
Border-adjusted cash flow tax (to replace corporation tax) explained - randomname2
http://www.vox.com/policy-and-politics/2017/2/28/14764098/dbcft-border-adjustment-explained
======
spangry
Although not entirely obvious at first glance, this is a tax on consumption.
Here's a simple explanation, taken from the clunkily titled _Australia 's
Future Tax System Review_:
[http://i.imgur.com/ocRMR0n.png](http://i.imgur.com/ocRMR0n.png). Consumption
taxes that don't create high administrative burdens for businesses (CFTs are
arguably less burdensome than VATs), are a very efficient way to raise tax
revenue. However, I do take issue with this part of the article, where they're
talking in the context of wages being deductible under a CFT (so that only
labour value-add is taxed):

 _" Taxing wages is the thing that makes VATs regressive, hitting poor
consumers the hardest."_

This is not entirely correct. Although taxes on gross labour might shift
production towards higher capital intensity, I don't think VAT's actually tax
the gross labour component of production (though I'm not 100% certain here).
Value-added taxes, and consumption taxes in general (including CFTs), are
regressive because they are levied at a flat rate and people on lower incomes
usually cannot defer consumption: many have no choice but to immediately spend
~100% of their income as soon as they receive it. The inability to defer
consumption also reduces scope to consume in an 'inter-temporally efficient'
manner (e.g. volume discounts), further compounding the regressive effect. And
although I have no real data to back this up (not that I've looked), I'd
imagine the poor spend a larger proportion of their lifetime income
domestically compared to the rich.

I'll stop here. I'm not trying to say CFTs or consumption taxes are bad (in
fact, I think they're good if done properly). But people should be aware that
any consumption tax introduction must also be accompanied by upwards
adjustments of low-income transfer payments and reduced low-income earner tax
burden elsewhere in the system (and this should be part of the public
discussion). Otherwise it will shift a larger amount of the overall tax burden
on to the poor.

EDIT: Giving it a bit more thought, this might be a good 'thin end of the
wedge' to build towards 'basic-income/negative income tax'. And handing out
some unconditional lump sum to every citizen also helps with some of the
equity concerns.

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PKop
Perhaps a better analysis, from a more politically-neutral source:

[https://taxfoundation.org/understanding-house-gop-border-
adj...](https://taxfoundation.org/understanding-house-gop-border-adjustment/)

Also this: "Talking Tax Reform: A Discussion of Border Adjustability & Cash-
Flow Taxes"

[https://www.youtube.com/watch?v=FO1rlheCigk](https://www.youtube.com/watch?v=FO1rlheCigk)

~~~
gydfi
While Vox tends to lean pretty strongly anti-Trump I think this article is
actually pretty good/neutral.

~~~
mikeyouse
Especially in comparison to the ALEC/Heartland institute sponsored
TaxFoundation..

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tvanantwerp
I work at the Tax Foundation--a non-profit, non-partisan policy research group
--and we've been working a lot lately to try and explain exactly what a
destination-based cash flow tax is. There has been a lot of misunderstanding
around it generally. It's not an idea that's been talked about in US tax
policy much before. Our federal program director Kyle Pomerleau summed it up
like this[1]:

> destination-based cash-flow tax = current law - corp. tax + VAT - payroll
> tax.

[1]
[https://twitter.com/kpomerleau/status/807355060170739712](https://twitter.com/kpomerleau/status/807355060170739712)

~~~
spangry
Is that under the assumption that payroll tax, in the long-run, is a tax on
real labour income? Btw, I wish you guys the best of luck. It's surprisingly
complex and difficult to explain. Just in case it's of some use, check out
page 285 for a discussion on CFTs (followed by a discussion on payroll tax):
[https://taxreview.treasury.gov.au/content/downloads/final_re...](https://taxreview.treasury.gov.au/content/downloads/final_report_part_2/AFTS_Final_Report_Part_2_Vol_1_Consolidated.pdf)

EDIT: This gets even more complex/interesting if you are of the view that
labour-value add will be an increasingly smaller share of total production
value-add in future (i.e. due to automation)...

------
maxxxxx
I would like to see a tax system that makes it more attractive to hire people
and pay them well. I am not that versed in economics but are there any such
proposals out there? The current trend with more and more income going to the
upper ranks should be stopped.

~~~
dogma1138
What a lot of people miss about "upper ranks" compensation is that it's
performance based and conditional (lets ignore for the moment CEOs that
underperform and still get huge bonuses).

Most people will not accept a performance based salary, in most jurisdictions
it's also nearly impossible to do pay cuts properly.

Say that you reduce the compensation of a all C level execs of a company from
10M to 2. The first thing you notice is that CEOs that say earn 10M tend to
work for very large companies, so a 1000 employee company that gets 8M free
cash now has 8000$ per employee for raises. Say that it had 10 C level execs
earning 10M per year so now you have 80,000$ per employee for a raise, now
that's money.

You give all your employee a raise from 100K to 180K and they are all super
happy, but then the quarterly results are not good for a few quarters cutting
80% the salary of C level execs at that point is easy, reducing the salary of
every employee by 44% isn't, in many places it might not even be legal.

But even this is usually a very unrealistic situation let's take Microsoft it
employs over 60,000 people if you take every employee in MSFT with over 1M$
per year in compensation and you cut it by which every amount you want you
won't get an amount that when divided by all employees would result in any
significant increase in pay to the levels you expect. Sure if you liquidate
Satya's compensation that is 1500$ increase to everyone, but after Satya the
next high salary is probably the COO (and Kevin Turner which was the former
COO has a total compensation of about 12M per year) but then again the
majority of the compensation tends to be in equity which isn't hard cash, and
the jump (or drop) between C level execs is quite big and if you count
everyone that makes over 1M in MSFT you will probably will only reach 300M in
total and about 100M in cash.

~~~
maxxxxx
Fact is that the income of the top 1 (or use another number) percent has
increased steadily over the last 40 years. As far as I know their share of
national income has doubled while the bottom 50% have seen no increase. I
doubt that the performance of top management these days is much better than 40
years ago to justify that increase while the rest of the workers has been
slacking off and therefore doesn't deserve a raise.

In my view it would be good to create a tax system that incentivizes paying
average workers more. A strong middle class is the best recipe for a healthy
society.

------
erentz
To summarize, is it right to understand it this way:

I am a widget maker. I sell $100 of widgets to my friends domestically. I sell
$100 widgets to foreigners over the internet. I use $50 of local materials and
services, e.g. wood and labor (in the form of wages I pay my staff). I use $50
of foreign materials in the form of some rare earth metal stolen from a
Central African country. And the tax rate is 20%.

Thus, in the current system I would have $200 in total revenue. $100 in the
expenses (both domestic and foreign imports) I deduct. Leaving me with $100
profit on which I pay $20 to the government as tax.

In the proposed system I have $200 in revenue. I pay no tax on the $100 I
exported. I pay 20% on the $50 domestic profit (so $10). And 20% on the $50 of
imports (so $10). Total to government is $20.

(Side thought: Apple could bring all its cash back immediately in this scheme
tax free by buying a $50 billion widget from Apple HQ.)

EDIT: Actually the comparison to VAT (GST as we called it in NZ/Aus) makes it
confusing, the way that works in those countries (where I'm familiar with it)
it would seem to imply the proposal is more like: I have $100 in foreign
revenue on which no VAT is collected. I have $100 in domestic revenue on which
I charge 20% VAT (i.e. the people buying domestically are paying me $120, I'm
collecting that $20 for the government). That $50 of imports has 20% VAT added
to it, so it cost me $60. That $50 of domestic expenses had 20% VAT added to
it by those suppliers, i.e. also costing me $60. I've collected $20 in VAT
from people buying my goods and services domestically, and I've paid $20 in
VAT to my suppliers, so come the end of the year I pay nothing to the
government. The governments revenue of $20 from this whole chain comes from
the end users of products to the primary producers of the original goods and
services (in this case my suppliers would be paying $20 to the government on
behalf of my customers). How does this differ from a VAT?

------
thrill
Vox should bother to learn the difference between evasion and avoidance if
they're going to write on taxes.

~~~
Analemma_
A lot of us believe it is a distinction without a difference, so your view is
not universally shared.

~~~
kyleblarson
Do you take any deductions in your annual taxes?

~~~
danbruc
The difference is between deducting what just happens to be deductible and
deliberately acting in a way to maximize deduction and minimize your taxes.

~~~
gozur88
The government would be very disappointed to learn people weren't making
decisions based on a tax system that's filled with incentives to change the
way people conduct their lives and businesses.

~~~
danbruc
That are different kinds of taxes. There are taxes especially designed to
steer behavior away from discouraged actions or towards encouraged actions and
there are taxes that are mainly for funding. That is certainly no absolutely
sharp distinction and all taxes can at least at times be used to steer
behavior, but income taxes certainly do not exist to discourage having an
income.

~~~
gozur88
That's why, instead of trying to figure out what Congress intended, people
should just worry about the law as written. Congress can always make changes.

~~~
danbruc
That would work in an ideal world, but in the real world laws will have flaws.
That is essentially exactly the same as with vulnerabilities. You find a
vulnerability and responsibly disclose it, you are the good guy and maybe get
a coffee mug or some money as reward. You exploit the vulnerability until
someone else notices it, you are the bad guy and hopefully get punished.

As any other software developer I would certainly love if all the rules in the
world were unambiguous and free of flaws, but that is nothing we can have, at
least not at the moment. So we all have to deal with it and we all have to
accept that the spirit is at times more important than the words.

And just to come back, nobody can seriously claim that they believed it was in
the spirit of the law to pay no taxes at all. That is just not how or system
works and everybody knows that, don't be surprised if you get punished for
trying it anyway.

~~~
gozur88
>That would work in an ideal world, but in the real world laws will have
flaws.

Well, sure, and it's incumbent on Congress to fix them, not the bureaucracy or
the courts. Of course there is some gray area where you can try to gain extra
deductions through miscategorizating expenses and such, but that really a
question of the letter of the law and not its spirit.

>And just to come back, nobody can seriously claim that they believed it was
in the spirit of the law to pay no taxes at all.

That is entirely irrelevant and not even true for almost half the households
in the US.

------
vmarsy
I'm curious what this tax would change for :

\- iPhones made in China and sold in Europe (i.e. would Apple have an
incentive to involve Apple USA or not)

\- iPhones made in China and sold in the U.S.

\- U.S. based company (LLC/C-Corp) offering SaaS subscriptions in the U.S. and
abroad

~~~
khuey
If I understand it correctly:

> iPhones made in China and sold in Europe (i.e. would Apple have an incentive
> to involve Apple USA or not)

Nothing

> iPhones made in China and sold in the U.S.

Fully taxed

> U.S. based company (LLC/C-Corp) offering SaaS subscriptions in the U.S. and
> abroad

Fully taxed on subscriptions sold to customers in the US, nothing on those
sold to customers abroad.

~~~
vmarsy
thanks,

regarding the last one : today, if I own a US company and I charge a
subscription to a German customer, I have to pay Germany's VAT and U.S.
corporate tax, is this correct?

'Tomorrow' , I would only have the VAT to Germany to pay?

If my U.S. business pays a monthly subscription for a European-equivalent of
Photoshop for instance, today I can deduct it from my taxes as it's a business
expense, but 'tomorrow' I won't be able to? or: are services not considered
"import" ?

------
pmiller2
Uf I'm reading the article correctly, the net effect of this tax will be
somewhere between zero and very small. What would be the point, then? If I am
wrong about this, I would like to know.

------
btilly
Step 1: Congress imposes a border-adjusted cash flow tax.

Step 2: Businesses switch to
[https://en.wikipedia.org/wiki/TransferWise#How_it_works](https://en.wikipedia.org/wiki/TransferWise#How_it_works).

Step 3: A lot less money crosses the border, so Congress doesn't collect any
tax.

------
omegaworks
>The tax reform plan being considered by Congress also involves huge rate
cuts, which would swamp any progressivity benefit of the new tax design and
mainly benefit the rich.

So it's a pretty design, but if it drops the revenue the government makes it's
still a big handout to the wealthy.

~~~
PKop
At the very least, the idea that any decrease in rates implies a decrease in
government tax revenues in short term is debatable, and in the long run is
exceeded by increased growth rates [0].

I think it's pretty logical that with lower corporate tax rates, we would see
an increase in business activity in the economy therefore not necessarily less
revenue, any more than a business decreasing prices always equals lower
revenues. I think it depends.

[0] [https://taxfoundation.org/corporate-tax-cuts-increase-
federa...](https://taxfoundation.org/corporate-tax-cuts-increase-federal-
revenue-long-run/)

edit: You were probably specifically referring to individual tax rates. Though
I would put forth a similar argument as above.

~~~
ubernostrum
_I think it 's pretty logical that with lower corporate tax rates, we would
see an increase in business activity in the economy_

Ask the state of Kansas and its "March to Zero" tax plan how that turned out.

Hint: it's been plenty of time for these policies to have their effect, and
business is not booming and the budget deficit is blowing up like a balloon.

------
lukasm
What are the good arguments agains revenue tax? Say 1,5%

~~~
slavik81
It makes small businesses even less competitive against large companies.
Consider a few businesses. One owns an oil well. One owns a refinery. One owns
a gas station.

The oil well sells 100L of crude oil to the refinery for $100 and pays $1.5 in
tax. The refinery sells 100L of gasoline to the gas station for $200 and pays
$3 in tax. The gas station sells 100L of gasoline to the consumer for $300 and
pays $4.5 in tax. Total: $9 in tax.

BigCo owns an oil well, oil refinery and gas station. The only time money
changes hands is when they sell 100L of gasoline to the consumer for $300 and
pay $4.5 in tax.

