BPEA September 8 2017 The DBCFT What is it Motivation for it Misunderstandings about it DBCFT What is It Starting from current US tax system Income tax for corporate and noncorporate businesses ID: 1028535
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1. Demystifying the DBCFTAlan AuerbachBPEASeptember 8, 2017
2. The DBCFTWhat is it?Motivation for itMisunderstandings about it
3. DBCFT – What is It?Starting from current US tax system…Income tax for corporate and non-corporate businessesWorldwide international approachTax US-source income of all businessesTax foreign-source income of US resident businesses, with a foreign tax creditAdopt big domestic and international changes
4. DBCFT – What is It?Cash flow tax:Replace depreciation with immediate expensingEliminate interest deductions (for NFCs)Destination based:Ignore foreign activities, as under a territorial taxBut also effectively ignore cross-border activities, by having border adjustments offset business export revenues and import expense deductionsEquivalent to replacing business income tax with VAT plus a wage deduction or payroll tax credit
5. MotivationSource: OECD Tax Database
6. A Changing Economic SettingIn last half century,Share of IP in nonresidential assets doubled. Share of before-tax corporate profits of US resident companies coming from overseas operations increased by a factor of 6.Result: Increased pressure on taxing based on company residence, location of production, or location of profits
7. DBCFT as an AlternativeEliminates:incentive to shift profits out of US, since doing so only affects (and increases) foreign tax liabilityincentive to shift production out of US, since zero tax on US-source profitsincentive for corporate inversions, since eliminates US tax on US companies’ foreign-source earningslock-out effect, since no tax on profit repatriations
8. MisunderstandingsBorder adjustment is protectionistDBCFT won’t affect the measured trade deficitBorder adjustment raises revenue only in the short run, or not at allDBCFT induces windfall gains and losses that a VAT doesn’tDBCFT is regressive