In this op-ed published in The Hill on Jan. 24, DCID Senior Fellow Peter Barnes and H. David Rosenbloom of Caplin & Drysdale conclude that now is not the time for the United States to experiment with a “destination-based cash flow tax,” which has not been adopted anywhere else in the world.
Corporate profits are up, unemployment is down, wages are rising, and markets are breaking new records. These all point to a U.S. economy that is more stable than the economies of other developed countries.
So this seems like an odd time to conclude that the United States should experiment with a tax system that has never been adopted anywhere else in the world.
That’s where we stand, as President Trump and Congress consider corporate tax reform, particularly for international transactions. House Republicans support a “destination-based cash flow tax” designed in significant part by economist Alan Auerbach. President Trump initially cast doubt on the proposal, calling it “too complicated,” but then quickly clarified that the proposal is “still on the table.”
Contours of the new tax are fairly simple. It is “border-adjusted” so that exports are free of tax (but importantly, the cost of making exported goods and services is deductible), while the cost of imports is not deductible.
This means that if a U.S. company imports goods, the company’s payments for the goods are not subtracted from the income it makes by reselling them. On the other hand, when a company exports, revenue from the foreign purchaser will not be taxable, but the company’s costs of making the exports will be deductible.