Border-adjusted cash flow tax (to replace corporation tax) explained | Hacker News Reader

Border-adjusted cash flow tax (to replace corporation tax) explained

vox.com

35 pointsrandomname253 comments

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. 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.

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

https://taxfoundation.org/understanding-house-gop-border-adj...

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

https://www.youtube.com/watch?v=FO1rlheCigk

NPR's Planet Money also had an episode on this recently: http://www.npr.org/sections/money/2017/02/01/512921756/episo...

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

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

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

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...

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)...

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.

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.

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.

Lowering the tax wedge (reducing payroll and income taxes) and making labor laws more flexible does exactly that.

Lowering minimum wage and increasing earned-income tax credit (aka negative tax rate) also has a similar effect.

Personally, I'm in favor of a strong earned-income program.

On your second point, why should it be stopped? Actual question, interested in hearing opinions about it.

Income tax by itself is highly deceptive, as it doesn't include payroll tax. Companies don't look at salaries, they look at the total cost, which includes salary, benefits, bonuses and payroll taxes/fees. The payroll taxes often aren't seen by the employees, so they feel they are being taxed less than they actually are.

The impact of that can be huge. Let's compare France and Switzerland:

Average yearly total cost worker:

* Switzerland: 74k USD PPP

* France: 63k USD PPP

Average yearly gross income per worker:

* Switzerland: 70k USD PPP

* France: 46k USD PPP

Average net income after taxes per worker:

* Switzerland: 58k USD PPP

* France: 33k USD PPP

So out of every dollar the company spends on a worker, in France the worker gets 52% of that. In Switzerland the worker gets 78% of that. In PPP-adjusted numbers, the average worker in Switzerland makes 75% more than the average worker in France, despite costing less than 20% more.

In which country do you think a company would want to hire employees? Switzerland or France?

Source: OECD.

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?

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

Or people could accept that 'politically correct' language is not the province of one side of these battles.

"Legally correct" is what we should strive for.

Many of us are in tech. If you exploited a security hole to gain access to an unpatched system, you are still guilty of circumventing the system. Many believe the tax code should be similar: avoidance==evasion.

Of course, I am not a lawyer.

Where's the line?

In New York, a sliced bagel with a smear of butter is a taxable prepared food product. A uncut bagel with a side butter is tax free. Should I be a criminal for going the unsliced route if I wish to deprive the state treasury of $0.10?

There are no laws saying it's illegal to follow the tax laws.

Never heard of a GAAR? (general anti avoidance rule)

GAAR replaces the predictable rule of law with the unpredictable caprice of whoever is currently the arbiter of what qualifies as 'avoidance'. (In practice, in a legal system that respects precedent, that would just replace legislation with case law.)

If you consider something a loophole, fix it. If the law is so complex that fixing loopholes seems untenable, consider simplifying the law to have fewer special cases.

Forget the law for a moment. A company profits from the infrastructure a country provides and therefore has at the very least a moral obligation to help financing it. It is a deal - company pays taxes, country provide infrastructure the company needs.

If a company then tries to avoid paying its share of the infrastructure, the company is breaking the deal. If doing so does not break existing tax law, that does not mean the company is in the right.

All this is of course fuzzy, but when a profitable company pays zero taxes, you can certainly not claim that you believed the amount of taxes you paid seemed reasonable to you. And the company should of course be held accountable for this even if it did not break any specific tax law. Not paying your share is a breach of the deal.

That's a moral argument for tax compliance. Even Christianity teaches that Caesar gets his due.

You have no moral obligation to pay a tax that is not levied.

In the case we are talking about, the companies have to pay taxes but they exploit loopholes to avoid it. They may be not in violation of the letters of the law but they are in violation of the spirit of the law.

The moral obligation is to participate in the funding of the system you are profiting from. Making money by transporting your goods on roads built by the state, employing people educated in schools funded by state, and enforcing your contracts by courts established by the state but not paying taxes towards this system is wrong.

And this obligation does not go away if you find a trick to circumvent the written rules.

Loopholes are not exploits. They are compliance. The only moral obligation is to follow laws, and then when they are just.

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

Do you take any deductions in your annual taxes?

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

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.

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.

> income taxes certainly do not exist to discourage having an income

They do, however, have that effect in practice; people with enough money to do so are incentivized to have long-term capital gains and no income.

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.

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.

>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.

As far as I can tell, the difference in practice is whether the person speaking likes the entity taking the deduction, which closely correlated with whether the entity taking the deduction is perceived to have "too much" money.

You are probably in for a Nobel Price in economics if you manage to come up with a viable tax system that allows painting a black and white picture. But at least for the moment we are stuck with a gray scale picture where the border between tax avoidance and tax evasion is fuzzy and at least subject to some kind of subjectivity.

There's a very clear distinction: one is illegal, the other is legal. If you say someone is engaging in tax evasion, you're accusing them of a crime. If you say someone is engaging in tax avoidance, you're accusing them of following the tax code as written.

And if you just wish someone paid more in taxes than they're required to, then look closer at the things they're legally doing, decide which of them you'd rather not be legal, and argue against that. But that's not an argument about the behavior of that person; that's an argument about desired properties of tax law.

Even if you believe that some part of the tax code is currently immoral (and I certainly think there's a critical distinction between law and morality), it still doesn't make sense to voluntarily pay extra. Pay the legally required amount, and if you decide that the best possible use of your additional funds is to donate them to the government, do so; the Treasury Department (and specifically the "Bureau of the Public Debt") accepts voluntary additional payments, and they're even tax-deductible. Or, perhaps you can find an even better use of that money to have an impact on the world.

I am not a native speaker, tax mitigation seems to be the correct term that I should have used instead of tax evasion.

I avoid a cigarette tax by not buying cigarettes. I avoid more property tax by moving to a lower property tax state. Will you jail me for tax avoidance in either case?

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

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.

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" ?

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.

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

Step 2: Businesses switch to 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.

>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.

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...

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

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.

So basically the Laffer curve? [0] It's definitely an intuitively appealing idea, but the point at which government revenue is maximised might occur at a much higher tax rate than you think (if the empirical work in this area is to be believed, which is a tenuous proposition either way). Also worth remembering that the government revenue maximising tax rate is very unlikely to be the economically optimal tax rate.

At any rate, barring some kind of international agreement on minimum corporate tax rates (which seems unlikely), there will always be incentive for governments to lower corporate tax rates to attract foreign capital (though I think the argument is less strong in the case of the US compared to a smaller open economy).

[0] https://en.wikipedia.org/wiki/Laffer_curve

EDIT: rate...

> I think it's pretty logical that with lower corporate tax rates, we would see an increase in business activity in the economy

But it is not logical to assume that this would, at all tax levels, be enough to offset the loss of revenue due to the rate cut. Given that the US has a low effective rate of corporate taxation despite high nominal rates, it is very unlikely that a decrease in corporate taxes would fail to decrease revenue in the US.

OTOH, if you want to stimulate hiring and economic activity, a really good tax to cut is payroll taxes, but even there you probably still lose revenue, so you probably need to increase some tax that has less direct effect on employment, like top-end income taxes.

it's still a big handout to the wealthy

The wealthy pay most of the taxes today, so if you were to cut taxes, most of it will go back to them, no?

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

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.

Isn't that just a sales tax shuffled around?

One person's revenue is another person's purchase.

Huge transfer of wealth from low-margin businesses to high-margin businesses.

Supermarkets, for instance, have margins of about 3%. With a revenue tax they'd be completely boned. They could raise their prices, of course. But the bigger supermarket chains would be better off buying out their own supply chain.

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