Cash-flow Taxation Research Articles

Tax policy competition under destination‐based taxation

AbstractWe extend Bond and Gresik (On the incentive compatibility of universal adoption of destination‐based cash flow taxation, International Tax and Public Finance, October 2022) by analyzing the equilibrium capital expense deduction policies that arise when countries compete for multinational investment under destination‐based taxation. Bond and Gresik proved that destination‐base cash flow taxation cannot arise as a tax competition equilibrium. We show that policies that allow for no deduction (income taxation) and those that allow a partial deduction can arise in equilibrium. In the former case, public good provision will be efficient. In the latter case, weak over‐provision of the public good will arise.

Transfer pricing under global adoption of destination-based cash-flow taxation

Transfer pricing under global adoption of destination-based cash-flow taxation

On the incentive compatibility of universal adoption of destination-based cash flow taxation

On the incentive compatibility of universal adoption of destination-based cash flow taxation

Cash-flow business taxation revisited: bankruptcy and asymmetric information

Cash-flow business taxation revisited: bankruptcy and asymmetric information

Revenue Implications of Destination-Based Cash-Flow Taxation

We estimate the revenue implications of a destination-based cash-flow tax (DBCFT) for 80 countries. On a global average, DBCFT revenues under unchanged tax rates would remain similar to the existing corporate income tax (CIT) revenue, but with sizable redistribution of revenue across countries. Countries are more likely to gain revenue if they have trade deficits, are not reliant on the resource sector, and/or—perhaps surprisingly—are developing economies. DBCFT revenues tend to be more volatile than CIT revenues. Moreover, we consider the revenue losses resulting from spillovers in case of unilateral implementation of a DBCFT. Results suggest that these spillover effects are sizeable if the adopting country is large and globally integrated. These spillovers generate strong revenue-based incentives for many—but not all—other countries to follow the DBCFT adoption.

Are Dutch Old-Age Pensions Taxed Fairly and Efficiently?

The Dutch pension system is internationally top-ranked as a well-designed three-pillar system. Moreover, almost all forms of pension benefits are expenditure taxed in line with the European Commission’s recommendations. Consequently, the Dutch pension policy approach could be regarded as a welcome blueprint for pension policy reform, currently on the agenda of all EU member countries. This paper focuses on the taxation of Dutch pensions and identifies two classes of problems that challenge the suitability of deferred pension taxation. First, cash flow taxation of pensions erodes the tax equity objectives of a progressive income tax. Second, deferred pension taxation generates a double fairness dilemma in a world with free cross-border migration and double taxation treaties in accordance with the OECD Model Tax Convention. The paper argues that these problems, as well as other minor problems in Dutch pension taxation, could be solved by replacing the Netherlands’ current system of deferred income taxation of pensions with a frontloaded expenditure tax system.

Unilateral introduction of destination-based cash-flow taxation

We analyze the unilateral introduction of a destination-based corporate cash-flow tax system (DBT), as proposed by Auerbach and Devereux (AEJ Policy 2018). We show that, first, the DBT rate is decision-neutral only if the source tax country makes the DBT payments deductible from its tax base. Second, a unilateral DBT introduction is, in many aspects, equivalent to completely abolishing the corporate tax and, instead, taxing domestic investors based upon their worldwide profit income, net of foreign taxes and on accrual. In this sense, the DBT is actually a pure residence-based tax. This implies that, from a foreign investor’s perspective, the DBT country is like a zero-rate tax haven and has the same gravitational power on taxable profits and economic activity. Third, the location of profit and activity within its borders is, however, without any fiscal value for the DBT country. Fourth, the introduction of a DBT system reduces national income. Fifth, the DBT country can only individually benefit from its new tax system if public goods provision is substantially increased. Finally, it is optimal to complement a unilateral DBT system with a source-based tax.

Revenue Implications of Destination-Based Cash-Flow Taxation

We estimate the revenue implications of a Destination Based Cash Flow Tax (DBCFT) for 80 countries. On a global average, DBCFT revenues under unchanged tax rates would remain similar to the existing corporate income tax (CIT) revenue, but with sizable redistribution of revenue across countries. Countries are more likely to gain revenue if they have trade deficits, are not reliant on the resource sector, and/or—perhaps surprisingly—are developing economies. DBCFT revenues tend to be more volatile than CIT revenues. Moreover, we consider the revenue losses resulting from spillovers in case of unilateral implementation of a DBCFT. Results suggest that these spillover effects are sizeable if the adopting country is large and globally integrated. These spillovers generate strong revenue-based incentives for many—but not all—other countries to follow the DBCFT adoption.

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Revenue Implications of Destination-Based Cash-Flow Taxation

We estimate the revenue implications of a Destination Based Cash Flow Tax (DBCFT) for 80 countries. On a global average, DBCFT revenues under unchanged tax rates would remain similar to the existing corporate income tax (CIT) revenue, but with sizable redistribution of revenue across countries. Countries are more likely to gain revenue if they have trade deficits, are not reliant on the resource sector, and/or—perhaps surprisingly—are developing economies. DBCFT revenues tend to be more volatile than CIT revenues. Moreover, we consider the revenue losses resulting from spillovers in case of unilateral implementation of a DBCFT. Results suggest that these spillover effects are sizeable if the adopting country is large and globally integrated. These spillovers generate strong revenue-based incentives for many—but not all—other countries to follow the DBCFT adoption.

Revenue Implications of Destination-Based Cash-Flow Taxation

We estimate the revenue implications of a Destination Based Cash Flow Tax (DBCFT) for 80 countries. On a global average, DBCFT revenues under unchanged tax rates would remain similar to the existing corporate income tax (CIT) revenue, but with sizable redistribution of revenue across countries. Countries are more likely to gain revenue if they have trade deficits, are not reliant on the resource sector, and/or-perhaps surprisingly-are developing economies. DBCFT revenues tend to be more volatile than CIT revenues. Moreover, we consider the revenue losses resulting from spillovers in case of unilateral implementation of a DBCFT. Results suggest that these spillover effects are sizeable if the adopting country is large and globally integrated. These spillovers generate strong revenue-based incentives for many-but not all-other countries to follow the DBCFT adoption.

Corporation taxes in the European Union: Slowly moving toward comprehensive business income taxation?

This paper surveys and evaluates the corporation tax systems of the Member States of the European Union on the basis of a comprehensive taxonomy of actual and potential regimes, which have as their base either profits; profits, interest and royalties; or economic rents. The current regimes give rise to various instate and interstate spillovers, which violate the basic tenets—neutrality and subsidiarity—of the single market. The trade-offs between the implications of these tenets—harmonization and diversity, respectively—can be reconciled by a bottom-up strategy of strengthening source-based taxation and narrowing differences in tax rates. The strategy starts with dual income taxation, proceeds with final source withholding taxes and rate coordination, and is made complete by comprehensive business income taxation. Common base and cash flow taxation are not favored.

Destination-based cash-flow taxation: A critical appraisal

This article offers the first comprehensive scholarly response to proposals for destination-based, cash-flow taxation (DCFT). DCFT proposals have attracted heightened public attention in 2016 because of the incorporation of one version into the US House Republican blueprint for tax reform and Donald Trump’s subsequent election to the White House. They also continue to fascinate tax specialists by suggesting that corporate profit can be taxed not only in countries of ‘source’ or ‘residence’ but also (or even exclusively) in the countries where sales to final consumers occur. This article clarifies the logical structure of DCFT proposals and exposes substantial gaps between their rhetoric and technical details. I argue first that it is crucial to distinguish between two versions of the DCFT. The first version resembles proposals for taxing corporate income by sales-factor-only formulary apportionment. The second version, which is what the US House Republican blueprint proposes, resembles a destination-based value-added tax with deductions for labour costs and refundable losses. I argue that the latter version of the DCFT introduces no fundamental new option into international tax design. Instead, it may create substantial trade distortions (and its loss refund feature is also unlikely to be administrable). The first version of the DCFT does present a new option for taxing corporate profit but is un-implementable. I also highlight ways in which DCFT proposals make ad hoc normative and behavioral assumptions. Finally, the article offers a novel explanation of why it is difficult to incorporate information about consumer location into international tax design and argues that ‘residence’ is more promising than ‘destination’ (when both are understood as capturing information about natural persons) for dealing with problems arising from capital mobility.

Hungarian small business tax and possibilities to minimize distortions from capital income taxation

Governments throughout the EU and OECD countries rely on revenues raised on capital income. Albeit several arguments can be made for keeping these taxes, in their widespread form they hinder capital accumulation and significantly lower potential growth due to their savings and investment distorting nature. At the same time, the actual economic impact of tax types is largely influenced by their structure. An elegant method, which is also simple in its concept, for eliminating the economic distortions of profit taxes is cash-flow taxation which moves income taxes closer to the more growth-friendly value-added taxes. The small business tax, which was introduced in Hungary in 2013, was designed along these principles. In this paper we review the theoretical literature on cash-flow taxation and discuss the main regulatory elements of the small business tax, as well as the solutions elaborated for working out the challenges related to its implementation.

Destination-Based Cash-Flow Taxation: A Critical Appraisal

This Article offers the first comprehensive appraisal in both the legal and economic literatures of proposals for adopting destination-based cash flow taxation (DCFT) of multinational corporations. The DCFT was a key recommendation for reforming corporate taxation in the U.K., and has subsequently attracted wide attention as a way to fundamentally reform international taxation in the U.S., Europe and elsewhere. The core intuition of the DCFT is to tax profits earned by mobile capital by reference to immobile factors. I distinguish three versions of the DCFT for implementing this intuition: 1. formulary apportionment of business profits by reference to locations of sales to final consumers; 2. a destination-based VAT with deduction of labor costs and full refund of losses; and 3. a destination-based VAT with deduction of labor costs and implemented by origin countries. In addition to identifying numerous controversial normative, behavioral and empirical assumptions that have been used to motivate and defend DCFT proposals, I present two conceptual dilemmas that challenge the proposals in their own terms. I argue that because the residence of individual shareholders and the location of final consumers are both immobile, the difference between residence- and destination-based taxation should be seen as lying in how likely it is to harness information about shareholder residence or consumer location. The fundamental challenge for DCFT proposals is that market mechanisms do not readily collect information about the latter, while information about shareholder residence is latent in the market. Therefore, most arguments made by DCFT proponents support residence-based taxation instead.

Capital Income, Risky Investments, and Income and Cash-Flow Taxation

It has become conventional wisdom, based partly on postulated portfolio adjustments by investors in risky assets, (1) to view an income tax as equivalent to a tax levied only on the risk free return to capital and as therefore equivalent to a wealth tax; and (2) to view the difference between an income tax and a cash-flow consumption tax as limited to tax on the risk free return. I show that the propositions (1) equating an income tax to a tax on the risk free return, and (2) distinguishing an income tax from a cash-flow tax only by tax on the risk free return, are distinct. Drawing on the literature on optimal responses to taxation by holders of risky assets I show also that the postulated adjustments on which the second of those propositions depends entail implausible assumptions about behavior under uncertainty, and that the foundation for that claim is to that extent unsound. This in turn suggests that claims that the differences between income and cash flow taxation are minor should be treated with caution.

Quantifying the Subsidies Hidden in the Cash-Flow Taxation of Fixed Bonds and Interest Rate Swaps

Quantifying the Subsidies Hidden in the Cash-Flow Taxation of Fixed Bonds and Interest Rate Swaps

Optimal Taxation of International Mergers & Acquisitions

If interest income is subject to tax, the taxation of business income from international mergers & acquisitions as well as international greenfield investments is globally optimal if economic depreciations are permitted as tax-deductible expenses, investors receive a credit for foreign taxes paid (tax credit method), and business income is taxed at the uniform income tax rate. It is nationally optimal with full taxation after deduction. This optimality result prevails with historical cost depreciation for international greenfield investments, but not for international mergers & acquisitions. Cash-flow taxation of international mergers & acquisitions and greenfield investment is globally optimal with a tax credit method and nationally optimal with full taxation after deduction.

Reforming the Corporate Income Tax: The Case for a Hybrid Cash-flow Tax

This paper argues for the adoption of a hybrid cash-flow tax on corporations that, on the one hand, taxes only corporate rents as they accrue, and, on the other hand, treats real and financial transactions neutrally. It is, therefore, a superior tax compared to the conventional corporate income tax – on both economic and administrative grounds. Its design also addresses the usual concerns associated with cash-flow taxation. The base of this hybrid cash-flow tax is the aggregate net cash inflow of combined real and financial transactions excluding capital expenditures, for which conventional depreciation allowances are retained with interest as compensation for the opportunity cost of equity capital. Furthermore, it is argued that it should be implemented on a destination basis that would render transfer pricing and thin capitalization moot.

Generalized cash-flow taxation

We show the unique form that must be taken by a tax system based entirely on realization accounting to implement a uniform capital income tax, or, equivalently, a uniform wealth tax. This system combines elements of an accrual based capital income tax and a traditional cash-flow tax, having many of the attributes of the latter while still imposing a tax burden on marginal capital income. Like the traditional cash-flow tax, this system may be integrated with a tax on labor income. We also show how such a tax can be supplemented with an optional accounting for a segregated subset of actively traded securities, subjected separately to mark-to-market taxation at the uniform capital income tax rate, to permit a fully graduated tax system applicable to labor income.