After the US Election, it was clear that corporate tax reform would be a priority of the new Administration. This is significant because US corporate statutory tax rates, at 40%, are some of the highest in the world. The business community has been lobbying for tax reform for the last decade, but major tax change in the US doesn’t happen very often with the last major overhaul in the late 1980s. However, tax reform is a long and contentious process so we can expect these discussions to play out for a many months to come. It is still unclear what a tax plan from President Trump’s team would look like, but the House Republicans have had some legislation prepared for years with the latest version drafted last summer. The premier proposal drafted by the Republicans is the Ryan-Brady “A Better Way” blueprint. The crux of this plan is a huge restructuring of the US corporate tax code, specifically eliminating corporate income tax, and replacing it with a destination-based cash flow tax (DBCFT). This shift would significantly lower the rate from 40% to a proposed 20%. The plan also encompasses more controversial aspects like the introduction of a Border Adjustment Tax and an implementation of a deduction for domestic payroll, essentially a deduction for US labor costs. DBCTF is favored by economists who argue that it is becoming more difficult to tax corporations at their origin so the easier method is to tax goods at the destination, or consumption, level. DBCFT is a USconstruct of a VAT, but not one in the traditional sense. Basically, there are two ways to implement a VAT scheme. The first, which is done by most countries, is a credit invoice system where for every transaction, there are two reporting entities, a seller and a buyer. The advantage of this method is that with two reporting entities, there is a lower likelihood of fraud or misreporting. The second way is a subtraction-method VAT, like Japan, where at the end of the year, the company reports the differences between revenue and deductions. The Ryan-Brady DBCTF proposal would look similar to the subtraction-method VAT.
Chad nailed this and the podcast has shelf life because of his discussion about the WTO and the framework it provides. I am excited to hear his thoughts again on September 6th when we get an update on US / China trade relations