1. Demystifying the DBCFT
Alan Auerbach
BPEA
September 8, 2017

2. The DBCFT
What is it?
Motivation for it
Misunderstandings about it

3. DBCFT – What is It? Starting from current US tax system…
Income tax for corporate and non-corporate businesses
Worldwide international approach
Tax US-source income of all businesses
Tax foreign-source income of US resident businesses, with a foreign tax credit
Adopt big domestic and international changes

4. DBCFT – What is It? Cash flow tax: Destination based:
Replace depreciation with immediate expensing
Eliminate interest deductions (for NFCs)
Destination based:
Ignore foreign activities, as under a territorial tax
But also effectively ignore cross-border activities, by having border adjustments offset business export revenues and import expense deductions
Equivalent to replacing business income tax with VAT plus a wage deduction or payroll tax credit

5. Motivation
Source: OECD Tax Database

6. A Changing Economic Setting
In last half century,
Share of IP in nonresidential assets doubled.
Share of before-tax corporate profits of US resident companies coming from overseas operations increased by a factor of 6.
Result: Increased pressure on taxing based on company residence, location of production, or location of profits

7. DBCFT as an Alternative
Eliminates:
incentive to shift profits out of US, since doing so only affects (and increases) foreign tax liability
incentive to shift production out of US, since zero tax on US-source profits
incentive for corporate inversions, since eliminates US tax on US companies’ foreign-source earnings
lock-out effect, since no tax on profit repatriations

8. Misunderstandings Border adjustment is protectionist
DBCFT won’t affect the measured trade deficit
Border adjustment raises revenue only in the short run, or not at all
DBCFT induces windfall gains and losses that a VAT doesn’t
DBCFT is regressive