The WTO has allowed the EU to levy €3.4 billion (about $4 billion) in tariffs against American exports in response to the Foreign Sales Corporation/Extraterritorial Income (FSC/ETI) subsidy that allows U.S. companies to exclude from federal taxes 15% of their income made from export sales. Some form of this has been on the books for 60 years and already ruled illegal once in 1999, but when changed, ruled illegal again.
Originally these tariffs were to start the first of the year, but the EU pushed them back to March 1 to give Congress time to act. Since the start of the month, a 5% tariff has been applied to a large assortment of goods, and an additional percentage point will be added to the tariff each month until the WTO-allowed limit of 17% is reached.
There are two main proposals in Congress. The Senate version has been active this week (with not so good results), and the House version is still waiting in the wings, looking for more support. House Ways and Means Committee chairman Bill Thomas has said that the effort to repeal the FSC/ETI is "probably going to fall by the wayside." At least one other Congressman has said that it might be best to wait until mid-way though next year. This year alone tariffs are expected to cost $300 billion.
Holding it up is some of the biggest receivers of the FSC/ETI benefit — Microsoft, Boeing, and Catepillar — and none of them expect to be hit by the tariffs. And this is one of the major practical problems with special tax breaks. Once they are handed out, they are hard to wrestle back. Both the House and Senate bills propose to take the revenue gained from the repeal and use it to lower the marginal tax rate of manufacturers from 35% to 32%. This creates situation where companies will lobby to have the definition of manufacturing widened (if a bakery is considered manufacturing, then why not software or fisheries).
Karl Marx would have instantly recognized this as "the economic and political sway of the bourgeois." The Senate and House bills are shaping up to be one large company against another to see who can draw off the greatest benefits, even at the expense of others. Marx asked "And how does the bourgeoisie get over these crises?" His response is brilliant, if a bit dark, "by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented." They create a situation where abuse of their position is even more possible, knowing that when that crumbles, they will again be able to continue their cycle.
One of the biggest problems is that both bills lack any focus. The House bill (H.R.2896) is a landfill of tax changes, including things from a number of piecemeal fixes to small business and S corporation taxation to expanding vaccine excise taxes to include Hepatitus A. (I bet you didn't even know that vaccines had federal taxes applied to them. Some childhool vaccinations have as high as a $3.75 excise tax applied per dose.) But don't worry. The bill will also repeal the excise taxes on fishing sonar devices and tackle boxes for you.
The Senate bill, S.1637, cutely titled Jumpstart Our Business Strength (JOBS), started out much smaller, but has since been hijacked by a flood of amendments. Sen. Frist has called on people to stop submitting offtopic amendments (such as noramlizing trade relations with Armenia), or he will pull the bill. There are still 126 amendments waiting, 65 of them submitted since Monday.
The House bill is still searching for enough votes before any more action is taken on it. And On Monday bad news came from the Senate for those hoping for a quick passage. Almost certainly this attributed to the spewing out of shares in the Dow earlier in the week.
A competing bill proposed by Sen. Smith (OR) was sent to the Senate Finance Committee in November. Hopefully if the first attempt gets pulled or slowed down, this could still get through. The only difference between Smith's S.1922 and the JOBS Act is a wider tax reduction for manufacturing. While JOBS Act would only allow part of the reduced rate to apply to those companies that manufacture overseas, leaving larger multinational corporations out, Smith's bill would remove that restriction and apply the benefit to all manufacturers.
Two very astute paragraphs in the dissention of H.R.2896 stick out:
The tricks that have been used to hide the true cost of the bill are evident when one reviews the Joint Committee on Taxation revenue table that estimates a revenue loss of almost $12 billion in fiscal year 2013, a loss that is growing year-by-year. More than half of the revenue losses would occur in the last three years of the 10 year budget window. In addition, outyear costs will be even higher because some of the offsets in the bill are slated to expire at the end of 2013, while the tax cuts are permanent. [...]
As a result of the last two years of Republican tax policy, our tax laws are gimmick-ridden. To artificially reduce the official cost of their bills, Republicans have resorted to a vast assortment of gimmicks, such as long phase-ins, temporary provisions, delayed effective dates, and sunsets. As a result, we have a tax law that is extraordinarily unstable. It is difficult to predict exactly what our law will be in the future. Since businesses and other taxpayers cannot make plans on the basis of an unstable tax law, it is doubtful that many of the tax incentives enacted by the Congress will have any real positive effect. The Committee bill makes a bad situation worse.
Constantly changing tax structures do no change behavior in a good way. They create uncertainty and slowness. The sunsetting provisions in the Republican 2003 tax bill are a good example of how not to draft tax legislation for the long term. If the tax breaks go away in six years, then there is little incentive to change behavior. If the capital gains tax will increase soon, then only reoganization of current capital will occur, and any decision to purchase capital will have to contend with the old, higher rate of taxation.
Slightly related, the Byrd Amendment is also on the WTO's no-no list. Passed in late 2000, the ammendment allowed for those companies that sucessfully brought a trade dispute forward to be compensated with money raised from the WTO-sanctioned tariffs. The WTO, though some very contorted logic, somehow managed to claim that something not under their jurisdiction (domestic subsidies) can be ruled illegal if taken in response to a countervailing trade action. In June we should know how much to expect in tariffs if that is not repealed.