too.

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93 GoneWithTheWind January 9, 2017 at 7:13 pm

“Take IKEA, for example, they cannot source locally, they will increase prices immediately by 20%,”
Did the author show a similar concern when the federal income tax on corporation rose to 39%? Does the author care that IKEA also is a tax evader in their own country? Why should a foreign company be able to sell into this country and pay no taxes while an American company has to pay taxes and other business related taxes and fees to do the same thing? At the least the foreign company should pay enough of a tariff to level the playing field.

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94 stephan January 9, 2017 at 8:23 pm

France and Germany have a similar (VAT tax ~ 20%) on imports from non-EU countries ( with none on exports) . Is that posing a problem there ? I think the issue for the US may be in the transition. Prices may rise at Walmart, the dollar may adjust upwards , imports may fall and be substituted by domestic sources. Until it becomes the new normal, nobody likes disruption and uncertainty.

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95 alexh January 9, 2017 at 11:45 pm

Great comment! Many people don’t realize that most of the US does the same, but even when it does (most places) it’s nowhere near as large and so nowhere near as unfair. E.g. California imposes an (varies by specific area, but averages at) 8.4% tax on imports from other countries (and even from the other states – take that, commerce clause!), but (like France and Germany) imposes nothing *at all* on exports. Exactly like France and Germany, except that 8.4 is much less than 20! (Still, 8.4% isn’t nothing, and it’s a bit weird that you almost never hear about it when trade barriers are discussed.)

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96 bellisaurius January 10, 2017 at 8:33 am

What form do those taxes take? Are you referring to things like transferring title, or something more insidious?

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97 gab January 10, 2017 at 6:00 pm

For the life of me, I’ve never seen nor heard of this 8.4% California tax. Who collects it and what is it called?

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98 Alain January 9, 2017 at 11:55 pm

The EU VAT is a beautiful, liberal, tax. Like all liberal things it is good and holy and those that reject it are racists.

OTOH, this tax scheme was created by team red. You know who else liked red? Hitler. Also Satan. Heil Satan.

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99 Ricardo January 10, 2017 at 1:48 am

If the Republicans want a VAT, let them propose and pass legislation that institutes a VAT. Most countries already have a VAT already so it isn’t as it is difficult to draft the legislation. But what we have instead is a proposed modification of the corporate tax code that has nothing to do with an actual VAT.

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100 Ricardo January 10, 2017 at 1:41 am

Alexh is right that sales tax is roughly comparable to VAT. France imposes a 20% VAT when imports are purchased by French companies but also imposes exactly the same 20% VAT when domestically produced goods are purchased by French companies. Moreover, that 20% tax owed can be used as a credit to offset the VAT that is assessed when the goods are resold. What is being discussed here is completely different from VAT.

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101 stephan January 10, 2017 at 1:51 am

@Ricardo Yes they add the 20% on domestic goods ( which is like a sales tax), but the rest is the same. Imports are taxed at 20% and exports are not. Why can’t we compare the Import/export tax scheme part of their VAT to the current tariff proposal ?

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102 Ricardo January 10, 2017 at 2:07 am

Every tax alters incentives so we have to look at the taxation system as a whole to understand its net effect on incentives. As I pointed out, VAT systems should have a roughly neutral effect on whether or not companies or consumers purchase imported goods versus domestic goods. That is why VAT has always been considered compatible with free trade agreements in the same way that American sales taxes or excise taxes on alcohol and gasoline are. This proposal is, as you acknowledge in your comment, comparable to a tariff. Because it creates an incentive for U.S. companies to avoid importing goods, it may be treated as a breach of trade agreements the U.S. has signed and may invite retaliation.

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103 Adovada January 9, 2017 at 8:41 pm

It’s pretty funny that people are criticizing this idea for having exactly the effect it is intended to have. Yes, imported goods will cost more. What is the cost of a permanently unemployed segement of society?

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104 Post-Truth Politics January 9, 2017 at 8:44 pm

LEt me guess. They vote for Donald Trump, who is just like G W Bush having a 3rd term except with trade wars too, and perhaps with Nuclear WWII AKA the War of the Small Hands? Well, that is truly horrible. Let’s employ those people somehow.

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105 msgkings January 9, 2017 at 9:05 pm

Adovada, technology is a thing and those people aren’t getting jobs in factories. Especially in a worldwide trade war and dollar rally where foreign demand collapses.

Think of it this way, let’s say Boeing could only make planes for the US….there wouldn’t be nearly enough demand to sustain the employees they have let alone add more. If the world slaps a big tariff on imported Boeing planes, that’s what you’re heading towards.

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106 Jp January 10, 2017 at 9:48 pm

I’m sure those same people will be thrilled with their jobs making 40k a year when their car once priced at 22k now costs 30k.

You’ve never actually tried living off of manufacturing wages have you?

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107 Post-Truth Politics January 9, 2017 at 8:45 pm

WW III, I meant to type.

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108 Joël January 9, 2017 at 10:08 pm

A request: does someone know a link to an article describing the Ryan’s plan, as opposed as commenting it (favorably or not)?
In other words, what are the sources that allow people to know the Ryan’s plan to begin with? The answer might be somewhere here in the comments, or in the comments of the preceding post on the same subject, or in Summers’ opinion, but if it is I have missed it. Thanks.

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109 leppa January 9, 2017 at 11:35 pm
110 Joël January 10, 2017 at 12:46 am

Thanks! I’ll read it tomorrow.

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111 Joël January 10, 2017 at 12:54 am

Oh yes, you’re right, it is the earliest one, no mention of the non-deductibility of imports for example…

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112 Rob42 January 10, 2017 at 10:43 am

David Weisbach recently posted an article on SSRN that walks through the plan as well

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113 Joël January 10, 2017 at 11:21 am

Thank you very much, but I am getting more and more confused. David Weisbach posted an article on SSRN on January 2, 2017 analyzing the Ryan’s tax plan *of last June*. This plan, again if I am not missing something, has nothing concerning how imports and exports should be counted for capital tax purposes. If it has, by the way, why would we be talking of this now instead of last June.

So I have not seen anywhere an article (or even less a press release) describing the tax plan supposedly proposed by Paul Ryan and currently negotiated with Trump that Summers and Cowen and all the respectable commenters on this site discuss. Does this plan even exist ? Please justify your answer.

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114 Massimo January 10, 2017 at 2:08 am

Relax, guys, our host mentioned my comment not because of my BS about inflation or South Korea, but because of what I wrote about Boeing selling prosciutto. It is a reference to Ronald Coase (and Oliver Williamson) work on the boundaries of the firm: https://en.m.wikipedia.org/wiki/The_Nature_of_the_Firm.

And thanks to msgkings for calling me a ancap nutjob, assuming he was talking about the first four definitions of the term, rather than the others: http://www.urbandictionary.com/define.php?term=nutjob

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115 Andao January 10, 2017 at 4:58 am

The scariest thing about Trump is that he comes up with random ideas completely off the cuff, then smart people rush in to try and rationalize it. Don’t do his homework for him.

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116 Rob42 January 10, 2017 at 10:44 am

The cash flow tax is the House Republican’s proposal and was not floated by Trump

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117 Andao January 10, 2017 at 3:59 pm

The non-deductiblity of imports was not part of Ryan’s plan until after Trump won. Protectionism wasn’t a GOP policy until Trump.

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118 B.B. January 10, 2017 at 10:52 am

Why, oh why, does no one talk about the dollar?

The standard view is the imbalance between domestic saving and domestic investment, where those terms include private and public sector, is matched by a capital account imbalance. The current account balance is the mirror image of the capital account balance. The dollar will adjust to create the current account balance needed to accommodate the gap between saving and investment. No tax reform will change the current account balance unless it also changes saving and / or investment.

The move to a destination-based cash flow tax will result in an offsetting movement in the US dollar exchange rate that will level price levels and terms of trade unchanged. Folks, this is a tax reform, not trade policy, not tariffs.

Only if exchange rates are blocked from fully adjusting will this tax reform change the terms of trade.

Trump may think of this as protectionism. Alan Auerbach does not.

The DBCFT is the equivalent of imposing a VAT and lower payroll taxes in a revenue neutral fashion.

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119 TallDave January 10, 2017 at 2:12 pm

I wouldn’t worry about it overmuch before something makes it out of committee, doubtless very little will remain the same.

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120 byomtov January 10, 2017 at 10:17 pm

News flash:

Republican fiscal plans are stupid.

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121 John Henry January 12, 2017 at 9:01 pm

IKEA already makes furniture in the US. I have done work in the plant, on the manufacturing line.

There is a big IKEA sign on the building so it is not secret. You could probably find out more in a quick search.

I prefer not to say more because I am under an NDA. Probably doesn’t cover this but why annoy a client.

John Henry

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