Friday, February 17, 2017
This week, David Gamage (Indiana) reviews a new piece by Michael Graetz (Columbia), The Known Unknowns of the Business Tax Reforms Proposed in the House Republican Blueprint, Columbia Law and Economics Working Paper No. 557.
How should we evaluate the House Republicans’ proposals for adopting a destination-based cash-flow tax (“DBCFT”)? This is among the most important tax policy question currently facing the United States. Yet this question is difficult to analyze, in part, because of uncertainty about what the proposed DBCFT might turn out to be if implemented.
To survey this quagmire, Graetz offers what is essentially just a list of questions, presented on PowerPoint slides printed to PDF. Nevertheless, I found Graetz’s work to be by far the most helpful document for understanding the House Republicans’ DBCFT proposal that has been made available to date.
To highlight just a couple points raised by Graetz’s list of questions:
1. To what extent will the DBCFT proposal apply to pass-through entities? Some commentators seem to believe that the proposal would be limited to C corporations. But this would be a disaster in practice, as business entity groups could then channel their imports through partnerships and their exports through C corporations and thereby largely arbitrage the tax to a nullity. Presumably the drafters are too smart to make such an elementary error, and so the proposal will encompass at least most large partnership entities. Yet this merely raises a second set of questions. Will the proposal extend to sole-proprietorships and small partnerships, or what will be the cutoff? How will the proposal integrate with the individual income tax? How will the deduction for wages apply in the pass-through context?
2. Graetz states that, due to the wage deduction, “It is quite certain that the DBCFT of the Blueprint would be held to be in violation of our international trade agreements by the WTO.” (p. 18). The proposal could be revised to comply with WTO rules by transforming the wage deduction into a credit for payroll taxes paid on account of employees (and perhaps also other expenses incurred to comply with mandated employee benefits, such as, for instance, a portion of the cost of employee-provided health insurance). Transforming the proposal in this way would have distributional consequences and other implications that the House Republicans might perhaps find distasteful. Does this mean that the House Republicans are determined to violate WTO rules? Should WTO rules insist in perceiving wage deductions as violations? Could the wage deduction be refashioned so as to comply with WTO rules and still satisfy the House Republicans’ aims?
Many of Graetz’s questions raise further questions, upon reflection. After all, illuminating a quagmire helps one to see that it is a quagmire indeed. Hopefully, the House Republicans’ tax staffers are currently in the process of grappling with Graetz’s questions. For now, Graetz’s piece is essential reading for anyone hoping to even begin assessing the House Blueprint.
Here’s the rest of this week’s SSRN Tax Roundup:
- William Byrnes (Texas A&M), How May the United States Leverage Its FATCA IGA Bilateral Process to Incentivize Good Tax Administrations among the World of Black Hat and Grey Hat Governments? A Carrot & Stick Policy Proposal, Emory International Law Review, Vol. 31, No. 1, 2017
- Lilian V. Faulhaber (Georgetown), The Trouble with Tax Competition: From Practice to Theory
- J. Clifton Fleming Jr. (BYU), The EU Apple Case: Who Has a Dog in the Fight?, Tax Notes, Vol. 154, No. 2, 2017
- Gary Lucas, Jr. (Texas A&M), Voter Psychology and the Carbon Tax, February 10, 2017
- Allen D. Madison (South Dakota), The Legal Consequences of Noncompliance with Federal Tax Laws, Tax Lawyer, Vol. 70, No. 1, p. 367, 2016
- Roberta F. Mann (Oregon), Sustainably Funding Transportation Infrastructure: Tax Fuel or Miles?, 31 Australian Tax Forum 609 (2016)
- Rebecca N. Morrow (Wake Forest), Accelerating Depreciation in Recession, Florida Tax Review, Vol. 19, No. 8, 2016
- David M. Schizer (Columbia), Subsidies and Nonprofit Governance: Comparing the Charitable Deduction with the Exemption for Endowment Income, Columbia Law and Economics Working Paper No. 558