Administering the DBCFT: Selected Issues Itai Grinberg Professor Georgetown University Law Center

Outline of Remarks Enforcement International Coordination WTO Addressing any concern Enforcement International Coordination However, WTO rules prohibit border-adjusting a “direct tax” Direct taxes are defined as taxes on wages, profits, and all other forms of income. Furthermore, the WTO prohibits rebates on the export of a good that exceed the tax levied on the same good if sold domestically.

The World Trade Organization and Border Adjustments Under WTO rules border adjustments are prohibited for “direct” taxes Direct taxes are defined as “taxes on wages, profits… and all other forms of income” Rebate on the export must not exceed the amount of tax levied on the same good or service when sold for domestic consumption However, WTO rules prohibit border-adjusting a “direct tax” Direct taxes are defined as taxes on wages, profits, and all other forms of income. Furthermore, the WTO prohibits rebates on the export of a good that exceed the tax levied on the same good if sold domestically.

Alternative Economic Equivalent An alternative system can produce the same results as the DBCFT: Subtraction-method consumption tax Business-level “American Job Credit” Flat-rate credit provided to the employer equal to amount of wages paid to qualifying workers multiplied by the tax rate Economic effects and incidence likely equivalent to a DBCFT IF PRESSED: Why should we take all the steps involved in implementing a credit-method X-tax? Isn’t it just too much? Isn’t it politically unrealistic?   Thanks for that question – I think you raise a fair point. As I hope is clear in the paper – I’ve never intended to propose that we should do this … just that the credit-method X-tax is an available tool. But that said, I do think there are circumstances where one could imagine the tool being employed. As we all know, the source of the long-term fiscal crisis is the growth of social security and medicare. Historically those have been paid for by payroll taxes --- and when there hasn’t been enough money, in addition to programmatic reforms – we’ve raised the rate, expanded the base, or raised the cap. One could imagine that happening again. Now imagine that happens and at the same time politicians decide it is sensible to try to implement the principles of the Graetz plan as a way to simplify the code -- but in the context of rising tax takes. Frankly I personally am strongly supportive of the Graetz proposal – with the one caveat that it is revenue-neutral and that I don’t think revenue-neutrality is likely to be where we land. So if you want to provide some upside to Americans of rising tax takes, perhaps you implement the Graetz plan and pay for the growth of social security and medicare through the payroll tax system. Now the Achilles heel of such a proposal would be that you would need to have a way of providing progressivity. And there business-level tax credits come in as a potential tool that might be politically attractive.

Enforcement Requires More Than a Border Adjustment Description of economic incentives created by DBCFT assumes working enforcement mechanisms Expensing, interest expense deduction disallowance, border adjustments, and a special regime for financial institutions described as the key components of the system DBCFT as proposed by 2005 President’s Advisory Panel had other essential components Deductions are only available for purchases from entities that are part of the DBCFT system