A NEW TAX TO REPLACE AN OLD ONE?
by Philip Schlosser, Tax Revolution Institute, ©2017
(Mar. 21, 2017) — US House Republicans have proposed a tax reform plan as part of their Better Way Forward initiative called “The Blueprint,” which, for one, modifies the corporate income tax into what is called a “destination-based cash-flow tax,” or DBCFT. In a nutshell, this means both domestic and foreign firms alike will be subject to a tax on all sales made within the United States, while US exports are exempted.
The plan drops the tax rate on business income from 35 percent, to 20 percent, which they insist on passing with “revenue neutrality.”
Revenue neutrality entails paying for the 15 percent cut in the business tax rate, which House Republicans have proposed accomplishing via the “Border Adjustment Tax,” or BAT. This new tax is poised to raise $1.2 trillion in revenue over 10 years, thereby paying for said cut. I am admittedly concerned with the BAT for multiple reasons — and, furthermore, hold the opinion that it may not even be necessary.
For one, Republicans seem to be tactically surrendering to the flawed premise that pro-growth tax cuts must be paid for with a new tax rather than allowing economic growth to maximize tax receipts. Simple math with the latest CBO numbers also reveals we could cut taxes by “$3 trillion” while still closing the deficit in 10 years, if we were to simply limit baseline spending growth to 1.96 percent annually.
Outside of the BAT, the destination-based cash-flow tax does have desirable features as far as economic growth is concerned. For one, capital investments would no longer need to be depreciated by firms. Instead, they would now be able to fully write them off.
The plan also moves us closer to a territorial-tax system, rather than our present world-wide system. With a territorial regime, the IRS can no longer tax the profits which US firms earn abroad. In other words, Uncle Sam would only have tax jurisdiction within US borders.
This is preferable not only because it is fair, but also because US firms can repatriate foreign profits without being double-taxed at the border, which can then be reinvested in the US economy, creating jobs. There are $2.5 trillion in US profits presently parked overseas for said reason. The difference between a standard origin-based territorial regime and the House Republican plan, however, is the BAT.
So What Is This Border Adjustment Tax?
The BAT works by applying a 20 percent tax on imports, while exempting exports. In other words, if a US firm sells goods abroad, said sales are exempted from the tax. However, if said firm imports goods — let’s say, inputs required to manufacture a good — the importer’s sales are hit with the BAT. So, on the surface, this screams of mercantilist-style protectionism, yet proponents argue this isn’t so.
At first glance, the DBCFT sounds a lot like a tariff, since we are talking about exempting exports, while applying a new tax on imports at the border. However, although the plan does exempt US exports from the BAT, the same 20 percent tax rate is applied to the sales of foreign imports and domestic goods within the US alike. The DBCFT therefore differs from a tariff, which applies only to imports.
Furthermore, DBCFT proponents argue that the export exemption will be completely sterilized, as US firms will be able to drastically reduce the price of the goods they sell overseas, resulting in a rise in demand for US dollars to purchase said goods. This will thereby result in the value of the US dollar appreciating relative to foreign currencies, offsetting any trade advantage realized from the BAT.
This, they argue, will negate the subsequent need for importers to increase prices on American consumers.
Read the rest here.
