Al Ullman and the Destination Based Cash Flow Tax

TaxAnalysts reminds us of Congressman Al Ullman:

When Ullman won his first race for the House in 1960, he was regarded as a solid liberal -- which only made his victory more surprising, because his district was historically conservative. Once in Congress, Ullman solidified his left-leaning credentials, earning a 100 percent rating from Americans for Democratic Action (ADA) in 1961.

By 1974, his ADA rating fell to just over 50%. What changed?

Ullman's education at Ways and Means apparently included a course on consumption taxes, because he came to believe deeply in their relative efficiency. He put ideas into action by introducing the Tax Restructuring Act of 1979. The bill, introduced in late October, featured $130 billion in cuts to existing taxes, offset by $130 billion in new revenue from a federal VAT. The sluggish economy of the late 1970s needed a shot in the arm, and tax cuts were just what the doctor ordered, Ullman argued. Specifically, he suggested: (1) a $52 billion cut in Social Security payroll taxes, with rates dropping from 6.65 percent to 4.5 percent for both workers and employers; (2) a $50 billion cut in personal income taxes, with credits for the poor and elderly and various investment incentives; and (3) $28 billion cut in corporate income taxes, with the top rate dropping from 46 percent to 36 percent, as well as "substantial depreciation reform."

How did Greg Mankiw described the Destination Based Cash Flow Tax?

Consider the following tax reform: (1).Impose a retail sales tax on consumer goods and services, both domestic and imported. (2) Use some of the proceeds from the tax to repeal the corporate income tax. (3) Use the rest of the proceeds from the tax to significantly cut the payroll tax.

Was Ullman ahead of his time? I learned about this when I asked someone who knows this history about a 1994 proposal from certain Republicans to have a subtraction VAT much like the Japanese VAT. The Europeans have a tax-credit VAT. GAO explains the details. As I noted earlier, Alan Auerbach has admitted his proposal to end U.S. corporate profits taxes and have us rely entirely on VAT will increase transfer pricing manipulation not lower it:

A lot of folks thought DBCFT would end tax arbitrage but not if the U.S. adopts it alone. It just seems all the work for clever accountants and lawyers will be occurring offshore. Auerbach et al. do make a point that if all nations abandon the taxation of profits and raise retail sales taxes to offset the revenue loss, then transfer pricing becomes irrelevant.

Of course VAT differs in its detailed implementation from a retail sales tax. If all nations went on the European system, Auerbach’s dream of ending transfer pricing manipulation might have a chance. But if the U.S. follows Japan with a subtraction VAT, transfer pricing still matters.