Destination-based cash flow tax

A destination-based cash flow tax^{[1]: 27 [2]} (DBCFT)^[3] is a cashflow tax with a destination-based border-adjustment. Unlike traditional corporate income tax, firms are able to immediately expense all capital investment (called "full expensing).^[4] This ensures that normal profit is out of the tax base and only super-normal profits are taxed.^[5] Additionally, the destination-based border-adjustment is the same as how the Value-Added Tax treat cross-border transactions—by exempting exports but taxing imports.

It was proposed in the United States by the Republican Party in their 2016 policy paper "A Better Way — Our Vision for a Confident America",^[6] which promoted a move to the tax. It has been described by some sources^{[by whom?]} as simply a form of import tariff, while others have argued that it has different consequences than those of a simple tariff because the exchange rates would fully adjust.^[7][8]

According to economist Alan J. Auerbach at the University of California, Berkeley, who is the "principal intellectual champion" of the "package of ideas" surrounding border-adjustment tax that had been evolving in academia over a number of years,^[9] the destination-based system, which is focused on where a product is consumed, eliminates incentives that multinationals now have to "game the system" through tax inversion and other means, in order to "avoid taxes" and to "shelter profits" by "shifting" "intangible assets to low-tax nations."^[9][10][11]

Introducing this was the linchpin of the Republican Party's 2016 tax-reform proposal.^[1]: 27 A major aspect of the tax policy change would result in lowering the corporate tax rate from 35% to 20% by adjusting or removing export sales from the company's taxable revenue, thus leaving domestic exporters with a tax advantage.^[12] Offsetting that reduction in tax revenue, the border-adjustment tax applied to imports consumed domestically.^[12] Auerbach's theory is that a border-adjustment tax of 20% would strengthen the US dollar by about 25%. More exports will assumedly be sold because of their lower costs under the border tax subsidy. The stronger dollar would keep domestic consumer costs lower in spite of the 20% corporate income tax being applied to imported goods consumed domestically, effectively cancelling out the higher tax on imports and making the border-adjustment tax value-neutral.^[13]

However, both The Economist and the Brookings Institution caution that there is uncertainty as to how the currency exchange will respond. Unless it is immediate and as complete as Auerbach anticipates, the increased cost to importers would result in higher consumer prices which would "hit low-income households disproportionately."^[2] Some economists and policy makers have also expressed concern that other countries could challenge border-adjustment tax with the World Trade Organization^[14] or impose retaliatory tariffs;^[15] and there is also strong opposition by some US corporate interests.^[14]