March 6, 2017

WE ARE ALL NEOCONOMISTS NOW:

The Case for a Border-Adjusted Tax (ALAN AUERBACH and MICHAEL DEVEREUX, MARCH 6, 2017, NY Times)

In place of the old system, Republicans in the House of Representatives have proposed adopting a tax -- the destination-based cash-flow tax -- that would be levied on the domestic cash flows of all businesses operating or selling here. (Your domestic cash flow is your revenues in the United States minus the wages, salaries and purchases you pay for in the United States.) This would mean introducing "border adjustments" to the current system -- exempting exports from tax, but taxing imports.

This reform should appeal broadly, to Democrats and Republicans alike. The border adjustments would strongly discourage the shifting of profits and activities offshore and eliminate incentives for corporate inversions. (The proposal would also eliminate incentives for companies to borrow excessively and strengthen the tax benefits for investing in plants and equipment.) But there remains much misplaced criticism of the reform and its potential, and much misunderstanding about who the winners and losers will be if it is adopted. [...]

Free-market critics of the tax have suggested that border adjustments are tariffs and would thus erect trade barriers. This is also untrue. The border adjustments would merely shift taxation from where products are made to where they are sold. This, again, would encourage companies to locate their productive activities and profits in the United States. (Countries around the world use such border adjustments every day as components of value-added taxes that are collected at the location of purchases rather than production.)

Posted by at March 6, 2017 5:34 AM

  

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