In advance of yesterday’s House Ways and Means Committee hearing on tax reform, the Joint Committee on Taxation released its own comprehensive report on destination-based taxation and border adjustments. The report gives an overview of the current state of U.S. international taxation and then delves into the economics of border adjustments, including a summary of the academic literature on associated exchange rate (or other wage or price) adjustments such that exporters would not be advantaged and importers would not be disadvantaged (defined as “trade neutrality,” which we’ve previously explored here and here). Although the JCT ultimately does not take a view on whether the proposed destination-based cash flow tax would achieve this “trade neutrality,” the report does suggest that any currency adjustments would not happen quickly or, perhaps, evenly among importers and exporters, citing empirical studies that conclude that changes in consumer prices affected by exchange rate adjustments happen asymmetrically.
Indeed, witnesses and members of Congress at yesterday’s hearing also focused on potential transition issues relating to the House Blueprint’s destination-based cash-flow tax. The assembled witnesses included businesspeople and economists both for and against the House Blueprint and border-adjusted taxes generally. One economist, Lawrence Lindsey, predicted that the House Blueprint will result in long-term economic growth. His testimony submitted before the Committee forecasts GDP growth of about 3.5% in the first four to five years after tax reform, followed by longer-term growth of about 2.75%. In contrast, he predicted that failure to pass the reform would slow the growth to a maximum of 2%. Testifying against the proposal was economist Kimberly Clausing, who noted that the plan will only raise revenues as long as the United States is running a trade deficit and that border adjustments will lose revenue when the trade deficit eventually turns into a trade surplus (the Tax Foundation previously forecasted that the plan would raise $1.1 trillion over 10 years). Witnesses on both sides also disagreed on the merits and practicality of a possible challenge to the House Blueprint in the WTO, as we previously discussed here.
Despite these challenges, there are indications that the DBCFT will continue to be part of the tax reform discourse on Capitol Hill. Yesterday President Trump announced a new budget plan that does not include any new details on tax reform, but does rely on deficit-neutral tax reform to increase GDP growth to achieve its revenue forecasts and projected 3% growth. The destination-based cash-flow tax, in contrast to the proposal outlined by the Trump administration last month (which itself relied on growth to avoid deficits), would fit the bill for the ten year budget window so long as the Administration can overcome its recent and explicit reluctance to embrace the plan. Another route to a consumption tax could be a classic European-style VAT, as Treasury Secretary Mnuchin suggested at yesterday’s hearing, noting that “many other countries do have a VAT tax system and a corporate tax system and use them in conjunction.”