Wednesday, January 18, 2017

Idiot's Guide to DBCFT, Ryan Style

I've been fielding several "what is is this DBCFT idea" kinds of questions so I thought it might be helpful to present the six basic features of the DBCFT as proposed (in very general form) by Paul Ryan and a very simple chart to explain how the DBCFT would "work" if it was enacted as described in Ryan's "Better Way" plan.*

Accordingly, based on that proposal, the six main features of the DBCFT would be:

  1. domestic sales are included
  2. foreign sales are excluded
  3. dividends from foreign subsidiaries are exempt
  4. all foreign costs are non-deductible
  5. net interest is non-deductible
  6. allowable domestic costs are immediately deductible (expensed)

Obviously these are oversimplifications and I'm ignoring transition rules and so on, but these are the basic building blocks. The Ryan plan proposes a tax rate of 20%. 

So what happens if these building blocks are put in place via legislation, assuming away all transition issues etc., and that a tax imposed is a tax collected?** If we imagine a product that will sell for $125, and costs $100 to produce (in materials and labour), this is what happens:

Box 1: MAGA ideal: made in America, by Americans, for Americans. Tax will be collected on profits earned by selling goods produced & sold domestically. The DBCFT most resembles an income tax in this scenario (though expensing and non-deductibility of interest still moves it toward a consumption base); it will also be the easiest to collect.

Box 2: Exports. Tax exemption for sales abroad will create (possibly permanent) NOLs to carry forward indefinitely. This will require deciding on loss-shifting policy. This is obviously not an income tax but it not a VAT either.

Box 3: Imports. Sales in the US of goods produced abroad are taxed on a gross basis, more like an excise tax (or yes, a tariff). With an estimated $1.2 trillion trade deficit, this part of the DBCFT is expected to raise the most revenue but the success of that strategy depends to some degree (maybe a large degree) on remote sellers collecting tax (that’s complicated--see Europe).

Box 4: Foreign Sales of Foreign Products. Neither costs nor revenues are counted for goods produced and sold abroad, even if produced and sold by a US-based company. This part of the DBCFT would be more or less consistent with either a VAT or territorial income tax.

That, in a nutshell, is the basic skeleton of the DBCFT as proposed in the Ryan plan. It will be interesting to see what, if any, of this ends up enacted IRL.

* There is absolutely zero chance that the proposal will be enacted as described. Still, it is helpful to understand the basic vision. I do not claim to be an expert on the DBCFT and offer here no analysis or predictions about the incidence of the tax, or the impact such a tax would have on US or world capital flows, investment, consumption, economic growth, or international relations. This paper by Wei Cui, or this one by Wolfgang Schoen are helpful in addressing many of these issues.
** A tax imposed is never a tax collected. There is always a gap between a great idea (or for that matter a not so great idea) and something that can actually be carried out: tax administration is tax policy.

1 comment:

  1. Here is one problem no one and it appears absolutely no one has thought of. What happens when someone from the US goes cross border shopping into Canada. The border adjustability only affects corporations not individuals. Thus an individual from Vermont can go shopping in Quebec and only pay 15% TVQ/GST then cross back to the US and pay none of the DBCFT. Even better for the Vermonter is if they stop at a duty free store in Quebec and avoid even pay 15%(or 14.95 something)TVQ/GST.

    So effectively DBCFT will reduce any incentive for Canadian to cross border shop in the US and create HUGE incentives for Americans to cross border shop in Canada. This will especially be true if there is a huge appreciation of the US Dollar(Which I suspect would happen initial only slowly to decline as people found ways around the tax i.e. Cross Border Shopping like a slowly leaking balloon.)

    So in some sense a DBCFT will make Canadian retailers GREAT AGAIN.