The House GOP’s Destination-Based Cash Flow Tax

The Tax Foundation explains a proposal from the House Republicans:

The GOP’s plan would alter the corporate income tax in five major ways: 1. The tax rate would be lowered to 20 percent. 2. Businesses would no longer need to depreciate capital investments. Instead, they will be able to fully write off, or expense them, in the way in which they purchased them. 3. Businesses would no longer need to pay tax to the IRS on profits they earn overseas. 4. Businesses would no longer be able to deduct interest as a business expense. 5. The corporate tax would be “border adjusted.” These changes turn the tax into what is called a “destination-based cash flow tax.”

Progressives might be alarmed about the significant reduction in the tax rate as well as the end of the repatriation tax. Quite frankly, this repatriation tax has not worked all that well so I’d settle for a more aggressive enforcement of transfer pricing under section 482. The Tax Foundation addresses this border adjustment as well. Alan J. Auerbach and Douglas Holtz-Eakin start their discussion with another explanation. But this document also seems to be a full throttled defense of the GOP proposal that includes the following claim:

the multinational would have no incentive to use transfer prices to shift profits away from the United States, even if the tax rate in the foreign country is very low. Indeed, it would benefit by shifting profits to the United States, to reduce the taxes it pays in the low-tax country.

So we do not need to worry about transfer pricing manipulation? Something tells me this is not quite right. I’ll have to give this one more thought.