I've been caught 100% off guard by the GOP's 'border adjusted' corporate income Tax proposal. I knew it was floating around and I'd heard the tag lines, but I'd was not taking it seriously. Now it may be for real, in some form, but not the advertised form? I see that Trump wants changes from the Ryan version.
In any case, I need to do some reading. There is surprisingly (unsurprisingly?) very little out there on the topic and headline tax guys are rushing to write papers.
For starters, I understand how border adjustments work in VAT systems, but the GOP proposal is different, if I understand it correctly, like a VAT but with deducibility of labor costs (and some capital costs??? -- here things seem to get hard to understand). I don't yet know how to think about this. Also, importantly, implementation is based on what accounting systems actually do and can be made to do given incentives to structure income into tax accounting buckets, and given how the tax system builds on existing accounting and tax history.
And the politics looks brutal for the GOP coalition, unless the incidence shift to Democratic groups (always possible).
Here one discussion (MNC = multinationals):
First, this tax system is very difficult to explain to public or, even, experts. This
creates a risk that loopholes will be easier to design due to the deliberate
exploitation of the system’s complexity by savvy tax planners and lobbyists. Yet if
the system is implemented in a more theoretically pure form, without opening the
door to loopholes, it is not clear that the MNC business community would support
the proposed changes. The net effect would be a tax increase for the intangible intensive
MNCs that had previously succeeded in achieving single-digit tax rates by
gaming the old system (and shifting U.S. profits abroad). It is also a tax increase for
highly-leveraged firms, since debt-financed investments would no longer be
subsidized. Retailers that import into the US and manufacturers that import parts
are likely to object to a new tax system that means they cannot deduct their cost of
Second, there is an increased likelihood that many profitable firms would show
losses. This is especially the case for exporters, since they may have deductible
expenses, but no taxable revenue. Exporting firms with persistent losses will find
the credits do them no good, which would affect export incentives. While
economists would support a refund system in order to keep tax neutral, there is a
large potential for fraud, and politically it seems unlikely that the government could
issue large checks to profitable corporations on a permanent basis. The alternative
suggested by the Blueprint is unlimited carry-forwards, but this doesn’t solve the
problem for businesses with losses that may not be offset. Exporting companies
could of course merge with non-exporters in order for the losses to be more useful,
but inducing a slew of tax-motivated mergers would be inefficient.
...there are myriad technical problems that remain to be worked out. For
example, financial institutions require separate treatment. The pure form of this tax
leaves out financial flows entirely. An augmented form of the tax can capture
financial transactions in the base, but this would introduce complexity as all
companies would need to keep track of financial transactions, as well as whether the
transactions occurred with foreign companies. There is also substantial ambiguity
between what transactions are real and what are financial, and such ambiguity
raises both technical considerations as well as opportunities for tax avoidance
Indeed, the corporate rate chosen is intellectually incoherent. One of the purported
advantages of a destination-basis corporate cash flow tax is that it is supposed to
curb profit shifting by removing the incentive for shifting profits and activities
abroad. But, if that is the case, why is the rate cut needed? If tax burdens truly
depend only on the location of immobile customers, why not keep the corporate rate
at the same level as the top personal rate? The usual argument for the lower rate
relies on the international mobility of income and competitiveness concerns. If such
concerns are moot, then there is no reason to tax at a low rate.
Further, the discrepancy between the top personal rate and the business rate will
create new avoidance opportunities as wealthy individual seek to earn their income
in tax-preferred ways, reducing their labor compensation in favor of business
income. Companies would be inclined to tilt executives compensation toward stock options
and away from salary income, and high-income earners would be inclined to
earn income through their businesses in pass-through form.
The Ryan proposal exempts the normal return from capital, giving these returns
zero-tax treatment. Further, excess returns (profits above the normal level) are
taxed through the business tax system, but at rates far lower than the top personal
income tax rate. The theoretical rationale for justifying such a favorable tax
treatment for rents (excess profits) is simply absent. From an efficiency or an equity
perspective, taxing rents at a higher rate makes sense.
Recent evidence from Treasury suggests that now about 75% of the corporate tax
base is rents/extra-normal profits; this fraction has been steadily increasing. If
destination-based taxes are meant to fall solely on rent, this implies a higher ideal
optimal tax rate, since taxing rents is far more efficient than taxing labor or capital.