The Corner

Liberals Can’t Wait for Republicans to Adopt the Border-Adjusted Tax

I have already expressed some of my objections with the border-adjusted tax included in the otherwise very good House Republican’s Tax Blueprint. But I think it is important to revisit the utter enthusiasm of liberals at the prospect of a Republican Congress implementing a Destination Based Cash Flow Tax (DBCFT).

Exhibit number 1: This article in the U.S. edition of The Independent called “Deluded Republicans are accidentally pushing for progressive corporation tax reform.” It reads:

Indeed, we find ourselves in the paradoxical situation where a reform being presented by deluded right-wing American politicians as a way of sticking it to cheating foreigners actually represents the world’s best chance for lancing the boil of rampant tax evasion by multinational companies. . . . 

But the great advantage of this reform is that it would eliminate the incentive for multinational firms to dodge their US corporate taxes through accounting tricks, such as registering profits at subsidiaries abroad and relocating their corporate headquarters to tax havens.

No matter where they based their headquarters, multinationals would be liable for a hefty US tax bill if they sold plenty of products and services in America.

This is correct. No matter how high the rate goes (as I we will see below under a Democratic Congress and White House, it could go high), companies will have nowhere to go and will lose their escape valves, i.e., they will be stuck with “a hefty US tax bill.” That’s what tax harmonization does. Dan Mitchell has a good speech here about how the DBCFT undermines tax competition.

According to the author, the best part of the tax plan is that other governments will copy it and the bad system will be imposed everywhere. Tax competition gives you a virtuous cycle of countries adopting better and cheaper tax systems to compete with other countries. Under a destination-based border-adjustment regime, you instead get tax harmonization and a vicious cycle that spreads a bad system everywhere. He concludes:

Back to the paradox. Republicans care little about the iniquities of tax havens. They want firms to pay more in corporation tax in the same way that Donald Trump wants judges in Washington to influence immigration policy. And they seem terribly confused about the reform they are championing and about what it would entail, not least the progressive outcomes.

Yet, for all that, what they have ended up pushing is the right thing, not just for the US but the world. Treason or not, we should wish them good speed on this one.

Exhibit number 2: At a recent Tax Foundation event on the issue, Bill Gale of the Brookings Institution made this remarkable endorsement of the destination-based border-adjustment tax. He said (at the 43:40 mark): “It essentially makes the government a shareholder in every corporation in America. The government shares all the losses, and it shares all the profits.”

You can tell from the video that Douglas Holtz-Eakin is obviously uncomfortable with his comments. He even says something to the effect of “are you trying to kill it?”

But then it gets better. Gale then reiterated his call for a much higher rate than the Republican plan’s 20 percent. And as he said at the 45:33 mark, “If something is non-distortionary, you should tax the hell out of it.” That has the merit of being honest and transparent.

Now, never mind that a very likely less than perfect adjustment of our currency will actually create plenty of distortions in the form of, among other things, higher prices for consumers. And never mind that the adjustment of the currency itself will be painful and destroy a whole lot of wealth. But he is right that if there is no escape valve, then lawmakers are likely to try to tax the hell out of it.

As I wrote last week:

When you think about it, it is not surprising that many, not all, liberals like the new tax idea.

Republicans in Congress should think about this carefully.


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