Tax Analysts Blog

Will Delay Doom the DBCFT?

Posted on Feb 24, 2017

There’s a school of thought in Washington that if something as complicated as tax reform is going to pass the House and the Senate, it must be rammed through the legislative process with great haste. Otherwise the opposition forces will have time to gather and strategize. “Delay means death,” the saying goes.

One gets the sense that the destination-based cash flow tax (DBCFT) could fall victim to this adage. True, it has the backing of House Speaker Paul Ryan and Ways and Means Committee Chair Kevin Brady. It’s also earned the support of conservative activist Grover Norquist, who has blessed it  despite the controversial border adjustment. He labeled the House tax reform blueprint a consensus view among Republicans, but that seems to be a stretch. Each passing week brings another skeptic from the ranks of GOP lawmakers. We’re less focused on Democrats here because their opposition is presumed; it’s more newsworthy when House Republicans deviate from the script and challenge the blueprint.

The latest objection came from Ohio Rep. James B. Renacci. He’s known among tax wonks for his proposal to replace the corporate income tax with a credit invoice VAT -- not to be confused with a subtraction-method VAT that parallels aspects of the DBCFT destination-based cash flow tax. The Renacci tax reform plan received little attention upon its release last summer, but we didn’t hesitate to obsess over it in this blog post . Renacci was recently interviewed on the Fox program Varney & Co., and used the opportunity to highlight a few criticisms of the blueprint, as follows:

• First, like any variation on fundamental tax reform, the blueprint creates winners and losers. The losers involve importers, who are viewed as suffering greatly under the border adjustment. This criticism implies that Renacci doesn’t buy the argument about currency appreciation offsetting the detrimental effects of taxing imports.

• Second, Renacci questions where the economic burden of the tax will fall. There continues to be a lively debate about whether the cash flow tax would fall mostly on consumers or on shareholders, which is to say people still aren’t sure whether it’s a tax on consumption or a tax on capital income. That’s a fair question since the blueprint is being styled as a replacement for the corporate income tax, which largely (but not entirely) falls on capital income. The blueprint itself leaves no doubt that it’s attempting to shift the tax burden to a consumption base, but the issue isn’t adequately addressed in most of the news coverage you see.

•Third, Renacci acknowledges that the blueprint faces major hurdles regarding our international trade obligations, namely WTO compliance.

If you’re not a student of WTO jurisprudence, we will simplify things. It’s permissible for governments to deliver export-contingent tax subsidies through indirect levies (VAT). However, they cannot deliver that same subsidy through direct levies (income taxes). I’ll be the first to admit that the concept of differentiating between direct and indirect taxes stopped being relevant around the time of the League of Nations, but that’s beside the point for these purposes. WTO rules are what they are.

Because the blueprint includes a wage allowance, it’s a near certainty to flunk WTO scrutiny. Renacci’s own tax reform plan does not suffer from this defect, and he knows it. Renacci’s plan is smarter than the blueprint for the simple reason that Congress wouldn’t have to endure the embarrassment of repealing the darn thing once the WTO declares it illegal.

For a moment, let’s ponder the stupendous inefficiency involved in transitioning the world’s largest economy to an alternate tax code, only to be forced to unwind the whole project a few years down the road. Why bother? (Unless you enjoy chaos for the sake of chaos.) So why aren’t more members of Congress screaming about the obvious WTO obstacle presented by the blueprint? Probably because they realize that the plan faces more pressing concerns (the retail lobby). And also because drawing public attention to our WTO obligations implies a subtle forfeiture of sovereignty that doesn’t play well in an era of rampant populism. So it’s better not to fixate on how unelected foreign bureaucrats might dictate what tax laws Congress can pass -- wiser to sit back and let Wal-Mart and Target pick apart the DBCFT. They’re already doing a fine job of that.

Read Comments (3)

Edmund DantesFeb 24, 2017

Great summary. I particularly appreciate the point that deferring to the WTO is an abandonment of sovereignty. That's an acute insight on today's politics.
However, the thing that will really kill the DBCFT is that it has a terrible acronym. Every time I see it, I think WTF? It has too many letters, and no vowels. The best tax bill acronym of all time? ERTA 81.

Mike55Feb 28, 2017

Great article, as per usual. A couple thoughts...

I don't think the WTO answer is an easy one. My (admittedly limited) understanding is that the domestic wage deduction works so long as it operates in lieu of a domestic tax that imported items don't bear. For this reason DBCFT proposals are often paired with a payroll tax increase, thereby strengthening the argument that there is no extra burden on importers.

Something more trivial, but that I am a bit more confident in stating: if the DBCFT fails, it won't be due to the retail lobby. Retail has less clout on the Hill than pretty much any other lobby: it's no accident many retailers suffer ETRs approaching 50% under current law, and are often selected as scapegoats for whatever malaise is allegedly destroying "Main Street." This is primarily a function of being unable to relocate operations (legislators tend to dote upon those who can add/remove jobs from their districts). Having no influence on the voting preferences of employees, and being popularly viewed as a result rather than driver of economic growth* also limit the capacity of the Retail lobby to drive change. As such those against the DBCFT will probably need to do their own work when the time is right.

*The fact that policy wonks know this to be a fallacy is beside the point: what matters is that voters BELIEVE it to be true.

Dale SpradlingMar 4, 2017

This "tax" will morph into a VAT. As a result, we'll end up with two tax systems: an income tax and a VAT.

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