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Want to Create U.S. Jobs? Forget the BAT, and Lower Corporate Taxes

Now that the Republicans are finally in charge of the White House and both houses of Congress, it is time to reform taxes. After years of facing down tax inversions and other tax dodges, Congress now seems intent on sealing the loopholes that allow certain taxpayers to avoid paying their fair share. So what’s wrong with that?

Part of the plan being advanced by House Republicans is something called a Border Adjustment Tax (BAT), and it could kill our company.

Under the BAT, taxes will be assessed only on U.S. consumption, and imports will — unlike other business expenses — no longer be deductible for tax purposes, essentially imposing a massive surcharge on those imports. Some companies’ current tax bills will multiply to more than their actual profits. Some tax cut!

I wonder what we did to deserve this.

Our family business, Learning Resources, Inc., develops educational toys in our two U.S. offices. We design them here; we happen to manufacture them overseas. Though we have looked for ways to make them in the U.S., the cost is prohibitive. We are, in that sense, similar to many other American firms.

Our products are innovative, high quality, safe and priced to sell. We haven’t raised prices in two years. We sell our toys all over the world, shipping from our warehouses in Chicago and in England. We touch millions of children’s lives every year — perhaps yours, too.

And under the BAT, our tax bill will go to 165% of our earnings.

This is a problem. I am starting to lose sleep.

The BAT is supposed to solve tax injustices in foreign countries. Politicians point to rebates that U.S. exporters receive in value-added tax (VAT) countries.

VAT refunds, however, are only refunds of previously paid VAT and aren’t a source of profit or subsidy. Foreign exporters still pay corporate income tax, just like we do. This is not a tax injustice.

Ironically, the BAT compounds the problem by subsidizing U.S. exports. Under the new law, U.S. export revenue will not be taxable. The design of this plan likely violates World Trade Organization (WTO) rules and may result in serious sanctions on the U.S. The speculation is any WTO decision will take years, and by then it will be “too late.” That is, unless other countries choose to retaliate rather than wait for the wheels of justice to turn at the WTO.

Imagine every other country subsidizing exports, too. This is called a trade war, Mr. Smoot and Mr. Hawley. Not the best idea.

Some economists argue that the new law will induce a revaluation of the U.S. dollar, bringing great savings to importers like us. Most U.S. importers have dollar-based costs, so savings from a rising dollar requires renegotiation of existing contracts.

This is no slam dunk. If the economists’ fantasy does not happen, importers will have no choice but to pass on the tax cost to you, the consumer. This is happening in England right now after the dollar rose against the Pound in the wake of Brexit. Rising import costs will hurt the American consumer.

So what is the real tax injustice that must be remedied?

U.S. corporate tax rates are the third highest in the world, behind the United Arab Emirates and Chad. While our company pays 39.6% in Federal taxes as an “S” corp, Irish companies pay only 12.5%.

Can you think of any reason American companies want to move abroad? It might be something besides the weather.

We want to save our business, keep creating jobs and help kids learn. A lower tax bill would help.

Congress needs to rethink its new tax plan and target the real problem — namely, high corporate rates. With the right fix in place, the U.S. economy will accelerate, and growth in the tax base will fill the government’s coffers in time.

Rick Woldenberg is CEO of Learning Resources, an educational toy company based in Vernon Hills, Illinois.  Learning Resources was founded in 1984 and employs 150 people in the U.S. and overseas.  Rick’s blog can be found at www.BorderAdjustmentTax.com.

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