December 31, 2016


My take on the Republicans' new, interesting corporate tax plan (Jared Bernstein December 30, 2016, Washington Post)

The BAT makes a number of consequential changes to the current corporate tax:

-- Destination basis: Instead of taxing corporate income minus costs (i.e., profits), the BAT taxes U.S. sales at their destination. This is a simple, smart change for one very good reason: It takes tax-avoidance location decisions off the table. Right now, because they don't have to pay taxes on foreign profits held (or booked) abroad, a U.S. firm that sells stuff here has a huge incentive to locate in some tax haven. Under the BAT, however, any goods or service sold here is taxed here, regardless of where it is produced.

-- Border adjustment: That means U.S. exports, as they're sold abroad, are no longer taxed; conversely, domestic firms can no longer net out the cost of imported inputs from their taxable income. This, too, sounds like an attractive feature: a tax on the trade deficit! But there's a wrinkle I'll get to in a sec.

-- Lower rate: The Republican proposal calls for a 20 percent corporate tax rate, down from the current statutory rate of 35 percent (though given all the loopholes and carve-outs in the current system, the effective corporate rate -- firms' actual liability as a share of their income -- is closer to 25 percent).

-- 100 percent expensing: Capital investments would be fully expensed upon purchase (no depreciation schedules), and interest expenses would no longer be deductible.

As the nonpartisan Tax Policy Center notes: "Adopting a destination-based tax system and eliminating deductibility of net interest expense would eliminate U.S. corporations' incentives to move their tax residences overseas (i.e., 'corporate inversions') and to recharacterize domestic corporate income as foreign-source income. Border adjustability would remove these incentives, because the amount of U.S. income tax a corporation paid would not depend on where it was incorporated, where its product or service was produced, or where its shareholders resided."

TPC also estimates that the BAT raises over $1 trillion over a decade. To be sure, and this is important, the Republican plan still manages to lose around $3 trillion, on net, so this revenue-raising part is probably important to them.

Okay, them's the technical details. What do I think of this change?

I apologize to readers who want a clean thumbs up or down. The fact is, it's a big change, and no one knows how it will play out. That's not a reason to oppose it -- the current corporate code is a hot mess, fraught with loopholes and special treatment to chosen players. But there's much we don't know about how this significant change would play out in the real world.

Posted by at December 31, 2016 5:42 PM