16 February 2017

The New York Times: “A Tax Overhaul would be Great in Theory. Here’s why it’s so hard in Practice”

A short list of the plan’s potential benefits looks awesome: It would give companies more incentive to keep jobs in the United States, less to overextend themselves on borrowed money and provide vast savings by reducing what companies spend on tax lawyers, who help them game the current system.

Yet these changes could also set off a cascade of more harmful effects. The plan could shift trillions of dollars of wealth from Americans to foreigners; set off an emerging markets financial crisis; wreak havoc in global oil markets; and cause sustained harm to the American higher education and tourism industries (including, as it happens, luxury hotels with President Trump’s name on them).

Neil Irwin

Long story short: you can’t radically change the tax system of the world’s biggest economy (and home to the largest multinational companies) without huge repercussions everywhere.

Fireworks at Cinderella’s Castle in the Magic Kingdom at Disney World
Fireworks at Cinderella’s Castle in the Magic Kingdom at Disney World. Any organization that serves many foreign customers within the United States’ borders like amusement parks would suffer from the damage of a more expensive dollar. Credit: Edward Linsmier for The New York Times

If you want to get into more detail about the proposal – with the lovely mouthful of a name ‘Destination-Based Cash Flow Tax border adjustment’ (not to be confused with VAT) – I can recommend an article on Quartz, as well as the paper linked in the article above. If the author’s calculations are accurate, the dollar appreciation caused by the introduction of the DBCFT would noticeably increase the Debt-to-GDP ratio in several counties, including China by almost 35%. That right there would be reason enough for Trump to go ahead with this plan.

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