Blog Posts Tagged With Cash Flow Tax

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More on the Senate Mark’s Corporate Provisions

The Senate Finance Committee has released a summary of its proposed tax legislation (what we refer to as the Senate Mark), though without any legislative text. Following the House, the Senate Mark would lower tax rates and reduce or eliminate deductions and credits for corporations, but in several respects it takes an approach that differs from the House bill (which you can read about here). Here are some of the highlights:

Rate Reduction.  Like the House bill, the Senate Mark would eliminate the corporate alternative minimum tax and replace today’s graduated corporate tax rates, which include a top marginal rate of 35%, with a flat rate of 20%.
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Prospects for Tax Reform in 2017?

House Speaker Paul Ryan (R-WI) addressed the National Association of Manufacturers on Tuesday in an effort to build support for tax reform, emphasizing the unique, and diminishing, window of opportunity that exists to enact permanent tax reform ahead of next year’s primaries and midterm elections. According to his press office, this speech marks the beginning of his “sales pitch” for tax reform in 2017. Speaker Ryan’s prepared remarks are available here. You can also watch his speech here (starting at 1:41:34).

Here are the key takeaways:

  • Republicans Are Aiming for End of 2017:  Speaker Ryan said that lawmakers would “begin to turn” their plan into legislation to put in front of Congress, and promised to “get this done in 2017.”

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DBCFT Still Not Dead (to Brady)

At a WSJ conference yesterday, House Ways and Means Committee Chairman Kevin Brady (R-TX) gave a few tantalizing hints as to the content of the much anticipated house tax reform bill. Most notably, Brady suggested that the bill would include a DBCFT that is phased in over a five-year transition period. This is intended to respond to a number of concerns, including the fear that currencies may not adjust immediately (click here for the Tax Foundation’s summary of the concerns alleviated by, and new concerns raised by, a five-year transition).

Brady also reaffirmed that certain industries (financial services, communications, insurance and digitally-focused businesses) would be subject to “special treatment” under the DBCFT.
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The DBCFT, Anti-Avoidance Rules and a Cartoon about Sandwiches

Earlier this week, Kyle Pomerleau of the Tax Foundation published an article highlighting the effects of the destination-based cash flow tax on the number and complexity of anti-avoidance rules otherwise required to prevent base erosion in a territorial system.  You can read the article here. On a less serious note, Vox came out with an article that explains the impact of a destination-based cash flow tax with a cartoon about sandwiches. We enjoyed both articles and thought you might too.
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Tax Reform and the Tax-Exempt Sector

There’s a lot at stake for tax-exempt organizations in the current proposals for tax reform.

The Charitable Deduction.  In 2014, individuals contributed $258 billion to charity, more than 80% of which was donated by persons who itemized deductions and claimed a charitable contribution deduction.  President Trump’s tax reform plan and the House Blueprint would substantially reduce the percentage of taxpayers itemizing their deductions, from a current 30% to as low as 5%, and would cap the total value of itemized deductions for those who still claimed them.  The Charitable Giving Coalition, among others, is concerned that these changes would reduce the value of charitable giving and curtail charitable contributions. 
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Tax-Related Excerpt From Trump’s Address to Congress

Below is a transcript of the tax-related section of Trump’s address last night to a Joint Session of Congress. You can watch the full speech (and read the full transcript) here.


President Donald Trump’s Address to a Joint Session of Congress

Washington, D.C., February 28, 2017

But to accomplish our goals at home and abroad, we must restart the engine of the American economy — making it easier for companies to do business in the United States, and much harder for companies to leave.

Right now, American companies are taxed at one of the highest rates anywhere in the world.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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Tax Rates and Horse Trading

The House Blueprint and the President’s plan currently represent the primary visions for tax reform. Both would reduce tax rates for individuals and corporations (the House Blueprint caps the top individual rate at 33% and the corporate rate at 20%, while the President’s plan maxes out at 33% for individuals and 15% for corporations). Click here for a full comparison of the two plans. Although the administration’s position on revenue neutrality has not been entirely clear, the President’s nominee to head the Treasury Department, Steve Mnuchin, stated that the President’s tax plan would not increase the deficit after taking into account macroeconomic feedback and both House Speaker Paul Ryan (R-WI) and House Ways and Means Committee Chairman Kevin Brady (R-TX) have recently reiterated their commitment to pass a revenue neutral tax reform bill by the August recess.
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Is Current Expensing Pro-Growth?

One of the key features of the destination-based cash-flow tax proposed by House Republicans is the immediate deductibility of capital expenditures. The conventional wisdom is that immediate deductibility would reduce the after-tax cost of investing in business assets and thus would encourage additional investment relative to the current system of depreciation/amortization over a fixed period. Professor Lily Batchelder challenges this perspective in a post on the Tax Policy Center blog.
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Helpful Primers on the Practical Impact of a DBCFT

This morning, the American Action Forum released four primers on how a destination-based cash flow tax (DBCFT) would work in practice – one that sets forth an example of how a DBCFT would affect importers, one on the effect on exporters, a third on how a DBCFT would remove incentives for U.S. firms to move manufacturing and production overseas for sales back to the U.S., and a fourth that discusses how a DBCFT would diminish the use of transfer pricing by U.S.-based multinationals to shift income to low-tax jurisdictions.

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Cash-Flow Tax Systems: Five Thoughts

The European Commission contracted a study on cash flow taxes (CFT) that culminated in a 250+ page Final Report published in May of 2015. Here are five things we learned from the report:

  1. Some countries ignore simplification as a goal and apply CFT systems in parallel with corporate income tax systems.  Many countries have adopted “mixed systems” that include CFT elements, or sector-specific CFTs.
  1. No country has adopted a destination-based CFT, despite its theoretical appeal.
  1. Existing CFT systems do not show evidence of having been based on the CFT models discussed in the academic literature, but they do seem to have the desired effects of encouraging investment and eliminating the tax incentive to finance with debt rather than equity.

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And Now for Something Completely Different: A Primer on Destination-Based Cash-Flow Tax

The destination-based cash-flow tax (or DBCFT) at the heart of House Republicans’ “Blueprint” for tax reform has already attracted high-level attention, pro and con. Proponents and detractors are aligned, however, in one respect: the DBCFT would be a radical departure from the current corporate tax system.  In this post, we provide an introduction to the key distinctions by describing what a DBCFT is in broad terms. At base, a DBCFT contains two related but distinct changes to the current U.S. corporate tax: the change to a “cash-flow” tax and the change to a “destination-based” tax.

Cash-Flow Tax
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Setting the Stage for Comprehensive Tax Reform

Tax reform will be one of the top priorities for the 115th Congress. Hopes for pursuing tax reform to a successful conclusion are high, given one-party control of the government (and exuberant campaign promises). Following the 2016 election, Davis Polk laid out the background and context in which tax reform measures will be considered, with links to summaries of the leading proposals and details on the politics of tax reform. Although life in Washington has moved forward since this memo was published, the key points and players remain the same. Read on for things to watch.

Setting the Stage for Comprehensive Tax Reform, December 2, 2016

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