Daniel Hemel: Is a Destination-Based Cash Flow Tax “Highly Progressive”?

Is a Destination-Based Cash Flow Tax “Highly Progressive”?
Daniel Hemel
Whatever Source Derived
February 15, 2017

Lots of smart people have been saying that the House GOP’s proposed “destination-based cash flow tax” (DBCFT) would make our system of business taxation more progressive. Alan Auerbach, the intellectual architect of the proposal, says the system would be “highly progressive” because unlike other consumption taxes, the DBCFT exempts wages and salaries from the tax base. Stuart Leblang and Amy Elliott write in a BloombergView column that the DBCFT “should actually be more progressive than our current corporate income tax.” The UK-based Independent posted an op-ed earlier this month with the amusing (though moderately misleading) title: “Deluded Republicans are accidentally pushing for progressive corporation tax reform.”

Well, it all depends on what we mean by “progressive.” Kyle Rozema and I point out in an article forthcoming in the Tax Law Review that even the mortgage interest deduction can be characterized as “progressive” depending on which counterfactual you choose. Our analysis of the mortgage interest deduction applies similarly to the DBCFT. The House GOP plan reduces revenue: the Tax Policy Center pegs the revenue loss from the DBCFT and related corporate income tax reforms at $891 billion over the next decade, while the Tax Foundation estimates an even larger loss of $1.2 trillion (actually rising with dynamic scoring). Whether a DBCFT is “progressive” or “regressive” — i.e., whether it redistributes wealth from the rich to the poor or the other way around — depends entirely on how that gap is filled.

Daniel Hemel