Should-Read: Alan Auerbach: Understanding the destination...

Should-Read: Alan Auerbach: Understanding the destination-based approach to business taxation: "The rising importance of multinational companies and the changing nature of production represents a challenge to the traditional ways that countries try to tax corporate profits...

...This column examines one potential policy response ��� a destination-based cash-flow tax.... A fundamental tax reforms that can deal more adequately with the new economic realities.... builds on the concept of business cash-flow taxation.... A destination-based cash-flow tax (DBCFT)... adds ���border adjustment��� to cash-flow taxation and has the effect of basing the tax on the location of consumers rather than on the location of profits, production, or corporate residence. As described in a series of papers, including Auerbach (2017), converting an origin-based cash-flow tax into a destination-based cash-flow involves relieving tax on export revenues and imposing tax on imports, in precisely the same manner as is done under existing value-added taxes (VATs). The key difference from a VAT is that the DBCFT maintains the income tax deduction for wages and salaries, and thus amounts to a tax on domestic consumption not financed by labour income, in principal a much more progressive tax than the VAT....

There is little doubt that a large border adjustment can lead to large real exchange rate responses, through some combination of nominal exchange rate appreciation and domestic price and wage increases.�� Under simplifying assumptions, the Lerner symmetry theorem predicts that such responses should neutralise any effects on trade.�� But there are many possible complications to the analysis...