Who’s Afraid of the WTO?

One concern voiced about the destination-based cash flow tax (DBCFT) is that the border-adjustment feature may not be compatible with World Trade Organization (WTO) rules. Although much of the current discourse on the topic is muddled, the border adjustment feature of the DBCFT proposal is not intended to be trade policy (and, as we have discussed before, many economists believe that it should have no impact on trade). Instead, it is intended to be tax policy – i.e., a means to achieve territoriality within a cash flow tax-based system, taxing only cash flows associated with consumption in the United States.

It is on this basis that House Speaker Paul Ryan and House Ways and Means Committee Chairman Kevin Brady (R-TX) have repeatedly defended the proposition that the DBCFT is a consumption tax that meets WTO standards. Continue Reading

Economist Challenges Currency Appreciation Doubters

Alan Auerbach, a University of California economist and a leading advocate for the switch from an income tax system to a border adjusted cash flow tax (or DBCFT), released a note yesterday that seeks to reinforce his prior analysis detailing why the dollar will rise in response to the border adjustments contemplated by the DBCFT. In this note, Auerbach catalogues and counters the more popular arguments against his currency appreciation predictions. The full note is available here.
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Tax Foundation Seeks to Set Us Straight on Border Adjustments

The Tax Foundation released a paper today that aims to dispel some of what it views as the common misconceptions regarding the effect of border adjustability. The paper challenges the notion that border adjustability will impact the trade balance or boost production at home, but argues that border adjustability will have other effects, including preventing profit shifting, eliminating the need for complex anti-base erosion provisions, and broadening the tax base within the budget window.

The full paper is available here. Continue Reading

Challenges to Implementing a DBCFT

On TaxVox, Howard Gleckman of the Tax Policy Center highlights five challenges the House GOP will face in implementing a destination-based cash flow tax (DBCFT). In particular, lawmakers will have to decide what exemptions to offer, figure out how to distinguish imports from exports, think through exchange rate impacts and transition rules, and deal with ramifications of the DBCFT for international tax agreements. Continue Reading

The Senate’s Path to Tax Reform

Last week, at a U.S. Chamber of Commerce event, Senate Finance Committee chairman Orrin Hatch (R-UT) signaled that the Senate would take its own path to tax reform, saying “a major concern on tax reform is producing a bill that can get through the Senate, and that is likely going to require a separate Senate tax reform process, which will almost surely end up looking different from what passes in the House.”

With only a 52-vote Republican majority, Hatch will need to craft bipartisan legislation or (if the filibuster-proof budget reconciliation process is used) wrangle support from all but two of his Republican colleagues in the Senate to pass a tax reform bill. Continue Reading

Tax Reform: A Private Equity Perspective

The Trump administration and House Republicans have each proposed tax law changes that, if enacted, would significantly impact private equity, both directly and (potentially more significantly) through the businesses in which private equity funds invest. The consequences of the proposed changes vary by industry and therefore the proposals may have an uneven impact across the private equity sector.  We highlight a few of the major proposed changes below.

Lower Tax Rates.  The House and Trump plans would cut corporate tax rates to 20% and 15%, respectively.

Treatment of Pass-Through Entities (Including, Potentially, Private Equity Management Companies).  The House plan would tax the “active business income” of pass-through entities at a maximum rate of 25%.  Continue Reading

Transition Issues For a Move to the Destination Based Cash-Flow Tax

Two weeks ago, we previewed the destination based cash-flow tax (or DBCFT), the centerpiece of the House Republicans’ Blueprint for tax reform. In this post, we focus on one aspect of that proposal—the immediate deduction for capital expenditures—and how transition to immediate expensing might be implemented.

Policy choices for transition rules must take into account short-term and long-term effects on businesses, revenue effects and political considerations. Pro-growth rationales for tax reform tend not to favor prolonged phasing-in of expensing, but generous transition rules for the “losers” in tax reform may need to be offset, to some extent, by the phasing-in of expensing to achieve revenue neutrality. Continue Reading

Economist Compares DBCFT to Retail Sales Tax

The chairman of the Council of Economic Advisors under President George W. Bush has weighed in on the destination-based cash-flow tax (DBCFT) at the heart of House Republicans’ tax reform plan. Greg Mankiw wrote on his blog yesterday that the DBCFT is “in effect” a retail sales tax on consumer goods and services that would replace the corporate income tax and finance a reduction to the payroll tax. Mankiw favors the DBCFT. Continue Reading

What does “Territoriality” really mean?

“Territoriality” is one of the key buzz words in this year’s tax reform lingo, with many proposals urging a shift away from our current “worldwide” system of income taxation for business income. This post expands on what features a “territorial” system might include.

The Basics.  A worldwide system of income taxation taxes residents of the taxing jurisdiction on all of their income, both foreign and domestic (usually with a credit for foreign taxes paid). A territorial system, on the other hand, theoretically taxes only income earned in the taxing jurisdiction. In practice, however, the lines between a territorial and worldwide system are rarely, if ever, this clear. Continue Reading

Simulating the DBCFT

As House Republicans and President Trump debate the merits of a destination-based cash flow tax (DBCFT), Treasury’s Office of Tax Analysis released a working paper that attempts to unpack the consequences of the tax by running a simulation. The paper, by Elena Patel and John McClelland, applies a hypothetical DBCFT to a sample of corporations for the period 2004 to 2013. Continue Reading