Critical Issues in Understanding the House GOP Tax Reform Blueprint

Abstract

The House Republican Task Force on Tax Reform released its Blueprint for tax reform in June 2016, at the center of which is a destination-based cash-flow tax (DCFT) to replace the current federal income tax on corporations. The House GOP Blueprint represents the first time that the DCFT has been promoted by political leaders. Initial commentators have stressed the capacity of such a tax (if adopted in the U.S.) to reduce U.S. companies’ incentives for international tax planning and profit shifting, and to allow the U.S. to “leapfrog to the front of the pack” in its tax competitiveness. In this essay I discuss issues that are crucial for understanding the DCFT. I start off by examining border adjustments required under DCFT, and argue that we should not see the “perennial question” concerning such adjustments as being about whether it is in violation of WTO agreements. Instead, the question should be whether we truly understand the DCFT’s potential impact on trade, aside from WTO legal concerns. I identify a couple of ways in which objections against the DCFT have not been adequately answered. I then examine how the loss carry-forward aspect of the Blueprint interacts with border adjustments, and how things get even more complex when non-corporate entities are also taxed on a destination basis. The implementation issues for the DCFT I highlight would not arise if the U.S. were to adopt a VAT instead. I conclude by comparing the DCFT with the VAT in respect of the issue of progressivity, and considering the question of how other countries would respond to a U.S. DCFT.