BONUS CONTENT: The Destination-Based Cash-Flow Tax

What was called #DBCFT Twitter was a brief but memorable online phenomenon which captivated certain corners of tax wonk social media, immediately following the 2016 election and Donald Trump’s ascension to the presidency. While most of the Internet was freaking out about this political paradigm shift, #DBCFT Twitter participants were earnestly trying to wrap their heads around the destination-based cash-flow tax, a rather radical Republican tax proposal which all of a sudden looked like it had a chance of passage.

Congressional Republicans had made the proposal, which would make dramatic changes to how American corporations are taxed and how profit is sourced, in the summer of 2016 as part of their “Blueprint” for “A Better Way for Tax Reform.” But it didn’t get much notice then, as Republicans seemed headed toward defeat with their unconventional standard-bearer.

But when the GOP won full control of government in November, tax experts realized that the long-awaited chance for comprehensive tax reform had arrived, and the DBCFT was the battle plan.

It reminded me a bit of Michael Crichton’s “Sphere,” one of my favorite books growing up, which is about a team of scientists exploring an apparent alien spacecraft at the bottom of the Pacific Ocean. The setup was the kind of slightly cynical premise that the author was known for–the protagonist, a psychologist, submitted a report to the government in the waning days of the Carter administration, with a plan for how to handle extraterrestrial contact. As a young academic hoping to buy a house, he barely took the assignment seriously at the time. A decade later, he watches in shock as his instructions are dutifully carried out.

Likewise, it’s hard to believe that anyone involved with the Blueprint thought it would be considered as a real proposal so soon. It seemed like a rhetorical and political document, trying to push forward in the debate about tax reform. But it became something much bigger, and online tax wonks were pumped to have something so transformational to argue over.

It was not to last for long, however. One of the key parts of the proposal was "border adjustment," exempting exports from taxation and applying corporate taxes only on imports and U.S.-based sales. (The aim is to be similar to a value-added tax or other consumption taxes.) DBCFT proponents said that, by shifting the balance of dollars at home and abroad, U.S. currency would ultimately adjust and counteract the cost for importers. But retailers and others who would be affected weren’t about to take that chance with their own money.

The campaign against the DBCFT was swift and harsh, including one of the most amusing political ads ever made about taxes. Some Republicans recoiled at its similarity to a consumption tax–Sen. Mike Lee, R-Utah, called it a “VAT-like substance”–which they view as a boon for big government. Not long into the negotiations, the whole thing was dropped, and what eventually became the Tax Cuts and Jobs Act emerged. The DBCFT became a theoretical idea again.

But while its enactment in the U.S. seems far-off, some of the basic principles underlying the proposal live on, in a way.

The “cash-flow” part of the proposal refers to recognizing all costs and investments immediately under full expensing. Advocates of this approach say it encourages investment and innovation–startups will have an easier time writing off costs–and better focuses taxes on “super-normal” profits. The TCJA did include several provisions to move up the deductibility of expenses–and while some of those provisions have expired, there’s been a vigorous push to renew them through a bipartisan tax agreement. This issue will no doubt play a big role in the upcoming 2025 Tax Cliff.

For international taxes, the more relevant part of the DBCFT may be the “destination” part. This is, indeed, similar to a VAT in that it would tax gross revenue where it’s earned, normally at the consumer level. In theory, this would eliminate so many of the problems with income-shifting and base erosion, as it’s much easier to pin down a consumer’s location than to evaluate intangible assets or other factors which can play such a huge role in today’s system. Since deductions for imports are nixed, there’d be no point in arranging huge outbound related-party transactions simply for the tax benefits. (Although, since this would also be a fully territorial system, the foreign revenue from U.S. companies would be out of reach from the Internal Revenue Service. But that’s the revenue that’s hardest to tax, anyways.)

Given how complex and difficult the issues with base erosion are–just look at the OECD’s Two-Pillar plan–the DBCFT seems like an elegant and conceptually simple solution.

Critics say it wouldn’t be nearly as easy in practice. For starters, while product sales are relatively simple to source, with business-to-business transactions and income from services it gets more complicated and potentially problematic. Especially in the online world, where so many services are now delivered. Unlike people, global corporations aren’t so easy to source to a location.

Nevertheless, the principle of looking to the consumer and leaning towards more destination, source-based taxation continues to be prevalent in tax reform discussions. There’s both an administrability argument–again, consumers are easier to find–as well as an equity one. Many poorer, developing countries with strong markets feel they’re missing out on tax revenue they deserve, and with their voices combined the concern can’t be ignored. This has been a major factor in the push for digital services taxes and Pillar One. (You can read more about this in my interview with Tax Foundation CEO Daniel Bunn.)

It may be that the political flaws in the DBCFT will prevent it from ever becoming law here. But as the U.S. and global tax systems continue to evolve rapidly, its influence may soon be felt everywhere.

Contact the author at amparkerdc@gmail.com.