Abstract
Following renewed academic and policy interest in the destination-based principle for taxing profits—particularly through a destination-based cash-flow tax (DBCFT)—this paper studies other forms of efficient destination-based taxes. Specifically, it analyzes the Destination-Based Allowance for Corporate Equity (DBACE) and Allowance for Corporate Capital (DBACC). It describes adjustments that are required to turn an origin into a destination-based version of these taxes. These include adjustments to capital and equity, which are additional to the border adjustments needed under a DBCFT. The paper finds that the DBACC and DBACE reduce profit shifting and tax competition, but cannot fully eliminate them, with the DBACE more sensitive than the DBACC. Overall, given the potential major political cost of switching from an origin to a destination-based tax system, we conclude that advantages of the DBCFT are likely to outweigh the transitional advantages of the DBACE/DBACC.
Highlights
The idea of taxing corporate income based on the location of final consumption, i.e., the destination rather than the origin, has recently gained prominence in academia and in the policy arena
For the destination-based cash-flow tax (DBCFT) there is no need to distinguish intermediate and investment goods, but as this will be required under the allowance for corporate equity (ACE), we introduce the distinction here
Border-adjustments imply significantly higher DBCFT revenues than corporate income tax (CIT) revenues, which is in line with the result in Hebous, Klemm, and Stausholm (2018), given that the United States is a country with a trade deficit
Summary
The idea of taxing corporate income based on the location of final consumption, i.e., the destination rather than the origin, has recently gained prominence in academia and in the policy arena. CFT and ACE/C systems are efficient and neutral in a domestic setting They are, — like a standard CIT—vulnerable to tax competition and base erosion including cross-border profit shifting. The destination-based cash-flow tax (DBCFT) addresses these concerns through border adjustments, whereby business export revenues are not taxed and expenditure on imported goods is not deductible (or equivalently, taxed at the border). It was first proposed in Bond and Devereux (2002) and several of its attractive features are discussed and analyzed in some recent papers (e.g., Auerbach and others (2017a, 2017b)). An Appendix lists country experiences and empirical evidence on ACE systems
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