Corporate tax (or is it?) reading list

On the house and administration plans to reform the corporate tax, and my struggles to figure it out.

Larry Kotlikoff, "With Some Tweaks, The Democrats Can Love The House Tax Plan."

..the corporate tax reform, which is the most significant part of the House plan and represents a major and long overdue shift toward consumption taxation.  ...  there are two ways to tax consumption, C. You can either tax it directly (e.g., via a retail sales tax or a personal consumption tax) or indirectly by taxing everything available for consumption, namely output plus imports, less investment plus exports.

Greg Mankiw, "A Three-Point Tax Reform"

Consider the following tax reform:
1. Impose a retail sales tax on consumer goods and services, both domestic and imported.
2. Use some of the proceeds from the tax to repeal the corporate income tax.
3. Use the rest of the proceeds from the tax to significantly cut the payroll tax.
...
As I understand it, this plan is, in effect, what the Republicans in Congress are proposing.

William G. Gale, "Understanding the Republicans’ corporate tax reform"

The DBCFT is essentially a value-added tax (VAT), but with a deduction for wages.  ...The deduction for wages makes the DBCFT progressive, relative to a VAT. It only taxes consumption financed out of holdings of capital, whereas a VAT burdens all consumption. 

..A final concern is that the corporate reform proposals described above, ... would reduce federal tax revenue..Rough estimates suggest that setting the DBCFT rate at around 30 percent for all businesses would eliminate the revenue shortfall. 

The revenue point, I think, makes it clear though just how far from a VAT or consumption tax this is.  From the Tax Policy Center, Federal government revenues are  $3 trillion—about 17.5 percent of GDP. Thus, a pure VAT of 17.5% with no Federal personal income tax, estate tax, excise tax, corporate tax, or anything else is revenue neutral.  Current corporate taxes are 10 percent of government revenue and 1.5 percent of GDP over the past five years -- tiny. So if this tax needs to have a 30 percent rate just to generate 1.5% of GDP, its base must be tiny.

If we tax corporate sales, but allow corporations to deduct wages, the cost of inputs, investments (i.e., they buy forklifts for the factory, and can deduct the cost of the forklift), interest payments, and dividend payments then... there is nothing left! So, I infer that the tax base is only on interest and dividend payments.

(At least the house proposal promises to end the differing treatment of dividends and debt payments. This is excellent! The subsidy to debt is distorting our financial system towards too much debt, and we all just saw what too much debt leads to.)

This interpretation coincides with Kotlikoff's analysis that in essence what you have left is a wealth tax.

But, a tax system in which you tax $100 of sales, but offer $99 of deductions (costs, wages, earnings retained for investment), then tax only the last $1, then tax that $1 again as personal income, would seem to offer lots of room for shenanigans on just what gets deducted. Along with interesting financial engineering to "invest" more earnings and pay less dividends and interest. Similarly, a corporate wage subsidy to offset the wage taxes of payroll and personal income is not the cleanest way to do things.

I'm also still scratching my head at the idea that this does not distort investment. Yes, immediate expensing of corporate investment helps. But the tax system still includes personal income (not consumption) taxes. It still penalizes personal saving, which is needed to finance investment. For example, you give a company $100. They buy a new forklift, and make money from it. The forklift expense shields current income, or is carried over to shield $100 income against future corporate taxes. But when they pay you $5 interest next year, the corporation pays $1 tax, and you then pay more personal income tax. Your rate of return is cut in half. A tax that truly does not distort incentives to consume vs invest must not distort the individual decision to consume vs. save, no? (Or am I missing something here?) 

The border adjustment appears clever. It makes it look to trade warriors that we've passed a big tariff, though it amounts to the rule that everyone pays sales tax in their own place of residence. Sort of. See also

Martin Feldstein, "The Shape of US Tax Reform;" Feldstein also in Wall Street Journal, "The House GOP’s Good Tax Trade-Off"

Since a border tax adjustment wouldn’t change U.S. national saving or investment, it cannot change the size of the trade deficit. ... the exchange rate of the dollar must adjust... 

I wish I knew better what we are all talking about. A historian's son, I gravitate to primary sources. The only one linked to in any of the above is Paul Ryan's Better Way tax plan. That plan has a great statement of principles and lots of great ideas for the tax code. But it is dated last June. It's a document of principles made for the campaign, back when everyone thought Mrs. Clinton would be president. I presume an actual house tax plan may look a lot different.  I looked hard at Whitehouse.gov and could find no mention of taxes. The Trump campaign plan only mentions cutting the corporate rate to 15%.

What are we talking about really? Or is this all a kerfuffle interpreting the latest tweets? Are we just making this up?

Bottom line, I am beginning to understand that whatever it is these commenters are talking about has the potential to be a big improvement on the current system. However, it suffers from much of the structural defect of current Federal taxation. It's obscure. Yes, as Kotlikoff explains, you can either tax consumption directly or sneak it in by taxing its ingredients. But it would be a whole lot better for our political system -- both enacting a better tax system, keeping it from becoming overgrown with barnacles, and making continued progress towards a consumption-based tax -- if it were what it appears, not a tax that looks like one thing (corporate tax with a tariff barrier) but sneakily is something else (consumption tax with VAT treaty).  Economists emphasize the difference between who pays a tax and who bears the burden of taxation (see my last post), but politically it is much better, when you can, to have who pays actually be who bears.

Two views along this line:

Tyler Cowen:

I say anything complicated they will just screw up, and the lack of transparency in the plan means eventually it will lead to a tax hike and furthermore a good deal of favoritism and rent-seeking along the way.  Best hope is simply that they cut the corporate tax rate and don’t do much else on that front.

Holman Jenkins, "Incompetence Is the Norm" (an excellent piece on other matters)

In the short weeks since Mr. Trump was elected, the vision of clean, straight tax reform has gone out the window. Instead of merely lowering or, ideally, ending the corporate rate, we may get a 20% border-adjustment tax to go along with a 20% corporate income tax. That is, two taxes instead of one, which Congress can immediately start peppering with exemptions, exclusions and deductions.

So does one support or not an improvement with so many asterisks? Fortunately, we are not at the stage of support or not. The big pot in Washington is still stewing with ingredients.

On the one hand, there is a lot that I and my fellow bloggers don't know. Just what were the political constraints that went in to the better way tax plan? Paul Ryan, acting alone, would surely eliminate the corporate tax, income tax, estate tax, and so on, and enact a simple consumption tax or VAT in its place. So, what produced the house plan? Is the same constellation of forces still in place? What better could actually be achieved? I don't know, and it's a mistake to criticize the process and personalities too heavily if one does not know. That, alas, is the job of historians.

On the other hand, this is the one chance in my lifetimes to really reform the tax system. If we're ever going to dramatically simplify, eliminate the corporate tax, really move to a broad-based consumption tax instead of an income tax, separate revenue raising from subsidies and transfers, and so on, if not now, when? Republicans, who have been talking about these things through their years in the wilderness, now have majorities in house, senate, and have the presidency.  They let this chance slip with Bush II. Will it return?

So as I read it these are still ideas floating around, and the chance for all of us to ask for more dramatic, simple, and transparent tax policy is still there.

Distribution.  Larry Summers doesn't like the proposal,

the corporate cash flow tax is supported by some experts in both political parties. However, it has four major — probably fatal — flaws. 

Three out of the four are about income distribution. Given the utter confusion all around on how this tax would work, who would bear the tax (again, see my last post - who is hurt by a tax has little to do with who bears the tax), the interaction of corporate and personal taxes (like my questions about interest and dividend taxation above), and that we are also thinking about how prices, wages, interest rates, and stock prices change in the general equilibrium, it seems to me a little presumptuous to have any clear idea about the distributional consequences of this tax.

Economists are supposed to first to understand incentives, then understand efficiency, then understand who actually bears the burden of taxes, and then move on to distribution. Distribution also collects hundreds of different polices, from the progressivity of personal taxation, the welter of deductions, the effects of social programs, and effects on prices, like how cheap things are at Walmart. Starting with a distributional analysis of every individual policy seems like a big mistake even if one wants to craft redistribution, which one must always do understanding the disincentives that redistribution engenders.

Or, as Kotlikoff summarizes a more extensive analysis,

Summers needs to get a grip. 

In my last post, I skated over many of the details one must think about in moving to a consumption tax. There are many book length tax plans that work out such systems:

Kotlikoff's preferred tax plan, summarized in "You're hired!,  quoting the Forbes article,

a) eliminates the corporate income tax, the personal income tax, and the estate and gift tax, b) introduces a value added tax (VAT), a progressive personal consumption tax on top consumers that exempts consumption financed by labor income, an inheritance tax that kicks in after the receipt of $5 million, and a Co2 emissions tax of $80 per ton, c) eliminates the ceiling on the FICA payroll tax, and d) provides a $2,000 annual payment to each U.S. citizen.

As you can tell, it's not a pure ideal, but merges ideal taxation with some of Kotlikoff's ideas on what subsidies and tax-based redistribution are desirable or politically necessary.

My Hoover colleagues Bob Hall and Alvin Rabushka also have an excellent detailed Flat Tax plan that fills in the details of another way to achieve a progressive consumption tax. Recommended.

Update. 

Alan J. Auerbach, Michael P. Devereux, Helen Simpson, Taxing Corporate Income, NBER working paper.

Alan J. Auerbach Michael P. Devereux, Cash-Flow Taxes in an International Setting.

Alan Auerbach,  Michael P. Devereux Destination-Based Cash Flow Taxation

I should have found these long ago, serious academic papers describing the border-adjusted cashflow tax. I have only read the abstracts, but they seem predicated on taxing corporate "rents," an interesting and perhaps somewhat fragile restriction that I doubt will make it in to policy. (In the usual use of the term it means that competitive businesses would face no tax.)

Jason Furman, Douglas Holtz-Eakin, Gary Clyde Hufbauer, Adam S. Posen, Caroline Freund, Joseph E. Gagnon, Sherman Robinson and Chad P. Bown, Border Tax Adjustment and Corporate Tax Reforms (panel)

Brad Setser, Dark Matter. Soon To Be Revealed? On the border adjustment, and the fact that the US seems to be running a successful hedge fund, borrowing cheap abroad and investing with great returns. Much of that involves tax strategies which will be upended. Also the post where I found the above and HT Marginal Revolution, the best economics blog by far.