Border Adjustment as Tax Policy

and as Macroeconomic Policy

Jason Furman
Senior Fellow, PIIE

Conference: Border Tax Adjustment and Corporate Tax Reforms

Washington, DC
February 1, 2017
Peterson Institute for International Economics | 1750 Massachusetts Ave., NW | Washington, DC 20036
 Concern #1: Our Business Tax System is Broken,
As Evidenced by High Statutory Rates

Statutory Corporate Income Tax Rates, 2016

Percent
45
40
35
OECD Weighted Average
30 (Excluding United States): 27.1
25
20
15
10
5
0

Note: Combined central and sub-central (statutory) corporate income tax rate given by the central government rate (less deductions for sub-national taxes) plus the sub-central
rate. OECD average is calculated using gross domestic product (in current U.S. dollars) in 2015 (latest year available for all countries) as weights.
Source: Organisation for Economic Co-operation and Development; national sources via Haver Analytics; authors calculations.
 Without Commensurately Higher Effective Rates,
Indicative of the Narrow Tax Base
Average Effective Tax Rates in the G-7, 2006-2009
Percent
45
38.8
40
G-7 Weighted Average
35 (Excluding United
States): 29.2 27.7 27.9 29.1
30

25 23.1 23.6
21.6
20

15

10

0
Canada France United United Germany Italy Japan
Kingdom States
Note: G-7 average is calculated using gross domestic product (in current U.S. dollars) as weights.
Source: Council of Economic Advisers (2015).
 And a Stupid Territorial System for International
Taxation That Distorts While Raising Little/No Revenue

U.S.-Controlled Foreign Corporation Profits

Relative to GDP, 2010
Foreign Corporation Profits
Country Relative to GDP (Percent)
Bahamas 104
Bermuda 1,578
British Virgin Islands 1,009
Cayman Islands 1,430
Cyprus 13
Ireland 38
Luxembourg 103
Netherlands 15
Netherlands Antilles 25

Source: Council of Economic Advisers (2015).

 The Resulting Variable Tax Rates Cause Capital
Misallocation, Financial Fragility, and Other Distortions
Effective U.S. Corporate Tax Rates
Average Effective Actual Rate

Utilities 10
Wholesale and Retail Trade 27

Effective Marginal Tax Rates on New Investment

Equity-Financed 35
Debt-Financed -5

Corporate Business 29
Pass-Through Business 24

In the United States (Hypothetical) 30

In a Low-Tax Country (Hypothetical) -24
In a High-Tax Country (Hypothetical) 13

Business 27
Owner-Occupied Housing -2

Source: Office of Tax Policy, Department of the Treasury (2017); Council of Economic Advisers (2015).
 The Net Effect of These is Meaningful, But Not So
Large As to Override Other Concerns

Select Estimates of the Effect of Tax Reform on the Level of Output

Source Policy Change Short-Run Long-Run

Treasury (2006) President's Advisory Panel on Tax Reform

Simplified Income Tax 0.0 - 0.4 0.2 - 0.9
Growth and Investment Tax 0.1 - 1.9 1.4 - 4.8

Altig et al. (2001) Stylized Revenue-Neutral Tax Reforms

Proportional Consumption Tax 6.3 9.4
Flat Tax with Transition Relief 0.5 1.9

Note: Output measure is (in order of preference if multiple measures are reported) national income, real gross national product, and real gross domestic product. Time period for
short-run effects varies across studies, but (in most cases) is an average over several years in the first decade. Long-run effects typically reflect estimates of the change in the
steady-state level of output.
Source: Furman (2016).
Concern #2: The Medium- and Long-Run Deficit
Federal Budget Deficit as Share of GDP
Percent of Fiscal Year GDP
6
2027

4
Actual CBO Baseline
Forecast
3

0
2014 2016 2018 2020 2022 2024 2026 2028

Source: Congressional Budget Office.

 Concern #3: High Levels of Inequality
Top 1 Percent Income Share, 1945-2015
Percent
24
2015

20

16

12

4
1945 1955 1965 1975 1985 1995 2005 2015

Source: World Wealth and Income Database.

 Some Weak or Fallacious Arguments for
Destination Basis/Border Adjustment

1. Everyone else is doing it, so we should, too.

2. It improves U.S. competitiveness.

3. It is a necessary part of a cash flow/consumption tax.

4. It raises revenue in the budget window.

Capital Export Neutrality Worldwide

OR
Capital Ownership Neutrality Territorial

OR
Profit Location Neither System is Perfect

OR
The Tax Policy Argument for Destination Basis:
Sales Less Affected by Taxes

&
 Summarizing the Tax Policy Argument for
Destination Basis/Border Adjustment

Comparison of Selected Tax Systems

Where to Who Owns a
Where to Where to
Locate Given
Report Profits Locate HQ
Production Subsidiary
Current: Deferral
Worldwide
Territorial
Minimum Tax / / / /
Destination Basis
 Some Tax Policy Concerns with
Destination Basis

1. Direct sales to consumers, tourists and retirees

2. More firms with unrecoverable losses

3. Impact on global tax system from incentive to shift

income

4. Treatment of financial transactions

 Large Exchange-Rate Adjustments (or Lack
Thereof) Would Have Global Repercussions
Real Trade-Weighted Dollar (Major Currency Index)
Index (Mar-1973 = 100)
150
Full Adjustment
140 (Illustrative)

130
Partial Adjustment
120 (Illustrative)

110

100

90

80

70

60
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Note: Shading denotes recession.
Source: Federal Reserve Board; authors calculations.
 Questions on WTO Legality and
Sanctioned/Unsanctioned Responses
One indication of magnitude comes from Bown (2017),
import restrictions (trade effects) formula: $220 billion in
retaliation

China: $46 billion

European Union: $42 billion

Mexico: $30 billion

Canada: $28 billion

Japan: $13 billion

Six other countries: $4 billion or more

 Border Adjustment Does Not Raise Long-Run
RevenueUsing It as a Payfor is Deficit-Increasing

Plausible Illustration of Long-Run Fiscal Effects (NPV, Percent of GDP)

Ten Years Permanent

Border Adjustment 0.4 0.0 to -0.3

Portion of Rate Reduction Financed by Border

-0.4 -0.4
Adjustment

Net Fiscal Impact 0.0 -0.4 to -0.7

Source: Tax Policy Center (2016); Bureau of Economic Analysis, National Income and Product Accounts; OASDI Trustees Report (2016); authors calculations.
 Long-Run Impact on Households: Need
Dynamic Distributional Analysis

Cannot answer the most important question without knowing:

Direct incidence of taxes
Impact on before tax incomes
Indirect incidence of financing tax cuts

All are very difficult and depend on the plan as a whole.

Would raise concerns if:

Static distribution was regressive (e.g. large reductions in top
rate)
Proposal was a net-present-value tax reductionbecause
ultimate financing unlikely to be progressive
Significant reduction in tax rates on market power and luck
 Border Adjustment as Tax Policy
and as Macroeconomic Policy
Jason Furman
Senior Fellow, PIIE

Conference: Border Tax Adjustment and Corporate Tax Reforms

Washington, DC
February 1, 2017
Peterson Institute for International Economics | 1750 Massachusetts Ave., NW | Washington, DC 20036