The Potential Distributive Effects of the Proposed Destination Based Cash Flow Tax (DBCFT)

Abstract

The House GOP Blueprint for tax reform is the most ambitious corporate tax reform since the 1930s. It cuts business tax rates and allows immediate expensing of capital outlays. It accomplishes these goals by replacing the current corporate income tax which taxes profits to a destination based cash flow tax that taxes cash flow. The tax is a move from origin or production based to destination or consumption based. As Alan Auerbach said rather than figuring out “how do you measure income...with cash flow you just follow the money.” The cash flow tax is designed to accomplish a couple big goals. First, stop the gaming done by companies like Facebook to reduce their corporate tax burden. Second, encourage equity investment over borrowing. Finally, encourage exports while increasing the tax burden on imports. To put it mildly, the plan has caused quite a reaction. This essay considers the GOP proposals under the lens of whether the new corporate tax will disproportionately harm the lower boundaries. The new corporate income tax is being marketed as more progressive than the current corporate income tax because it will shift the tax from normal returns to supernormal returns, in other words from labor to capital. Since capital tends to be the wealthy; the tax will redistribute from the rich to the poor. In order to examine the progressivity of the proposal, I first discuss the proper comparative baseline for determining progressivity. Since the proposed tax, at first blush, appears to increase the deficit, the primary question is can the current structure ever be progressive. By cutting other social programs or raising the deficit to pay for the tax is not progressive. Then, assuming that the tax could be neutral in costs because rates can change, the essay concludes that the proposed corporate tax still fails short of being considered progressive. The distortions that continue to exist cause too much uncertainty that the distributive effects would benefit anyone but the owners of capital.