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Dec 12, 2016

NYT | Economy - December 12, 2016: New Approach to Corporate Tax Law Has House G.O.P. Support, by Steve Lohr

nytimes.com
 
Steve Lohr
 
This would be a sharp departure for the United States in a number of ways, but taxing imports but not exports is in step with nearly all of America’s trading partners, which have so-called value-added taxes. The import-and-export tax treatment is known as border adjustment.

The proposed overhaul would have other changes. The cost of capital investments would be deducted immediately rather than depreciated over years, but interest costs would no longer be deductible.
The package of ideas has evolved over years, mainly in academic circles. Its principal intellectual champion in the United States is Alan Auerbach, an economist at the University of California, Berkeley. Mr. Auerbach’s goal, he said, is to transform the economics of the corporate tax system so that “incentives will align with the national interest.”
The destination-based concept, according to Mr. Auerbach, is an adaptation to the modern economy of open borders and advancing technology. Much business value is now in intellectual property like patents and software.
Multinationals are adept at shifting these intangible assets to low-tax nations as a way to shelter profits and avoid taxes. A destination-based system, focusing on where a product is consumed, would be much simplified, eliminating incentives to game the system, Mr. Auerbach said.
By not taxing exports, he said, it would “strongly encourage American companies to locate activities in the United States.”
But critics say this is wishful thinking, divorced from the reality of international trade laws, Washington lobbying and corporate financial engineering. Major features of Mr. Auerbach’s design, they say, will probably be jettisoned to appease domestic interests or conform to trade rules. A new system might curb some tax gaming, they say, but not stop it.
What will remain, they predict, will be the House proposal to sharply reduce the corporate tax rate. “The result will be a giant corporate tax cut that benefits the rich because most of the owners are rich,” said Robert McIntyre, the director of Citizens for Tax Justice. “Everyone loses except those at the top.”
Mr. Auerbach, 65, became fascinated by the mechanics and impact of tax policy while pursuing his doctorate at Harvard, encouraged by his thesis adviser, Martin Feldstein, a chairman of the Council of Economic Advisers in the Reagan administration.
Mr. Auerbach was an adviser to John Kerry, the Democratic nominee for president in 2004. But Mr. Auerbach has long been a registered independent. “I like to keep conversations open with both sides,” he said. “I think of myself as an economist first, and that the evidence should dictate the policy.”
His research on tax policy has increasingly focused on the global context. So has the study of other economists. In 2001, in a conference at Berkeley, Michael Devereux was the co-author of a paper with Stephen R. Bond that introduced the term destination-based corporate tax.
In recent years, Mr. Auerbach and Mr. Devereux have cooperated in developing the idea and working through how it might be put into effect. “We’re kindred spirits, for sure,” said Mr. Devereux, a professor at the Saïd Business School at the University of Oxford.
For years, Mr. Auerbach has been making that case on trips to Washington. There has been some interest at times. In 2005, a bipartisan presidential advisory panel on tax reform included his idea as one option, but it went nowhere.
In 2010, Mr. Auerbach laid out the destination-based system in a paper for the liberal Center for American Progress and the Hamilton Project, a middle-of-the-road research group within the Brookings Institution.
But the real political endorsement came this year, when Representative Kevin Brady, a conservative Texas Republican and the chairman of the House Ways and Means Committee, introduced corporate tax overhaul proposals. His blueprint includes most of Mr. Auerbach’s recommendations. The House speaker, Paul D. Ryan of Wisconsin, now vows to pursue tax legislation that would cut both business and personal taxes.
Representative Kevin Brady, Republican of Texas, and chairman of the House Ways and Means Committee, introduced some corporate tax overhaul proposals. Chip Somodevilla/Getty Images
Mr. Brady’s plan calls for lowering the corporate tax to 20 percent, from 35 percent. Mr. Auerbach, who has met with Mr. Brady, did not advocate a specific rate, but he said 20 percent was a “solid rate that is often discussed.” (Mr. Trump has proposed lowering the corporate rate to 15 percent.)
In an interview, Mr. Brady said a destination-based system would “level the playing field for made-in-America products.”
He added, “It removes all the incentives to move jobs, research and headquarters overseas.”
Mr. Brady and his staff have met with Mr. Trump’s advisers. “I’m convinced the Trump team will want to work with us,” he said.
But they may not agree with the entire House package. Eliminating interest deductions would hurt businesses that rely heavily on debt financing, like real estate developers and Wall Street financiers, many of whom have been Trump backers.
And the plan is already stirring resistance elsewhere, dividing business interests even more than experts who split along ideological lines.
Companies that import goods or import a large portion of the parts and materials that go into their products will most likely be worse off, at least initially.
Many retailers fall into that camp. David French, the senior vice president for government relations at the National Retail Federation, said his group, while still studying the plan, considered it “an exotic economics lab experiment.” Retailers, he added, were “very concerned about practical effect of this on profits, jobs and operations.”
Mr. Auerbach said the retailers’ worries were misplaced. If, in the short term, exports rise and imports fall, the value of the dollar should increase in step with the higher demand for dollars. Retailers, he said, will “make up in a stronger dollar what they lose in higher tax payments.”
Mr. French, of the retail trade group, is unconvinced, saying it would be a risky bet to be making with the nation’s $2.6 trillion retail industry.
At the National Association of Manufacturers, which counts 14,000 members from corporations and private companies, Dorothy Coleman, the vice president for tax and domestic economic policy, called the initial Brady plan a “thoughtful attempt to break out of the gridlock” on tax simplification in recent years.
But even some manufacturers have concerns. Last week, Koch Industries, a private industrial corporation run by Charles G. and David H. Koch, prominent Republican supporters, said the “border adjustment” provision of the House plan could be “devastating” to the economy. In a statement, the company said it would “greatly benefit” in the short term as a large exporter, but warned that the American economy would suffer from less free trade and higher consumer prices.
Mr. Auerbach’s approach, embraced by the Brady proposal, will also face a hurdle at the World Trade Organization. Among its provisions is to allow American companies to deduct domestic wages from taxation, which makes it less costly to employ workers and helps them offset the higher price of imported goods. A wage deduction is not currently permitted under W.T.O. rules, and is likely to be seen as an unfair subsidy to American companies and a trade barrier.
But Mr. Auerbach replies that his system is the “economic equivalent” of policies that comply with W.T.O. rules — a value-added tax that is border-adjusted, combined with a reduction in payroll taxes and lowering income taxes.
Michael Graetz, a tax expert at the Columbia Law School, said he doubted that argument would prevail in Geneva. “W.T.O. lawyers do not take the view that things that look the same economically are acceptable,” Mr. Graetz said. “They don’t behave the way Alan might like.”
To explain how a destination-based tax system like the House plan might affect different kinds of companies, Mr. Auerbach co-wrote a recent paper with Douglas Holtz-Eakin, an economist and the president of the conservative American Action Forum.
“Economists don’t rule the world; I understand that,” Mr. Auerbach said. “You never know when or if your policy ideas will have an impact.”
Correction: December 12, 2016 An earlier version of this article, using information supplied by an executive at the National Association of Manufacturers, misstated the number of members in the association. It is 14,000, not 12,000.