Destination-based cash flow tax

A destination-based cash flow tax[1]: 27 [2] (DBCFT)[3] is a form of border adjustment tax (BAT) that was proposed in the United States by the Republican Party in their 2016 policy paper "A Better Way — Our Vision for a Confident America",[4] which promoted a move to the tax. It has been described by some sources[by whom?] as simply a form of import tariff, while others have argued that it has different consequences than those of a simple tariff.[5][6]

The proposed tax is a destination-based, border-adjustable international corporate consumption tax system in which a tax is "applied to all domestic consumption and excludes any goods or services that are produced domestically, but consumed elsewhere."[3][7] The border adjustments included in the proposal are "taxes or tax reductions that apply when payments for goods and services cross international borders."[8] Imported goods purchased/consumed domestically are subject to the tax while goods produced domestically and sold internationally are exempt.[2]

According to economist Alan J. Auerbach at the University of California, Berkeley, who is the "principal intellectual champion" of the "package of ideas" surrounding border-adjustment tax that had been evolving in academia over a number of years,[9] the destination-based system, which is focused on where a product is consumed, eliminates incentives that multinationals now have to "game the system" through tax inversion and other means, in order to "avoid taxes" and to "shelter profits" by "shifting" "intangible assets to low-tax nations."[9][10][11]

Introducing this was the linchpin of the Republican Party's 2016 tax-reform proposal.[1]: 27  A major aspect of the tax policy change would result in lowering the corporate tax rate from 35% to 20% by adjusting or removing export sales from the company's taxable revenue, thus leaving domestic exporters with a tax advantage.[12] Offsetting that reduction in tax revenue, the border-adjustment tax applied to imports consumed domestically.[12] Auerbach's theory is that a border-adjustment tax of 20% would strengthen the US dollar by about 25%. More exports will assumedly be sold because of their lower costs under the border tax subsidy. The stronger dollar would keep domestic consumer costs lower in spite of the 20% corporate income tax being applied to imported goods consumed domestically, effectively cancelling out the higher tax on imports and making the border-adjustment tax value-neutral.[13]

However, both The Economist and the Brookings Institution caution that there is uncertainty as to how the currency exchange will respond. Unless it is immediate and as complete as Auerbach anticipates, the increased cost to importers would result in higher consumer prices which would "hit low-income households disproportionately."[2] Some economists and policy makers have also expressed concern that other countries could challenge border-adjustment tax with the World Trade Organization[14] or impose retaliatory tariffs;[15] and there is also strong opposition by some US corporate interests.[14]

  1. ^ a b "A Better Way— Our Vision for a Confident America" (PDF). Republican Party (United States). June 24, 2016. Archived from the original (PDF) on January 16, 2017. Retrieved January 17, 2017.
  2. ^ a b c William G. Gale (February 7, 2017). "A quick guide to the 'border adjustments' tax". Brookings Institution. Retrieved February 17, 2017.
  3. ^ a b Cite error: The named reference TF_DBCFT_explained was invoked but never defined (see the help page).
  4. ^ Ryan Ellis (January 5, 2017), "Tax Reform, Border Adjustability, and Territoriality: When tax and fiscal policy meets political reality", Forbes, retrieved February 18, 2017
  5. ^ Cite error: The named reference Bloomberg_2017_Freund was invoked but never defined (see the help page).
  6. ^ Chon, Gina (Jan 25, 2017). "Breakdown: Border tariff vs. border-adjustment tax". Reuters.
  7. ^ Parker, Tim (January 6, 2017). "Border Adjustment Tax". Investopedia. Retrieved February 13, 2017.
  8. ^ Cite error: The named reference AAF_Auerbach_2017_borderadjustments was invoked but never defined (see the help page).
  9. ^ a b Cite error: The named reference NYT_Auerbach_BAT_2017 was invoked but never defined (see the help page).
  10. ^ "Pfizer Ends AstraZeneca Bid But The Tax Issues It Raised Live On". Forbes. May 26, 2014. for example when Pfizer proposed to invert to the UK through a takeover of AstraZeneca
  11. ^ Sander Levin (July 22, 2014). "Inversions Highlight Unfairness of the Tax Code". The New York Times. Retrieved February 18, 2017.
  12. ^ a b Cite error: The named reference Forbes_BAT_Nitti was invoked but never defined (see the help page).
  13. ^ Cite error: The named reference Cotton_BAT_2017 was invoked but never defined (see the help page).
  14. ^ a b Patti Domm (February 17, 2017), Border adjustment tax is on 'life support,' and tax reform may come later ... and with less punch, CNBC, retrieved February 17, 2017
  15. ^ Gina Chon (January 25, 2017). "Breakdown: Border tariff vs. border-adjustment tax". Reuters. Retrieved February 17, 2017.

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