Destination Based Cash Flow Tax and Supply-Side Silliness

Phillip Swagel comes out for this proposed change in the tax code:

The current corporate tax system, in contrast, typically means a lower tax rate for firms that produce overseas and import into the United States. U.S. firms that move production overseas do better than American companies that produce here because they get to put off paying taxes on the profits they make by producing in other countries.

But of course as we rely more on income taxes whereas European governments use a combination of VAT taxes and income taxes. But I interrupted Swagel as he got into “incentives”:

It is disappointing that companies move jobs and production lines overseas, but the backward incentives in the U.S. tax system make this no surprise. The Brady-Ryan tax plan will flip the situation. The proposal includes lower tax rates, strengthening U.S. job creation and economic growth, while giving both businesses and American families a simpler tax system.

Does Swagel seriously think that decisions where to produce goods depends solely on taxation? Try differences in unit labor costs. As I said – supply-side silliness. Up next is silliness about transfer pricing issues:

The border adjustment in the proposal addresses the vexing aspects of the U.S. tax code that today lead firms to shift their profits or invert their corporate structure to move their headquarters outside the United States.

Oh good grief! Where the corporate structure puts "headquarters" (basically the CFO and his tax minions) has nothing to do with the allocation of a multinationals profits. Yes – it ends the repatriation tax which could be more simply done without the Brady-Ryan proposal. But yea if you make the U.S. a tax haven, multinationals will have incentives to shift profits into our tax haven and not out of it. This will create a massive new wave of transfer pricing manipulation and international tax controversy. But Swagel continues with his silliness:

The border adjustment means that all products sold in the United States will face the same tax, regardless of where the item is made, and U.S. firms selling overseas will not face higher taxes than their foreign competitors. The incentives that lead firms to shift production to low-wage countries or to use accounting wizardry to shift profits to low-tax countries like Ireland will disappear. Decisions about where to invest and hire will be made on business considerations rather than driven by the tax code.

This is so manifestly not right that even Alan Auerbach has conceded the point. I guess this is why Swagel’s silly defense had to appear on CNBC.