RIP DBCFT

It was probably too good an idea to survive the Washington policy meat grinder, but President-elect Donald Trump may have killed the House Republicans’ favored corporate tax reform before it even had a chance. “I don’t love it,” Trump told The Wall Street Journal in an interviewed published this morning—an early anti-Valentine widely seen as the kiss of death.

The idea, burdened with the unfortunate name of a destination-based cash flow tax (DBCFT), is not only a favorite of House GOP leaders such as Speaker Paul Ryan (R-WI) and Ways & Means Committee Chair Kevin Brady (R-TX), it also has the backing of a broad spectrum of tax economists. For instance, here’s how TPC’s Bill Gale explains it.

The plan is based on a concept called border adjustability. Firms would pay no US tax on the goods and services they sell overseas but would no longer be able to deduct their cost of imported goods. TPC’s Eric Toder describes it here.

In some ways the idea seems to exactly fit Trump’s agenda. It would reduce taxes on US exporters. It would effectively replace the corporate tax code with a consumption tax and discourage tax-motivated corporate inversions by US-based firms. And it would raise $1.7 trillion in revenue over 10 years, according to estimates by my colleagues at the Tax Policy Center—money that the GOP could use to buy down business tax rates.  TPC estimates that this new way of taxing US firms could finance about 60 percent of the cost of the House GOP plan to reduce corporate rates from 35 percent to 20 percent.

Yet, Trump told the Journal that the tax is too complicated. And, he added, “Anytime I hear border adjustment, I don’t love it. Because usually it means we’re going to get adjusted into a bad deal. That’s what happens.”

Trump’s criticism comes on top of strong objections from US retailers and other businesses that rely heavily on imports for production of their own goods.

It is hard to understand exactly what Trump means. While the tax is not easy to explain, it is administratively far simpler than the current corporate tax. Instead of trying to sort out where a company locates its facilities, where it holds its patents, or where its headquarters is legally domiciled, the firm would be taxed only on where its good are sold. Income from products sold in the US would be subject US tax. As Trump noted, sorting out the cost of  some foreign-sourced parts would still be complicated. But the tax would be much simpler to administer than most alternatives.  

It is not to say the destination-based tax does not have problems. It is hard to explain. It is a Value-Added Tax, but because VATs are anathema for many Republicans, its sponsors had to make it look like a corporate income tax. Many retailers, who sell imported goods, believe that it would increase consumer prices—through economists insist it would not since the value of the dollar would adjust to reflect these tax changes. And, because it would still be structured as a corporate tax, it is probably an “unfair trade practice” according to the World Trade Organization and could subject the US to retaliation by other countries.

More broadly, where do Trump’s remarks leave us? They expose three important truths:

Tax reform is really hard. At best, it is likely to take much longer than Trump and congressional Republicans have promised. But more likely, reform could once again sink of its own weight. Instead, Congress might pass a simple (though large) tax cut, constrained only by how big a deficit lawmakers can swallow, and leave serious reform for another day…or year.      

There are deep divisions within the GOP over what to do. House Republicans were counting on the cash-flow tax as the linchpin of their corporate reform plan. But Senate Finance Committee Chair Orrin Hatch (R-UT) would go in an entirely different direction: He favors an effort to end the double-taxation of corporate dividends—another worthy idea fraught with practical challenges. And Trump seems to support a low tax rate on US-based businesses combined with steep tariffs on imports. The latter idea has almost no support among congressional Republicans.

Trump will continue to make high art out of disruption and unpredictability. In two days, he upended congressional GOP plans for health care and taxes. These tactics may make it increasingly difficult for congressional Republicans to do business with their president.