December 13, 2016

WE ARE ALL PIGOVIAN NOW:

New Approach to Corporate Tax Reform has House GOP Support (Steve Lohr, 12/12/16, NY Times)

"It would be the biggest change in business tax law ever in the United States," said Martin A. Sullivan, the chief economist at Tax Analysts, a nonprofit tax research organization and publisher. "It might actually work, and I don't think it's a partisan issue."

A central idea is that goods would be taxed based on where they were consumed rather than where they were produced, meaning that imports would be taxed by Washington while exports would not. Tax experts call this a destination-based consumption tax.

This would be a sharp departure for the United States in a number of ways, but taxing imports but not exports is in step with nearly all of America's trading partners, which have so-called value-added taxes. The import-and-export tax treatment is known as border adjustment.

The proposed overhaul would have other changes. The cost of capital investments would be deducted immediately rather than depreciated over years, but interest costs would no longer be deductible.

The package of ideas has evolved over years, mainly in academic circles. Its principal intellectual champion in the United States is Alan Auerbach, an economist at the University of California, Berkeley. Mr. Auerbach's goal, he said, is to transform the economics of the corporate tax system so that "incentives will align with the national interest."

The destination-based concept, according to Mr. Auerbach, is an adaptation to the modern economy of open borders and advancing technology. Much business value is now in intellectual property like patents and software.

Multinationals are adept at shifting these intangible assets to low-tax nations as a way to shelter profits and avoid taxes. A destination-based system, focusing on where a product is consumed, would be much simplified, eliminating incentives to game the system, Mr. Auerbach said.

By not taxing exports, he said, it would "strongly encourage American companies to locate activities in the United States."

It's not a question of whether we switch to consumption taxes, just how rapidly.
Posted by at December 13, 2016 4:06 PM

  

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