Monday, January 23, 2017

Paul Ryan’s Two-Faced Comments on Auerbach’s Tax

Page 15 of the tax portion of A Better Way makes this claim:
This Blueprint represents a dramatic reform of the current income tax system. This Blueprint does not include a value-added tax (VAT), a sales tax, or any other tax as an addition to the fundamental reforms of the current income tax system. The reforms reflected in this Blueprint will deliver a 21st century tax code that is built for growth and that puts America first.
A few lines later, it makes this claim:
The focus on business cash flow, which is a move toward a consumption-based approach to taxation, will allow the United States to adopt, for the first time in history, the same destination-based approach to taxation that has long been used by our trading partners. This will end the self-imposed unilateral penalty for exports and subsidy for imports that are fundamental flaws in the current U.S. tax system. The new tax system also will end the U.S. taxation of the worldwide income of American-based global businesses
So is the Destination-Based Cash Flow Tax, an income tax or a consumption tax? And why is Speaker Ryan contradicting himself within the same page? I earlier praised Joel Trachtman for articulating the legalese of whether this proposal would violate WTO rules:
The ability to tax imports and exempt exports –known as border tax adjustments—is permitted under World Trade Organization rules, but only for taxes on a product, such as a sales tax (as opposed to income taxes). Many of the U.S.'s major trading partners tax imports while exempting exports because they have a system of what are called value-added taxes, which act like a sales tax on goods (but are collected in stages along the production chain). Value-added taxes are understood to be taxes on a product and are eligible to be border tax adjusted: they are rebated on exports and applied to imports as the product crosses the border. Relying on corporate income taxes has precluded the U.S. from applying similar border adjustments—a fact the GOP blueprint aims to rectify. But, whether the border tax adjustments in the blueprint are deemed legal from a World Trade Organization perspective will depend on a core interpretation: Is the tax in question an income tax or a tax on a product? While some argue that the business cash flow tax is economically equivalent to a value-added tax, legally it does not seem possible to characterize it as a tax on a product under the World Trade Organization rules. It is a tax on a firm, calculated by reference to firm-based attributes under a new and simplified definition of net income, but a definition of net income nonetheless. Moreover, imports would face 20% tax on their price with no deductions while domestic producers would be able to deduct most expenses — including payroll — from the tax base. This discriminatory treatment could also make the import border adjustment illegal under the international rules.
Reuven Avi-Yonah and Kimberly Clausing have a longer discussion that reaches the same conclusion. These authors also wondered why Speaker Ryan does not simply call this a consumption tax with a labor subsidy. The answer might be simply politics – Speaker Ryan has always wanted to get rid of the corporate profits tax replacing it with a consumption tax. But of course Speaker Ryan does not have the political courage to just say so. No wonder President Trump finds this too confusing. The tax’s main political proponent has never been exactly honest about what his agenda is. I stand by my second post on this topic:
I think the real issue here is that this proposal smooshes together two very different ideas sort of like how shimmer was a floor wax and a dessert topping


reason said...

"No wonder President Trump finds this too confusing. "

What economic policy idea do you think President Trump would not find too confusing. The man only understands body language.

Gerald said...

So Paul Ryan is making a two-faced comment about Auerbach's tax? Actually it's impossible for him to make any other kind of comment. He is, in fact, two-faced.