Accordingly, based on that proposal, the six main features of the DBCFT would be:
- domestic sales are included
- foreign sales are excluded
- dividends from foreign subsidiaries are exempt
- all foreign costs are non-deductible
- net interest is non-deductible
- allowable domestic costs are immediately deductible (expensed)
Obviously these are oversimplifications and I'm ignoring transition rules and so on, but these are the basic building blocks. The Ryan plan proposes a tax rate of 20%.
So what happens if these building blocks are put in place via legislation, assuming away all transition issues etc., and that a tax imposed is a tax collected?** If we imagine a product that will sell for $125, and costs $100 to produce (in materials and labour), this is what happens:
Box 1: MAGA ideal: made in America, by Americans, for Americans. Tax will be collected on profits earned by selling goods produced & sold domestically. The DBCFT most resembles an income tax in this scenario (though expensing and non-deductibility of interest still moves it toward a consumption base); it will also be the easiest to collect.
Box 2: Exports. Tax exemption for sales abroad will create (possibly permanent) NOLs to carry forward indefinitely. This will require deciding on loss-shifting policy. This is obviously not an income tax but it not a VAT either.
Box 3: Imports. Sales in the US of goods produced abroad are taxed on a gross basis, more like an excise tax (or yes, a tariff). With an estimated $1.2 trillion trade deficit, this part of the DBCFT is expected to raise the most revenue but the success of that strategy depends to some degree (maybe a large degree) on remote sellers collecting tax (that’s complicated--see Europe).
Box 4: Foreign Sales of Foreign Products. Neither costs nor revenues are counted for goods produced and sold abroad, even if produced and sold by a US-based company. This part of the DBCFT would be more or less consistent with either a VAT or territorial income tax.
That, in a nutshell, is the basic skeleton of the DBCFT as proposed in the Ryan plan. It will be interesting to see what, if any, of this ends up enacted IRL.
* There is absolutely zero chance that the proposal will be enacted as described. Still, it is helpful to understand the basic vision. I do not claim to be an expert on the DBCFT and offer here no analysis or predictions about the incidence of the tax, or the impact such a tax would have on US or world capital flows, investment, consumption, economic growth, or international relations. This paper by Wei Cui, or this one by Wolfgang Schoen are helpful in addressing many of these issues.
** A tax imposed is never a tax collected. There is always a gap between a great idea (or for that matter a not so great idea) and something that can actually be carried out: tax administration is tax policy.