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Chris Murphy
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The unconvincing case for 25%
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International spillovers from proposed
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Dhammika Dharmapala
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Australia's company tax: options for
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David Ingles and Miranda Stewart
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Dividend imputation: a critical review of
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Tax treaties and the international allocation
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International spilloversfrom
proposed US tax reforms
Dhammika Dharmapala*
Abstract
This article provides an overview of recent proposals for reform of the US tax system,
focusing on the potential implications for the rest of the world if these proposals were
to be enacted. The most widely discussed recent proposal is related to an idea - the
destination-based cash flow tax (DBCFT) - that has been prominent in academic
discussions of business tax reform. While it has many important virtues in terms of
promoting economic efficiency, its poltical appeal is more likely to be due to specific
features of Congressional budget rules and to misconceptions among politicians about
the trade effects of foreign countries' VAT border adjustments. This article discusses
the international spillovers that this and related proposals would create, involving
profit shifting into the US and changes to the location of economic activity. The article
also presents a critical evaluation of these proposals from the standpoint of widely
accepted principles of tax policy, and draws some lessons from the US debate that
may be relevant for other countries contemplating company tax reform. An important
general theme of this discussion is that business taxation helps shape households'
tax planning opportunities, and thereby constrains the types of personal taxes that
can be imposed. The future of the company tax, both in the US and elsewhere, is thus
inextricably linked to the future of income taxation more generally.
*
University of Chicago Law School (email: dharmap@uchicago.edu).
This article was accepted for publication on 31 October 2017.
79
80 (2018) 33 AUSTRALIAN TAX FORUM
Acknowledgments
This article is based on a presentation at the conference on "What shall we do with
company tax?" (organised by the Tax and Transfer Policy Institute at the Australian
National University). Parts of the article also draw on a keynote address at the
IMF and World Bank conference on "International tax competition: challenges for
developing countries" in Washington, DC. I thank participants at both conferences
for valuable discussions and comments. I also thank Alan Auerbach, Mike Devereux
and David Weisbach for helpful conversations, and Dan Shaviro and an anonymous
referee for valuable comments. I acknowledge the financial support of the Lee and
Brena Freeman Faculty Research Fund at the University of Chicago Law School. Any
remaining errors and omissions are, of course, my own.
INTERNATIONAL SPILLOVERS FROM PROPOSED US TAX REFORMS
1.
81
Introduction
It has long been noted among scholars of tax policy that the tax system of the United
States (US) is highly distinctive in relation to those of comparable countries. The US
is a relatively low-tax country relative to its peers: tax revenue (across all levels of
government) constitutes 26% of gross domestic product (GDP), whereas the average
among members of the Organisation for Economic Cooperation and Development
(OECD) is 34%. However, the US is unusually reliant on income taxes, deriving 48%
of its tax revenue (across all levels of government) from income taxes; the average
OECD member obtains only 34% of tax revenue from income taxes. Both of these
features reflect the absence of a broad-based consumption tax such as a value-added
tax (VAT) or goods and services tax (GST). This lacuna - unique among comparable
countries - is surely the most noteworthy feature of the US tax system. It is, of
course, possible that this unusual US tax mix happens to be optimal, while the rest of
the world is mistaken in its choices. However, this is statistically quite unlikely. Most
observers instead view the US system as falling well short of global standards for
fiscal "best practices', 2 especially in view of the well-established efficiency properties
3
of consumption-type taxation.
The relatively high US corporate income tax (CIT) rate of 35%, on which great
emphasis has been placed in recent policy debates, is an element - but only one
element - of this exceptional dependence on income taxation. In addition, the US
also faces a significant structural deficit at the federal level - federal outlays are about
21% of GDP, while federal revenue is about 18% of GDP. Moreover, this structural
deficit is projected to grow, suggesting that additional revenue will be needed in the
4
future.
This brief description is sufficientto reveal the outlines ofwhat the US needs in terms of
tax reform. In essence, reform requires a shift from income-type to consumption-type
taxation. In their collective wisdom, the world's governments have converged
on the destination-based credit-invoice method VAT as the epitome of modern
consumption-type taxation. Thus, the objective of moving the US from income-type
to consumption-type taxation entails the introduction of a VAT, notwithstanding
certain unique political obstacles to so doing (as discussed in section 4 below).
1
2
3
4
5
See the Tax Policy Center's briefing book on "How do US taxes compare internationally?".
Available at www.taxpolicycenter.org/briefing-book/how-do-us-taxes-compare-internationally.
See, eg, D Shaviro "The rise and fall of the destination-based cash flow tax: what was that all
about?", (2017) NYU Law and Economics research paper no. 17-20.
See, eg, J Bankman and DA Weisbach "The superiority of an ideal consumption tax over an ideal
income tax", (2006) 58 Stanford Law Review 1413.
See the Tax Policy Center's "Federal receipt and outlay summary: 1940-2021" Available at
www.taxpolicycenter.org/statistics/federal-receipt-and-outlay-summary.
See I Grinberg "Where credit is due: advantages of the credit-invoice method for a partial
replacement VAT", (2010) 63 Tax Law Review 309.
82
(2018) 33 AUSTRALIAN TAX FORUM
Revenue from a VAT would enable a reduction in income taxes, even while raising
more revenue than the current system overall (as is clearly needed in order to meet
the spending objectives that the public is likely to continue to demand).
While the main elements of the tax reforms that the US needs are very clear, they
have not necessarily been the focus of the recent debates among policymakers on tax
reform. Rather, the US tax reform debate provides, in many respects, an illustration of
the definition of "politics" that is attributed (perhaps apocryphally) to Groucho Marx,
as "the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and
applying the wrong remedies".
In June 2016, the Ways and Means Committee of the US House of Representatives
produced a document that has come to be known as the "House blueprint'.6 This
became best known for its advocacy of a "border adjustment tax" (BAT), which is
related to an idea - the destination-based cash flow tax (DBCFT) - that has been
prominent in recent academic discussions of business tax reform.' Although the BAT
appears to no longer be under active consideration by policymakers, it is discussed in
some detail below because of the intellectual importance of the DBCFT and because it
is closely related to (though in some respects distinct from) a VAT. In April 2017, the
White House released a very brief tax plan that did not mention the BAT. In July 2017,
a joint statement by executive branch officials and Congressional leaders appeared;
it abandons attempts to enact a BAT, and more generally rejects the aim of moving
towards greater reliance on consumption-type taxation (or to put it differently, it
rejects the notion of tax reform).8 The widespread expectation that any change to the
US tax system will involve tax cuts rather than structural reforms has been confirmed
by the release in September 2017 of a "unified framework" for legislation.9
6
7
8
9
House Ways and Means Committee, "Abetter way: our vision for a confident America". Available
at https://abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf. Note that this
proposal is also referred to as the "Brady plan" or the "Ryan blueprint" It has given rise to
extensive academic commentary - see, eg, DA Weisbach "A guide to the GOP tax plan - the
way to a better way", (2017) 8 Columbia Journalof Tax Law 171; RS Avi-Yonah and K Clausing
"Problems with destination-based corporate taxes and the Ryan Blueprint" 8 ColumbiaJournal
of Tax Law 229; MJ Graetz "The known unknowns of the business tax reforms proposed in the
House Republican blueprint, (2017) 8 ColumbiaJournalof Tax Law 117.
AJ Auerbach A modern corporate tax, Center for American Progress and the Hamilton Project:
Washington, DC, 2010; AJ Auerbach, MP Devereux, and H Simpson "Taxing corporate income",
in JA Mirrlees, S Adam, T Besley, R Blundell, S Bond, R Chote, M Gammie, P Johnson, G Myles
and J Poterba (editors) Dimensions of tax design: the Mirrlees review, Oxford: Oxford University
Press, 2010, 837-893; AJ Auerbach, MP Devereux, M Keen, and J Vella "Destination-based cash
flow taxation, (2017) Oxford University Centre for Business Taxation working paper 17/01.
See https://www.whitehouse.gov/the-press-office/2017/07/27/joint-statement-tax-reform.
See www.treasury.gov/press-center/press-releases/Documents/Tax-Framework.pdf The tax
legislation enacted at the end of 2017 (after this article was completed) is largely consistent with
this prediction. However, it raises various complexities that cannot be addressed here.
INTERNATIONAL SPILLOVERS FROM PROPOSED US TAX REFORMS
83
The aim of this article is to provide an overview of these proposals, emphasising
their implications for the rest of the world. In particular, the article discusses the
international spillovers that these proposals would create, in the event that they were to
be enacted in some form. More generally, the article also presents a critical evaluation
of these proposals from the standpoint of widely accepted principles of tax policy,
and draws some lessons from the US debate that may be relevant for other countries
contemplating company tax reform. An important general theme of this discussion
is that business taxation helps shape households' tax planning opportunities and
thereby constrains the types of personal taxes that can be imposed. The future of the
company tax, both in the US and elsewhere, is thus inextricably linked to the future of
income taxation more generally.
Section 2 introduces the main features of the House blueprint, and discusses its
relationship to the DBCFT. It also addresses the question of why (apart from its
intrinsic virtues) the DBCFT may have come to be perceived as an attractive reform
option by some politicians. Section 3 analyses the potential international spillovers
from the types of reforms envisaged by the House blueprint. Section 4 provides a
critical assessment of these proposed reforms, and suggests a possible path forward.
Section 5 summarises more recent developments and their implications, and section
6 concludes.
2.
The House blueprint and the destination-based cash
flow tax
2.1 Background
The House blueprint retains the current personal income tax (PIT) system in
substantial measure (apart from some reductions in tax rates). However, its proposed
reform of the CIT is more far-reaching. The House blueprint would reduce the CIT
rate on the normal return to capital to zero, by allowing investment to be "expensed"
(ie fully deducted at the time it is undertaken). The CIT would be replaced by a new
consumption-type tax that has come to be known as the "border adjustment tax"
(BAT), imposed on abnormal returns to capital at a 20% rate.10
The BAT proposed in the House blueprint can be interpreted as resembling the
DBCFT articulated in the scholarly tax literature." The DBCFT is a cash flow tax
that would be remitted by companies, although in economic terms its base consists
of consumption by US residents out of economic rents generated in the corporate
sector. It would be imposed on a destination basis - ie cash receipts from abroad
(for instance, from exports) would be deductible, with no deduction for the cost of
10
11
House Ways and Means Committee, above n 6.
Auerbach, above n 7; Auerbach, MP Devereux and H Simpson, above n 7; Auerbach, Devereux,
Keen and Vella, above n 7.
84
(2018) 33 AUSTRALIAN TAX FORUM
purchases made abroad. This border adjustment (which gives the BAT its name) is
essentially equivalent to those made under a destination-based VAT, which ensure that
the base of the VAT includes only domestic consumption. However (unlike in a VAT),
wages would be deductible to the firm under a DBCFT. Apart from this difference in
the treatment of wages, a DBCFT is essentially equivalent to a subtraction-method
VAT (ie one that does not impose a requirement that firms present invoices for
taxes paid by suppliers in order to be able to claim deductions, as is required in a
credit-invoice method VAT).
The motivation for the development of the DBCFT can be understood with reference
to the economic inefficiencies created by the CIT. As has been widely documented,
the CIT induces distortions to firms' investment decisions, to the use of debt versus
equity, to payout decisions, to firms' organisational form, to the ownership of assets
and the market for corporate control, and to patterns of global portfolio investment.
Particular features of the US CIT regime distort decisions about repatriations (ie
dividends from multinational affiliates to their US parents) and lead to the retention of
cash by US-based multinational corporations (MNCs) within their foreign affiliates.
The CIT also creates deadweight costs associated with the expenditure of resources
by firms on tax planning (for instance, engaging in profit shifting from higher-tax to
12
lower-tax jurisdictions).
In principle, the replacement of the CIT by a DBCFT would correct most of these
economic inefficiencies. However, there are some important exceptions that relate to
the interaction between the CIT and the PIT. The scholarly advocates of the DBCFT
develop their proposal in the context of business tax reform, and do not take a
particular stand on wider reforms to the PIT." If the PIT were to be retained in
essentially its current form (as envisaged by the House blueprint), there would be
distortions to payout decisions and to the choice of organisational form. In particular,
as discussed below, there would be an incentive for personal income streams to be
recharacterised as corporate cash flows, in order to gain a deferral advantage from
the consumption-type tax treatment of the latter; this would give rise to potentially
substantial deadweight costs of tax planning. Nonetheless, the DBCFT clearly has
many important virtues in terms of addressing the inefficiencies of the existing CIT
regime.14
12
13
14
D Dharmapala "The economics of corporate and business tax reform', in AJ Auerbach and
KA Smetters (eds), The economics of tax policy, Oxford University Press, (2017), 231-258. This
chapter catalogues these distortions and summarises the empirical evidence regarding their
magnitude.
Auerbach, above n 7; Auerbach, Devereux and Simpson, above n 7. However, Auerbach,
Devereux, Keen and Vella, above n 7 at 69-70 discuss some design issues relating to the
interaction of the PIT and the DBCFT.
Dharmapala, above n 12.
INTERNATIONAL SPILLOVERS FROM PROPOSED US TAX REFORMS
85
2.2 Why were politicians attracted to the DBCFT?
While the DBCFT has undoubted virtues, as described above, it is unlikely that these
alone explain its rise to prominence in the political arena. Rather, the inclusion of
a DBCFT in the House blueprint is attributable to a confluence of various political
forces. Of these, two - the role of Congressional budget rules, and a common
misunderstanding among politicians regarding the trade consequences of foreign
countries' VAT border adjustments - are highlighted below. Although (as discussed
below) the BAT is no longer under active consideration, the factors that generated
politicians' interest in the idea are unlikely to disappear; thus, the BAT retains some
potential relevance in the future.
For purposes of forecasting revenue and spending, the US Congress uses a 10-year
budget window." As the US has a significant trade deficit, the border adjustment
would raise significant revenue (projected to be approximately US $1 trillion over
ten years) that can be used to offset or "pay for" PIT rate reductions (and the loss of
revenue from reducing the CIT rate). Economists have argued that such apparent
revenue gains will be temporary, as the trade deficit has to be zero in the long run:
the revenue gains from border adjustment will be offset by revenue losses from future
US trade surpluses." This reversal, however, would occur beyond the 10-year budget
window, and well beyond the electoral horizon.
There is a possibility that some of the revenue gain would be permanent, if the current
trade deficit is mismeasured due to strategic transfer pricing by MNCs. To the extent
that MNCs export products from the US to their foreign affiliates at excessively low
prices (or import products from their foreign affiliates at excessively high prices) in
order to shift profits abroad, then the US trade deficit appears larger than it "should":
the value of exports is lower and the value of imports lower than if arm's length prices
were to be used." The component of the trade deficit due to profit shifting will not
reverse in the future in the same way as the "true" trade deficit, and so there may be
some permanent gain in revenue from the border adjustment. How large this effect
would be depends on the magnitude of MNCs' profit shifting out of the US, an issue
on which there is considerable controversy (as discussed below in section 3).
15
16
17
See the Congressional Budget Office's description of its procedures at www.cbo.gov/topics/
budget. For a general theoretical framework for understanding Congressional budget rules, see
D Dharmapala "The Congressional budget process, aggregate spending, and statutory budget
rules", (2006) 90 JournalofPublic Economics 119.
OJ Blanchard and J Furman "Who pays for border adjustment? Sooner or later, Americans do",
(2017). Available at https://piie.com/blogs/trade-investment-policy-watch/who-pays-borderadjustment-sooner-or-later-americans-do. Note that the baseline for the "revenue gains" referred
to in the text is not the current CIT, but rather a cash flow tax with no border adjustment.
AJ Auerbach "Demystifying the destination-based cash-flow tax", (2017). Available at www
.brookings.edu/wp-content/uploads/2017/09/5aauerbach.pdf.
86
(2018) 33 AUSTRALIAN TAX FORUM
A second distinct reason why politicians may have been attracted to the BAT relates
to erroneous but widely held beliefs about the trade effects of foreign countries' VATs.
For example, the chair of the House Ways and Means Committee, Representative
Kevin Brady (a prominent architect of the House blueprint) has written that:"
"[O]ur broken code results in unfair double taxation of 'Made in America'
products. Using a "border adjustable" approach, our competitors [the term Brady
uses to describe trading partners of the US] take taxes off their own exports
when their products are sold in America, and they add taxes onto American
products sold in their countries. Ultimately, this means American exports are
subject to full U.S. taxes plus tax in the foreign market. In contrast, imports come
into America with foreign taxes removed and bear no U.S. tax."
This argument appears to relate to VAT border adjustments. Specifically, when a
Mexican firm exports a product to the US, Mexico provides a rebate of the 16% VAT
that has been paid at prior stages of the production process; US products imported
into Mexico are, of course, subject to the 16% VAT. This border adjustment ensures
that the base of the Mexican VAT consists of all consumption by Mexican residents,
and only of consumption by Mexican residents. It creates a level playing field where
US exports to Mexico are subject to the same VAT rate (16%) as Mexican products sold
domestically, and Mexican exports to the US are subject to the same VAT rate (0%) as
US products sold domestically. It is fully consistent with World Trade Organization
(WTO) rules. Moreover, it has long been understood by economists that VAT border
adjustments have no impact on trade.19
The claim made by Representative Brady that foreign countries' VAT border
adjustments disadvantage US exporters is inconsistent with this scholarly consensus
(however, in fairness to Representative Brady, he is far from being alone in holding
this belief). While there is in reality no "made in America" tax, it may appear to those
who have fallen under the spell of this fallacy that the imposition by the US of its own
border adjustment would compensate for the perceived (albeit illusory) disadvantage
created by Mexico's VAT. Indeed, the erroneous belief that foreign countries' VAT
border adjustments disadvantage US exporters seems to pervade the House blueprint:
"This Blueprint eliminates the existing self-imposed export penalty and import
18
19
K Brady "Border tax would boost U.S. workers, made-in-America products", (2017) Orlando
Sentinel, April 11. Available at www.orlandosentinel.com/opinion/os-ed-border-tax-would
-boost-american-economy-20170411-story.html.
See, eg, CE McLure Jr, The value-added tax: key to deficit reduction?(1987), American Enterprise
Institute Press; MS Feldstein and PR Krugman "International trade effects of value-added
taxation', in A Razin and J Slemrod (editors) Taxation in the global economy, University
of Chicago Press, (1990), 263-282; AJ Auerbach and D Holtz-Eakin "The role of border
adjustments in international taxation, (2016). Available at https://eml.berkeley.edul-auerbach/
The%20Role%20of%2oBorder%2OAdjustments%20in%20International%2OTaxation%2012-2
-16-1.pdf.
INTERNATIONAL SPILLOVERS FROM PROPOSED US TAX REFORMS
87
subsidy ... For the first time ever, the United States will be able to counter the border
adjustments that our trading partners apply in their VATs".20 One may question how
much this false belief matters - after all, the delusion of the "made in America" tax
does not in itself invalidate the coherent arguments that exist for a DBCFT. However,
the aim here is to explain the political appeal of the DBCFT, rather than to evaluate
its merits.
3.
Potential international spillovers
3.1 Profit shifting
Scholarly proponents of the DBCFT argue that one of its key advantages is that it
would eliminate profit shifting by MNCs out of the US. 21 If the DBCFT were to be
adopted by all countries on a multilateral basis, it is argued that all profit shifting
would end. If the US implements a DBCFT unilaterally, there would be an incentive
for MNCs to shift profits to - rather than from - the US, as discussed below. In
the political arena, advocates of the House blueprint make what appear to be similar
claims. However, in their case, it is unclear whether concepts such as profit shifting
and real investment responses are being properly distinguished, and the discussion is
often overshadowed by confusion relating to the nonexistent "made in America" tax.
The impact of the House blueprint reform on profit shifting can be illustrated using a
simple example. Suppose that initially the US and a foreign country that we will refer
to as Ruritania both have 35% CIT rates. An MNC owns affiliates in both countries,
and generates $100 of "true" income in each country. The unilateral implementation
of a DBCFT by the US would result in corporate income per se no longer being taxed
by the US, with cash flows relating to foreign transactions being ignored. The MNC
would now have an incentive to shift profits to the US, for instance by exporting
products from its US affiliate to its Ruritanian affiliate at an excessively high price. As
exports from the US affiliate to its Ruritanian affiliate are cross-border transactions,
they are ignored under the DBCFT's border adjustment provision. A zero rate
thus applies to this foreign income (regardless of whether it represents normal or
abnormal returns to capital).
20
21
House Ways and Means Committee, above n 6, at 27. Of course, a more obvious way for the
US to impose its own border adjustments would be to enact a standard VAT. For reasons that
are not entirely clear, though, this seems to be unacceptable to the House Ways and Means
Committee, which emphasises that: "This Blueprint does not include a value-added tax" (above,
n 6, at 15). The political barriers to a VAT are discussed in section 4.3 below. Note that in any
event, enacting a VAT in the mistaken belief that it is a form of protectionist trade policy would
scarcely constitute competent policymaking.
Auerbach, above n 7; Auerbach, Devereux and Simpson, above n 7; Auerbach, Devereux, Keen
and Vella, above n 7.
88 (2018) 33 AUSTRALIAN TAX FORUM
Profit shifting of this type would, of course, cause a decline in tax revenue for Ruritania.
A central question is the magnitude of profit shifting that might be expected. An
extensive empirical literature uses large firm-level datasets to analyse the impact
of changes in tax rates on the profits reported by MNC affiliates. The consensus
of this literature is that what is known as the "semi-elasticity" (a measure of the
responsiveness of reported profit to tax rate differences across countries) is about 0.8.22
This entails that a 10-percentage point increase in the tax rate difference between an
affiliate and its parent (eg because the tax rate in the affiliate's country falls from 35%
to 25%) would increase the pre-tax profit reported by the affiliate by 8% (for example,
from $100,000 to $108,000). Applying this estimate to the example here implies that
after the introduction of the US DBCFT, the MNC will shift $28 from Ruritania to the
US (with a loss of about $10 of revenue for the Ruritanian Government), as illustrated
in Figure 1.
Figure 1: An example of profit shifting
Tax rate = 35% (initially)
Tax rate = 35%
"BAT" reform -+ zero CIT
us
affiiate
True income = $100
Reports $128
$28
(using "consensus" 0.8 semi-elasticity)
Ruritania
a
True income = $100
Reports $72
There are, of course, many uncertainties about any such estimate. The responsiveness
of reported profit to tax rate differences is typically estimated using small changes in
taxes, while the assumed reform involves a very large change to the US CIT rate. It
is not clear whether such an extrapolation is necessarily reliable. There are already a
substantial number of zero-CIT jurisdictions, 23 and it could be argued that adding
one more (the US) need not make much difference to firms' behaviour. However, the
US would be a tax haven of unprecedented size and economic importance, making
the consequences very difficult to predict.
In addition, the types of estimates relied on above - which suggest that profit shifting
is relatively modest in magnitude - have become subject to various criticisms in
recent years. 24 In particular, they have been argued to be inconsistent with the very
22
23
24
D Dharmapala "What do we know about base erosion and profit shifting? A review of the
empirical literature", (2014) 35 Fiscal Studies 421.
D Dharmapala and JR Hines, Jr, "Which countries become tax havens?", (2009) 93 Journal of
PublicEconomics 1058.
KA Clausing "The effect of profit shifting on the corporate tax base in the United States and
beyond", (2016) 69 National Tax Journal 905.
INTERNATIONAL SPILLOVERS FROM PROPOSED US TAX REFORMS
89
substantial fraction of MNC profits that are reported in tax havens: for instance,
42.6% of the (foreign) net income of US MNCs in 2011 was reported in tax haven
jurisdictions. 25 One recent study adopts the very simple approach of allocating the
worldwide profits of US MNCs among affiliates based on factors such as the fraction
of worldwide sales that occur in the affiliate's jurisdiction. Using this method, the
authors find a substantially larger magnitude of profit shifting than assumed above
- for example, they argue that $280b of profit was shifted out of the US by US-based
MNCs in 2012.26 Large estimates of the magnitude of profit shifting would of course
imply that the revenue losses experienced by Ruritania would be correspondingly
larger.
In addition to affecting non-US governments' revenue, changes to patterns of profit
shifting may create new inefficiencies and deadweight costs. The structure of the costs
of tax planning is not very well understood. However, it is reasonable to believe that
tax planning entails a relatively large fixed cost and relatively small variable costs,
in relation to the amount of profit shifted. 27 Following the reform, MNCs will have
to incur a fixed cost of learning about Ruritania's laws - for instance, its transfer
pricing regulations - in order to shift profits outward. The cost of doing so is socially
wasteful, as it merely results in redistribution from the Ruritanian Government to
the MNC, but it may well be privately optimal from the MNC's perspective. Thus,
the reform would create deadweight costs associated with changes to the mode of
tax planning. The new deadweight cost would not be incurred if MNCs expected all
countries to adopt the DBCFT, but there appears to be very little prospect of such
multilateral adoption. In reality, there is of course US-to-foreign shifting under the
current system. However, the fixed costs of tax planning associated with US-to-foreign
shifting have already been incurred, and the variable costs of MNCs continuing to
engage in such shifting are likely to be small.
Another claim made by proponents of the DBCFT is that it would increase real
investment and economic activity in the US. Of course, a source-based CIT tends
to distort investment, and reducing the CIT rate should ameliorate these distortions.
However, there is a significant danger that the understanding of this claim in the
political arena and among the public has become confused with various false or
misleading notions, such as the aforementioned "made in America" tax, and affected
by hostile attitudes towards offshore economic activity.
It is also important to recognise the interactions between profit shifting and real
investment. The incentive to invest on the intensive margin (ie conditional on already
25
26
27
Dharmapala, above n 22.
F Gilvenen, RJ Mataloni, Jr, DG Rassier and KJ Ruhl "Offshore profit shifting and domestic
productivity measurement", (2017) NBER working paper no. 23324. This is quite a large
estimate, amounting to almost 2% of US GDP. It is difficult to reconcile with the micro-level
evidence surveyed in Dharmapala, above n 22.
Dharmapala, above n 22.
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engaging in some level of investment in that location) depends on the effective
marginal tax rate (EMTR). This is the tax rate on an extra dollar of income generated
by additional investment, and depends on depreciation schedules and investment tax
credits, as well as on the statutory rate. For instance, the Oxford University Centre
for Business Taxation database reports an EMTR of 23% for the US. 28 However,
by construction, the EMTR does not take account of the impact of profit shifting.
Consider an extreme case in which all of the profit generated by an investment in the
US is shifted to a zero-CIT jurisdiction. Then, the actual (post-shifting) EMTR would
be zero, and the level of investment in the US would not be distorted.
If the magnitude of profit shifting under the current system is large, then it would
follow that there is relatively little distortion to MNCs' investment decisions, and
that a DBCFT reform would not lead to large increases in investment in the US by
MNCs. 29 On the other hand, if the magnitude of profit shifting under the current
system is small, there may a substantial investment response by MNCs to the reform.
However, in those circumstances, the reform cannot also lead to a large decline in
profit shifting out of the US. In other words, it cannot simultaneously be true that
profit shifting is large and that there will be a large US real investment response by
MNCs from enacting a DBCFT.
3.2 Other types of spillovers
Some commentators have argued that the House blueprint and related proposals
are likely to generate large spillover effects on foreign countries that are not directly
related to behavioural responses to taxes. Indeed, critics suggest that the plan entails
potentially catastrophic risks to the global economy through mechanisms related to
international trade." The implementation of a BAT (or more generally of a DBCFT)
would be expected to lead to an appreciation of the US dollar. In theory, this exchange
rate effect would perfectly offset the border adjustments on imports and exports,
rendering the DBCFT trade-neutral. However, it has been argued that exchange rate
appreciation would result in an arbitrary redistribution of wealth from holders of
non-US assets to holders of US assets, and increase the cost to non-US borrowers
(including governments) of servicing debt denominated in US dollars. In response,
28
29
30
See www.sbs.ox.ac.uk/faculty-research/tax/publications/data.
This assumes that the cost structure of tax planning allows for part of the marginal dollar earned
to be shifted outwards (ie there is no binding upper bound to profit shifting of some fixed dollar
amount). It also abstracts from the possibility that there are complementarities between profit
shifting and real activity - for instance, that locating some minimal amount of real activity in a
low-tax jurisdiction facilitates profit shifting to that jurisdiction. This type of claim is sometimes
made (eg H Grubert "Intangible income, intercompany transactions, income shifting, and the
choice of location, (2003) 56 National Tax Journal221). However, any such distortions to the
location of real activity are properly viewed as arising due to transfer pricing regulations (and the
frictions they create for tax planning), rather than from profit shifting per se.
Graetz, above n 6.
INTERNATIONAL SPILLOVERS FROM PROPOSED US TAX REFORMS
91
advocates of the DBCFT have challenged critics' assessment of the magnitude of
the wealth redistribution.
They have also pointed out that the introduction of a
DBCFT is not unique among tax reform options in giving rise to arbitrary wealth
redistributions. For instance, if the US CIT were to be abolished (without replacement
by a DBCFT), foreign holders of US corporate equity would also receive a windfall
gain.
32
If the exchange rate adjustment is imperfect, a different set of concerns apply. The BAT
would then fail to be trade-neutral, and would distort patterns of international trade.
Regardless of the extent of the exchange rate adjustment, the border adjustments in
the House blueprint are widely thought to violate WTO law (for reasons that cannot
be fully described here due to space constraints). In the unlikely event that the House
blueprint were ever to be implemented, it is thought that there may be retaliation
against the US by other countries under WTO rules, potentially leading to the
collapse of the WTO-based trade regime that has been such an important element in
global prosperity over recent decades. Such catastrophic consequences are surely very
unlikely. However, whether it might be prudent to incur such risks depends in part
on whether the BAT has offsetting potential advantages over other readily available
reform options (such as a standard VAT); this question is addressed in section 4 below.
4.
An assessment of the House blueprint, and a path
forward
4.1 Strictural coherence
The most obvious feature of the House blueprint, as described above, is what might
be termed its structural incoherence. In particular, it seeks to combine income-type
taxation at the personal level (with a PIT that purports to tax, among other things,
dividends and capital gains) with consumption-type taxation at the company level.
It should be emphasised that this structural incoherence is a feature of the House
blueprint, and not of the scholarly proposals for a DBCFT. The latter focus only on
33
business taxation and do not take any particular stand on the personal tax system.
However, as discussed below, the adoption of a DBCFT may entail significant
constraints on the types of personal taxation that can be effectively implemented.
The House blueprint's approach entails both logical inconsistency and various
practical difficulties. It is well known that the primary difference between an ideal
31
32
33
AJ Auerbach "Notes on the US wealth effect of border adjustment", (2017). Available at https://
eml.berkeley.edul/-auerbach/NotesontheUSWealthEffectofBorderAdjustment.pdf.
Auerbach, above n 17.
Auerbach, above n 7; Auerbach, Devereux and Simpson, above n 7; However, Auerbach,
Devereux, Keen and Vella, above n 7 at 69-70 discuss some design issues relating to the
interaction of the PIT and the DBCFT.
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(2018) 33 AUSTRALIAN TAX FORUM
income-type tax and an ideal consumption-type tax is that the former (but not the
latter) taxes the normal return to capital.34 If the designers of a tax system decide not
to tax the normal return to capital at the company level, it is not clear - as a matter of
logic - why they would wish to do so at the personal level. On a more practical note,
this approach creates obvious tax planning opportunities as corporations become
tax shelters from the perspective of the PIT. Households can straightforwardly
establish corporate entities to defer the taxation of their wages and other income until
withdrawn for consumption, thus enjoying consumption-type tax treatment at the
personal level. However, society would bear possibly substantial deadweight costs
of tax planning, compared to a scenario with an explicit consumption-type tax at
the personal level. Alternatively, anti-avoidance rules may preserve the PIT to some
extent, but only at the cost of greater complexity and administrative burdens. Indeed,
it is surely no accident that no country has an effective PIT without also imposing
a CIT.35 Structural incoherence is primarily a domestic US concern rather than an
international spillover. However, it illustrates an important general lesson - that
the company tax regime shapes households' tax planning opportunities, and thus
constrains the PIT - that is applicable elsewhere when contemplating company tax
reform.
The tax planning opportunities for households created by the House blueprint rely
mostly on deferral. If accrual-based taxation were imposed at the personal level
- essentially abolishing the realisation requirement that has long been an integral
element of the income tax - then it would be much more realistic to envisage a PIT
that can survive in the absence of a CIT. 6 Of course, accrual-based taxation faces
strong practical challenges. Moreover, it is by no means obvious that introducing
accrual taxation only for the subset of assets (such as publicly traded stock) for which
the practical problems can be solved would necessarily be desirable.
Many decades ago, Vickrey proposed that taxation be imposed at the time of
realisation, with interest imposed to account for deferral (a tax that would require
knowledge of the time pattern of returns over the life of the asset).37 More recently,
Auerbach proposed a "retrospective tax" under which tax would be imposed at the
time of realisation on a notional gain computed by assuming that the asset generated
34
35
36
37
J Bankman and T Griffith "Is the debate between an income tax and a consumption tax a debate
about risk: does it matter?", (1991) 47 Tax Law Review 377.
Of course, a significant number ofjurisdictions have a zero CIT, but these jurisdictions generally
also impose a zero PIT. Thus, this particular problem of structural coherence does not arise.
Y Brauner "Should corporations be taxpayers?" in A Infanti (ed), Controversies in tax law: a
matter ofperspective, Ashgate Publishing, 2015, 177-194.
W Vickrey "Averaging of income for income-tax purposes", (1939) 47 Journal of Political
Economy 379.
INTERNATIONAL SPILLOVERS FROM PROPOSED US TAX REFORMS
93
the risk-free rate of return over the period since its purchase.38 This tax would require
knowledge of the date of purchase and the sale price, but not of the time pattern of
returns. Such ideas, however, are definitely not part of the current tax reform debate. 39
In their absence, abolishing the CIT makes it very difficult to sustain a PIT. This
suggests that a DBCFT would be most naturally paired with a wage tax at the personal
level (rather than with a PIT).
4.2 A path forward: modifying the House blueprint
An overall assessment of the House blueprint is complicated because it is replete
with internal contradictions. For instance, land is excluded from the expensing
regime, 40 which seems in tension with the overall intent of the document and with
well-understood principles of cash flow taxation. Weisbach's guide to the House
blueprint frankly states that: "I take these statements to be mistakes".41 Despite
these problems, a charitable view is adopted here; the focus is on how the overall
structure of the House blueprint might be made more coherent.
A first step would be to eliminate the BAT's wage deduction. This would result in a
price adjustment - rather than an exchange rate adjustment - to the introduction of
the BAT, and so eliminate the possible economic risks to which critics have pointed.
A second step would be to implement the BAT using a credit-invoice system, so that
deductions (including export rebates) would be contingent on invoices from BAT
taxpayers. In combination, these simple steps would address the concerns about the
WTO-compliance of the BAT's border adjustment. To remedy its overall structural
incoherence, one could eliminate the PIT on non-wage income, retain the CIT (albeit
perhaps at a lower rate), or implement a reformed PIT that replicates an accrual-based
tax (ie one with no deferral advantage). These modifications to the House blueprint
- while of course partly in jest - underline the similarities between a DBCFT and a
VAT. Indeed, if it would assuage the feelings of the House Way and Means Committee,
the rest of the world could surely be persuaded to rename the VAT the "credit-invoice
method BAT without a deduction for wages'.
38
39
40
41
AJ Auerbach "Retrospective capital gains taxation', (1991) 81 American Economic Review 167.
See D Dharmapala "Introduction" in D Dharmapala (editor) The economics of tax avoidance and
evasion, Edward Elgar Publishing, 2017, xv-xxix for a discussion of how these proposals relate to
the broader context of tax avoidance.
H Grubert and R Altshuler "Shifting the burden of taxation from the corporate to the personal
level and getting the corporate tax rate down to 15 percent, (2016) 69 National Tax Journal
643 propose an income averaging system based on Vickrey, above n 37. E Toder and AD Viard
"Replacing corporate tax revenues with a mark-to-market tax on shareholder income", (2016)
69 National Tax Journal 701 propose a mark-to-market (ie accrual-based) system for publicly
traded stock. However, neither of these proposals is under legislative consideration.
House Ways and Means Committee, above n 6, at 26.
DA Weisbach, above n 6.
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It was emphasised above that a DBCFT has numerous advantages over a CIT,
which account for its important role in recent academic discussions of tax reform.42
However, the superiority of a DBCFT to a VAT is less clear. In an ideal setting, they are
very similar - recall that the DBCFT is a subtraction-method VAT with a deduction
for wages - but there are potentially important administrative differences. McLure 43
distinguishes between consumption taxes that are "naive" (the subtraction-method
VAT and cash flow taxes) and those that are "sophisticated" (the credit-invoice method
VAT). The latter require that taxpayers seeking deductions for input costs must
present invoices establishing that prior taxpayers along the production chain have
paid tax on those inputs. The former do not require invoices, and allow all input costs
(excluding wages in a subtraction-method VAT) to be deducted. Evasion and fraud
are thus much easier under a "naive" system. Such a system would also create various
avoidance opportunities, for instance, involving strategic transfer pricing between
tax-exempt and taxable entities under common ownership and control. 44 As a result,
governments around the world have converged on the "sophisticated" (credit-invoice
method) VAT as the standard form of consumption taxation; subtraction-method
45
VATs and cash flow taxes are rarely, if ever, observed.
One possible advantage of a DBCFT may be that, unlike a standard VAT, it allows
wages to be taxed at the personal level at progressive rates. However, this applies only
when comparing a VAT-only system (a "full-replacement" VAT) to a system with a
DBCFT at the firm level and a wage tax at the personal level. If we compare the latter
instead to a system consisting of a VAT along with a wage tax at the personal level,
then it is possible to achieve the desired degree of progressivity under either system:
a combination of a wage tax and a VAT can be as progressive as the combination of a
46
wage tax and a DBCFT.
4.3 Why does the US not have a VAT?
The discussion above implicates the question of why the US does not already have
a VAT. Tax scholars have debated this question for decades, and what follows is
one interpretation of what has and has not been learnt. First, there seems to be no
compelling normative reason why the US should not adopt a VAT. People in the US
have not discovered some fatal flaw in the VAT that has escaped the attention of the
rest of the world. The arguments made against adoption of a VAT seem weak. It is
42
43
44
45
46
Dharmapala, above n 12.
McLure, above n 19.
DA Weisbach "Should the United States prefer a cash flow tax to a VAT?", (2017) Tax Notes,
June 12, 34-50.
Grinberg, above n 5.
Weisbach, above n 44. Note that the equivalence highlighted in the text applies to a comparison
of two hypothetical scenarios (a wage tax and a VAT versus a wage tax and a DBCFT). This does
not necessarily imply that either of these hypothetical scenarios would be likely to match the
progressivity of the current income tax system.
INTERNATIONAL SPILLOVERS FROM PROPOSED US TAX REFORMS
95
often claimed that the VAT is a "money machine'. The evidence suggests that countries
that adopt a VAT tend to raise modestly higher revenue, but this seems attributable
to its relative efficiency as a tax instrument.47 Welfare-decreasing increases in revenue
require quite extreme assumptions about political dysfunction. Keen and Lockwood
conclude that "if the VAT is, indeed, a money machine ... then that is an argument
for, not against, its adoption".48 Federalism concerns are sometimes cited, but the
Canadian experience suggests that a federal structure is not a significant obstacle to a
VAT.49 Distributional concerns are frequently raised, but these are relevant primarily
if the VAT were to fully replace the income tax; even then, the focus should be on
the progressivity of the overall tax-transfer system, rather than that of the tax system
alone.
What is more surprising is that there is also no compelling political economy theory
of why the US - and only the US among comparable countries - does not have
a VAT. Recently, Shaviro has developed a nuanced theory of the failure of the US
to adopt a VAT, recognising that the VAT has not always been easy to introduce in
many other countries as well. While it contains many elements, one important feature
of this theory is risk aversion among political parties about the use that the other
party might make of VAT revenue. In essence, one party fears that the other will use
VAT revenue to reduce income taxes (and to reduce the overall progressivity of the
tax-transfer system); conversely, the opposing party fears that the other will use VAT
revenue to increase government spending. This undoubtedly captures some important
elements of the situation. However, it should be noted that the possibility of divided
government in the US (where each party controls at least one of the two chambers
of Congress or the Presidency) reduces both the future upside and downside risks of
introducing a VAT, relative to those risks under a parliamentary system such as that
of the UK. Therefore, this type of risk aversion (at least when considered in isolation)
would seem to imply that the UK would be less likely to enact a VAT than the US; it is
not clear that risk aversion alone can fully explain the uniqueness of the US outcome.
It is perhaps the case that anti-tax political rhetoric has more resonance in the US than
elsewhere, and this may partially explain opposition to a VAT. It is difficult to view
this as a full explanation, however, as anti-tax sentiment has not prevented the US
from becoming a relatively high income tax country. Moreover, some of this anti-tax
sentiment may itself be a consequence of the almost uniquely burdensome income
tax filing requirements in the US (due to the absence of exact withholding and the
complexity entailed by myriad deductions and credits). For instance, in an important
recent contribution, Benzarti uses an innovative empirical approach to estimate that
47
48
49
M Keen and B Lockwood "Is the VAT a money machine", (2006) 59 National Tax Journal905.
Keen and Lockwood, above n 47, at 925.
RM Bird and PP Gendron "Sales taxes in Canada: the GST-HST-QST-RST system', (2010) 63
Tax Law Review 517 at 517 conclude that: "Canadian experience shows that the existence or
nonexistence of subnational retail sales taxes is, in both technical and economic terms, a matter
of indifference when considering a federal VAT".
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the cognitive burdens and other costs of record-keeping and tax filing may amount to
up to 1.2% of US GDP (in addition to the more familiar deadweight costs created by
behavioral responses to taxes).5 0 Thus, anti-tax sentiment may not be an independent
factor explaining the lack of tax reform, but rather, at least in part, a consequence of
the failure to undertake consumption-type tax reform.5 1
This discussion suggests that the absence of a VAT in the US is indeed anomalous.
The difficulty of explaining the political economy underlying this outcome in some
ways provides grounds for optimism - as it cannot be explained as an equilibrium
phenomenon, there is also no good explanation of why it would be impossible to
introduce a VAT. Much attention has been devoted by tax scholars in the US to
devising variants of a VAT - such as the Hall-Rabushka taX 52 and the X-tax5 3 - that
are thought to be more politically palatable. In the real world, however, there is only
one consumption-type tax - the standard VAT. The challenge for the US is not to
reinvent the wheel, but simply to catch up to the global frontier of fiscal technology.
Indeed, for US policymakers to reject the only broad-based consumption-type tax
that exists is tantamount to rejecting tax reform as an objective, and should be seen as
an implicit endorsement of the status quo.
4.4 Impications for the future of the company tax
The House blueprint, as well as much recent discussion of tax reform, is animated by
an impulse to abolish, or substantially diminish the role of, the company tax. It was
argued above that - in the absence of reforms to the PIT that would implement or
mimic accrual-based taxation - abolishing the CIT creates tax planning opportunities
for households and renders it difficult to sustain a PIT. The future of the company tax
is thus inextricably linked to the future of income taxation more generally. For those
who are committed to the maintenance of a PIT, the CIT is likely to continue to be
necessary, despite its well-documented inefficiencies, 54 unless an accrual-like PIT can
be implemented.
On the other hand, for those who favor consumption-type taxation, the inefficiencies
of the CIT may justify jettisoning income taxation altogether. What might such an
alternative look like? One possibility is a combination of a standard VAT and a wage
tax, while a second option is a "full-replacement" VAT (where the CIT and PIT are both
50
51
52
53
54
Y Benzarti "How taxing is tax filing? Using revealed preferences to estimate compliance costs",
(2017) National Bureau of Economic Research working paper 23903.
Some politicians may wish to maintain the burdensome elements of the tax system in order
foster anti-tax sentiment, and it is possible that tax rates are lower as a result than they would
otherwise be.
RE Hall and A Rabushka, (1995), The flat tax, Hoover Institution Press.
DF Bradford, (1996), Fundamentalissues in consumption taxation, American Enterprise Institute
Press.
Dharmapala, above n 12.
INTERNATIONAL SPILLOVERS FROM PROPOSED US TAX REFORMS
97
abolished and replaced by a VAT). Either of these would eliminate all of the distortions
attributable to the company tax, as well as those due to the personal taxation of
non-wage income, leaving only the labour supply distortion caused by a consumption
tax.55 The former option would enable policymakers to achieve any desired degree of
progressivity by taxing wages at the personal level (albeit requiring that individuals
file wage tax returns). The latter would dispense with individual filing, which in
view of recent estimates of the cognitive burdens of tax filing,56 may be a significant
advantage. Its distributional consequences are of course an important concern, but as
emphasised earlier, progressivity should ideally be assessed with respect to the overall
tax-transfer system, not merely with respect to the revenue-raising mechanism.
Obviously, neither of these options may be satisfactory; however, the more general
point is that the co-dependence of the PIT and the CIT implies that some difficult
choices have to be made if the CIT is to be abolished.
5.
An overview of recent developments
Recent developments suggest that the BAT is no longer an active element of the tax
reform debate. In April 2017, the White House released a plan that did not mention
the BAT. Its business tax reform proposal consisted in its entirety of four brief bullet
57
points:
.
.
0
.
"15% business tax rate
Territorial tax system to level the playing field for American companies
One-time tax on trillions of dollars held overseas
Eliminate tax breaks for special interests"
Two implications of this skeletal proposal are briefly discussed below.
First, note that the 15% business tax rate would apply both to corporate income and to
income earned by households via pass-through business entities. The latter represents
a particularly large component ofbusiness income in the US. 58 The creation of this new
55
56
57
58
In countries that impose a PIT on an individual rather than household basis, switching to a
VAT would also entail moving from individual to household taxation (as the burden of the
VAT is necessarily on a household basis), thus raising issues related to the optimal taxation of
two-earner households (eg P Apps and R Rees "The taxation of couples", (2007) IZA discussion
paper no. 2910). If the labour supply of secondary earners is highly elastic, then this reform may
result in substantial labour supply effects. In general, this is a valid concern, but it is not relevant
to the US where the PIT is imposed on a household basis.
Benzarti, above n 50.
See, eg, www.cnbc.com/2017/04/26/heres-the-white-house-memo-on-president-trumps-proposed
-tax-plan.html.
M Cooper, J McClelland, J Pearce J, R Prisinzano, J Sullivan, D Yagan, 0 Zidar and E Zwick
"Business in the United States: who owns it, and how much tax do they pay?", (2016) 30 Tax
Policy and the Economy 91.
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business income tax bracket leads to obvious tax planning opportunities for personal
taxpayers to recharacterise their wage income as "business" income by establishing
pass-through business entities. As with the tax planning opportunities from setting a
zero CIT rate, these strategies could potentially be addressed by anti-avoidance rules.
For example, a simple solution would be to apportion wage income by a formula.
Suppose, for instance, that the top marginal PIT rate is 35% and that 20% of business
income is treated as wages. Then, a taxpayer who earns $100 of "business" income will
be taxed at 35% on $20 and at 15% on the remaining $80. This, however, is equivalent
to setting the preferential business tax rate at 19%, rather than 15%. As long as the
formula does not require all business income to be treated as wages, there will remain
an incentive for taxpayers to recharacterise their wages as business income.
As this example suggests, tax planning opportunities created by a low business tax rate
can only be curbed at the cost of greatly increased complexity. Moreover, evidence
from dual income tax systems - in which owners of closely held corporations may
potentially characterise their returns as either wages or dividends - suggests that
taxpayers are highly responsive to such planning opportunities. 5 9 Beyond this, it is
possible that the same types of international spillovers (such as profit shifting into the
US) that would occur under a zero CIT rate may also occur, albeit to a substantially
lesser degree, with a 15% CIT rate (as many countries have CIT rates above 15%).
Second, the "one-time tax" on cash held by US MNCs abroad has been widely
viewed as necessary in order to prevent a windfall gain to MNCs from the enactment
of a territorial system. However, Congress cannot bind itself to not repeating the
"one-time" tax; once the administrative machinery is in place for measuring and
taxing foreign cash, it will be sorely tempted to impose this type of tax again. Prior
"one-time" international tax policies do not engender much confidence on this point.
60
In 2004, Congress enacted a "one-time" holiday for repatriations by US MNCs.
In 2009 and 2011, members of Congress sought on several occasions to repeat this
holiday, and the idea has not yet disappeared from consideration. The expectation
of future taxes on foreign cash may create a new type of inefficiency - excessively
large repatriations by US MNCs to avoid the possibility of the future recurrence of
the tax. 61 This potentially creates international spillovers in some circumstances.
In particular, in the presence of both financial frictions and agency costs among
affiliates, US MNCs may forego valuable investment opportunities abroad in order to
undertake excessive repatriations.
59
60
61
J Harju and T Matikka "The elasticity of taxable income and income-shifting: what is "real" and
what is not?", (2016) 23 InternationalTax and Public Finance 640. This study uses a reform in
Finland that reduced the dividend tax relative to the wage tax rate, and finds an elasticity of 1.4
for the recharacterisation of wages as dividends.
D Dharmapala, CF Foley and KJ Forbes "Watch what I do, not what I say: the unintended
consequences of the Homeland Investment Act" 66 JournalofFinance 753.
Dharmapala, above n 12.
INTERNATIONAL SPILLOVERS FROM PROPOSED US TAX REFORMS
99
In July 2017, a joint statement on tax reform was released by Congressional leaders
and White House officials. This explicitly abandons the BAT: 62
"The goal is a plan that reduces tax rates as much as possible, allows
unprecedented capital expensing, places a priority on permanence, and creates
a system that encourages American companies to bring back jobs and profits
trapped overseas. And we are now confident that, without transitioningto a new
domestic consumption-based tax system, there is a viable approach for ensuring a
level playing field between American and foreign companies and workers, while
protecting American jobs and the U.S. tax base. While we have debated the
pro-growth benefits of border adjustability, we appreciate that there are many
unknowns associated with it and have decided to set this policy aside in order to
advance tax reform." (emphasis added)
In the light of this statement, the current expectation is that, if any tax changes
occur, they will consist primarily of tax cuts, rather than structural reforms. Of
course, more generous depreciation allowances would tend to move the tax system
in a consumption-type direction (albeit with an origin rather than destination basis).
However, it is unclear whether any changes will extend to full expensing. If they do
not, then the CIT will remain primarily an income-type tax; to the extent that they do,
then the problems of structural coherence highlighted above will become a concern.
The expectation noted above - that any changes that are enacted will consist of tax
cuts rather than tax reform - was confirmed by the release on 27 September, 2017 of
a (slightly) more detailed plan, known as the "Unified Framework". 6' This framework
envisages maintaining the CIT in substantially the same form, while reducing the CIT
rate to 20% and moving towards territorial taxation (it would also set the business tax
rate on pass-through income at 25%, rather than 15%). Thus, the tax reform debate
has now essentially been concluded, although it remains to be seen whether any tax
cuts are enacted.
6.
Conclusion
The US tax reform debate, as described in this article, in some respects resembles
a comedy of errors. The reforms that are needed have long been obvious to tax
experts, but rather less so to policymakers. Essentially, reform requires a shift from
income-type to consumption-type taxation, and in particular, to the only type of
broad-based consumption tax that exists in the real world, namely the standard
VAT. Yet policymakers have proven themselves to be thoroughly Marxian (albeit
of the Groucho tendency) in their penchant for mistaken diagnoses and misguided
remedies.
62
63
Available at www.whitehouse.gov/the-press-office/2017/07/27/joint-statement-tax-reform.
Available at www.treasury.gov/press-center/press-releases/Documents/Tax-Framework.pdf
100 (2018) 33 AUSTRALIAN TAX FORUM
For all its foibles, however, this debate has potentially serious implications for the
rest of the world. If the proposals discussed above were ever to be implemented, they
would generate international spillovers with respect to profit shifting, the location of
investment, and other forms of behaviour. There are also important general lessons
from this debate that are applicable elsewhere, especially with regard to the question
addressed in this special issue, namely "what shall we do with the company tax?" For
instance, analysing the US debate highlights the idea that the company tax shapes tax
planning opportunities at the personal level; its future is thus inextricably linked to
the future of income taxation more generally.
At the time of writing, the expected outcome in the US involves (at most) some tax
cuts rather than anything that would merit the term "tax reform'. Such an outcome
would clearly fail to address the well-known structural problems of US taxation.
However, it may well generate more limited spillovers to the rest of the world than
would some attempts at structural reform. Ultimately, if fundamental tax reform is
ever to occur in the US, some unique (and quite poorly understood) political obstacles
to the enactment of a VAT will have to be overcome. Meanwhile, rejecting the only
viable form of consumption taxation should be clearly understood as amounting to
a rejection of tax reform. Although the House blueprint is obviously a deeply flawed
document, it has at least placed consumption-type taxation on the policy agenda.
Consequently, the tax reform debate of 2016-17 provides some intriguing ideas and
highlights important lessons that may be valuable if tax reform is taken up again in
future years or decades.