February 2, 2018 4:05PM

The FISA Follies: The Nunes Memo Edition

After much publicly acrimony and week-long speculation about its contents, the "Nunes Memo" (named for GOP House Permanent Select Committee on Intelligence (HPSCI) chairman Devin Nunes of California) was finally made public today. In reality, the document was authored by thus-far unidentified GOP HPSCI staffers and does not represent a genuine, bipartisan committee product. It is thus, by definition, a purely partisan document.

But what of its substance, if any? Is there anything truly new or genuinely important in the document that is worthy of follow up by Special Counsel Robert Mueller? Unlikely. Should the memo serve as an opportunity for Congress to revisit its anemic surveillance oversight and reform record? Absolutely. First, let's deal with the memo.

The memo itself is concerned with FBI Foreign Intelligence Surveillance Act (FISA) surveillance requests targeting then-former Trump campaign aide Carter Page in 2016. The core Nunes Memo allegation is that material that would've cast doubt on the credibility of the so-called "Steele Dossier"--a piece of campaign opposition research on the Trump campaign compiled by former British intelligence operative Christopher Steele, portions of which were allegedly used in the October 2016 FISA application on Page submitted to the FISA Court (FISC) by the FBI. In essence, the Nunes Memo alleges that a piece of political campaign material was used in an effort to target Trump and his campaign staff, and that the FBI failed to disclose Steele's political connection to the DNC and Clinton campaigns to the FISC. 

What the Nunes Memo fails to note is that Page was clearly a "person of interest" to the FBI as early as 2013 in connection with a counterintelligence investigation involving Russian spies--agents who were apparently attempting to recruit Page as a source. As a former intelligence officer myself, its very easy for me to see why the Bureau would be interested in Page and his ongoing contacts with Russians. That Nunes and his staff apparently don't see the problem presented by Page's Russian contacts should be of concern to anyone who cares about preventing hostile intelligence services from gaining access to Americans with potential political influence and access to sensitive government information via their friends in government.

The Nunes Memo also implies that the FBI deliberately lied to the FISC about what it knew about Steele's opposition research target and clients. From p. 2 of the Nunes Memo:

Neither the initial application in October 2016, nor any of the renewals, disclose or reference the role of the DNC, Clinton campaign, or any party/campaign in funding Steele’s efforts, even though the political origins of the Steele dossier were then known to senior DoJ and FBI officials.

Did the FBI have a statutory requirement to disclose that information? The specifc legal requirements for an application for electronic surveillance do not mandate that explicitly political/campaign-related conflicts of interest or similar politically sensitive information be included in the application. Should it? Absolutely. But in releasing the memo, neither Nunes, House Speaker Paul Ryan, or President Trump have called upon Congress to address this loophole. Neither have their Democratic Party counterparts.

What House Democratic Whip Steny Hoyer of Maryland has called for is Nunes' head. Speaker Ryan is unlikely to accomodate the request, though one could make a very credible argument that he should.

Nunes' tenure as HPSCI chairman has been a poltical and oversight disaster. Nunes and his GOP colleagues have made much about alleged surveillance violations against white businessmen while ignoring far more credible allegations of surveillance abuse against politically active people of color. The memo on alleged violations of Page's rights rings quite hollow when you consider that the House GOP-controlled HPSCI conducted no investigation into documents released by Edward Snowden showing clear evidence that Arab- and Muslim-American leaders had been the target of unjustified--and likely unconstitutional--surveillance. The targets included a then-Republican Muslim-American Virginia House of Delegates candidate, Faisal Gill.

Nor has the House GOP-controlled HPSCI shown the slightest interest in investigating the near-complete breakdown of internal Intelligence Community (IC) watchdog. Indeed, I have heard credible reports about whistleblower retaliation problems at multiple IGs across the IC. But instead of investigating these and other genuine IC oversight challenges, the House GOP leadership--and their Democratic counterparts--have spent their time and energy arguing over a political "nothingburger" for weeks...ensuring that the FISA Follies continue.

November 1, 2017 12:08PM

About Those Loopholes

When it comes to individual taxes, key Republican legislators seem to think “reform” is mainly about limiting or eliminating certain itemized deductions, rather than about raising revenue in ways that do the least damage to the economy (by minimizing tax distortions and disincentives).

This emphasis on curbing itemized deductions is often compared with the Tax Reform Act of 1986 (TRA86), which supposedly “paid for” cutting the top tax rate from 50% to 28% by slashing several itemized deductions. In reality, however, most extra revenue from repealing itemized deductions after 1986 was devoted to raising the standard deduction, leaving total deductions unchanged. This is apparent in the graph below, which shows total deductions – both itemized and standard – as a percentage of Adjusted Gross Income. 

Deducations as a Percent of Adjusted Gross Income

Deductions averaged 23.1% of AGI from 1976 to 1984, and deductions also averaged 23.1% of AGI from 1989 to 1995. In between, the reform merely shifted the timing of deductions. Deductions were pushed forward into 1985-86 to take advantage of those that were about to expire (e.g., the tax-deduction for credit card interest). Moving deductions forward held down deductions briefly in 1987–88 before they climbed back up again.

Note that total deductions were also unaffected by the fact that the maximum marginal benefit of itemized deductions (the amount saved per dollar) had fallen to 28–31% from 1988 to 1992. President Obama proposed to limit itemized deductions to 28% of the amount spent, but we already tried that in 1988–90, without success. Whatever the effect of the 1986 law eliminating several itemized deductions, plus the deep reduction in the marginal tax benefit, both were overwhelmed by the larger standard deduction.  

Standard deductions doubled – from $151 billion in 1986 to over $309 billion in 1989. The only reason that is called “reform” is that politicians only define itemized deductions as “loopholes,” although the standard deduction obviously has the same effect on taxable income. Tax exemption and tax credits are far more valuable than deductions, yet (like the standard deduction) are commonly not described as "loopholes" as a matter of semantic convention (or confusion).   

If the standard deduction soon rises to $24,000 per couple, as the GOP proposes, even couples with a $100,000 income would automatically have higher than average deductions.

The graph also shows that the ratio of deductions to income is clearly cyclical – rising in recessions like 1975 and 2009 because income fell more than deductions, then falling during the 1997–2000 stock boom as incomes (including capital gains and stock options) grew faster than deductions.  

Reynolds' Law of Taxes says the individual income tax will always hover around 8% of GDP, give or take one percentage point, regardless whether the top tax rate is 28%, 39.6%, 70% or 92%. Now, let's add Reynolds' Law of Deductions: Deductions will always hover around 23% of AGI, give or take one percentage point, regardless of whether itemized deductions are expanded, limited, or repealed.

Laws to limit itemized deductions, unlike booms and busts, have never had a noticeable lasting impact, largely because of Congressional fondness for raising standard deductions (and refundable tax credits, a super-loophole not counted here).

The Bush 41 Pease limitation on deductions was an anti-affluence political stunt making little noticeable difference. Revived in 2013, the Pease limits reduce the value of a taxpayer’s itemized deductions by 3% for every dollar of taxable income above $313,800 on a joint return. This adds about a percentage point to the top two marginal rates (and so does the PEP phase-out of personal exemptions). The Pease limits first began to phase-out itemized deductions of "the rich" in 1991, yet total deductions rose to 23.4–23.6% of AGI in 1991–93. The Pease phase-out was reinstated in 2013, yet total deductions remained the same as in 2012. Itemized deductions went down by $50.1 billion in 2013 and standard deductions went up $51.2 billion.

Doubling the standard deduction to $24,000 per couple appeared to be the primary revenue-losing objective of the GOP Big Six plan (losing $890 billion over 10 years by one estimate).  Meanwhile, there have been reports of backpaddling on trial-balloons about ending property tax deductions and curbing contributions to 401(k) plans.  It is not difficult to imagine the end result being that any revenue gained from limiting deductions barely offsets revenue lost by expanding the standard deduction, leaving deductions still stuck around 22–23% of AGI.

That would be like 1986 but with one big difference. In 1986, the top tax rate was cut by 22 percentage points, leaving a nearly-flat 15–28% rate structure. This year, by contrast, high-income taxpayers are not giving up big deductions and personal exemptions for a lower-rate, since the top rate is apparently to stay at 39.6%. Itemized deductions go down, personal exemptions completely vanish, yet targeted tax credits get larger (e.g., for children under age 17) and the standard deduction goes up. Tax-deferred contributions to retirement savings plans may be deeply slashed.  

By rejiggering exemptions, deductions, and credits with essentially no change in the highest, most damaging tax rates, the individual side of the Republican “tax cut” is shaping up as a sizable tax increase for well-educated two-earner couples with college-age kids living in high-cost metropolitan areas, among others.

May 30, 2017 2:38PM

Cut the Corporate Tax Rate; Drop the BAT.

We will never achieve a good tax reform by trusting bad revenue estimates.

According to Wall Street Journal reporter Richard Rubin, “Each percentage-point reduction in the 35% corporate tax rate cuts federal revenue by about $100 billion over a decade, and independent analyses show economic growth can’t cover all the costs of rate cuts.”

Economic growth does not have to "cover all the cost" to make that $100 billion-per-point rule of thumb almost all wrong.  If extra growth covered only 70% the cost of a lower rate, the static estimates would be 70% wrong.  Yet the other 30% would be wrong too, because it ignores reduced tax avoidance.  Mr. Rubin’s bookkeepers’’ rule-of-thumb implicitly assumes zero “elasticity” of reported taxable profits. Corporations supposedly make no more effort to avoid a 35% tax than to avoid a 25% tax.

Acceptance of this simplistic thumb rule – which imagines a 35% corporate rate could raise $1 trillion more over a decade than a 25% rate – explains why Ways and Means Committee Chairman Kevin Brady still insists a big new import tax is needed to “pay for” a lower corporate tax rate. 

In this view, a border adjustment tax (BAT) is depicted as a tax increase for some companies to offset a tax cut for others.  No wonder the idea has been ruinously divisive – with major exporters lobbying hard for a BAT and major retailers, refiners and automakers vehemently opposed.  Mr. Rubin declares the BAT “dead or on political life support,” while nevertheless accepting that it would and should raise an extra $1 trillion over a decade – assuming no harm to the economy and no effect on trade deficits.

Like Mr. Rubin, Reuters claims “Trump could have trouble getting the rate much below 30 percent without border adjustability.”  That is false even on its own terms because the Ryan-Brady plan would eliminate deductibility of interest expense, which is enough to “pay for” cutting the rate to 25% on a static basis.  Adding a BAT appears to cut the rate further to 20%, but the effective Ryan-Brady rate is really closer to 25% because the import tax and lost interest deduction are not a free lunch.

In any case, the entire premise is wrong. There is no need to “pay for” cutting a 35% corporate “much below 30 percent” because nearly every major country has already done that and ended up with far more corporate tax revenue than the U.S. collects with its 35% tax.  

The average OECD corporate tax rate has been near 25% since 2008, and revenue from that tax averaged 2.9% of GDP.  The U.S. federal tax rate is 35% and revenue averaged just 1.9% of GDP.  Ireland’s 12.5% corporate rate, by contrast, brought in 2.4% of GDP from 2008 to 2015.

Sweden cut the corporate tax rate from 28% to 22% since 2013 and corporate tax revenues rose from 2.6% of GDP in 2012 to 3% in 2015 according to the OECD. Britain’s new 20% corporate tax in 2015 brought in 2.5% of GDP according the same source, unchanged from 2013 when the rate was 23%. 

Many countries have deeply reduced corporate tax rates including Germany, Russia, Israel, Indonesia, Taiwan, Thailand, Mauritius, Vietnam and more.  And they didn’t raise VAT or other taxes to “pay for” lower corporate rates, because corporate revenues didn’t fall. Canada cut the corporate rate from 36.5% to 26.5% since 2006 while also cutting VAT from 7% to 5%.  

AEI Economist Alex Brill surveyed several studies that used experience of other countries to estimate what U.S. corporate tax rate would bring in the most revenue over time.  Among recent studies, the revenue-maximizing tax rate was found to range from 23.2% to 29.1%.  Contrary to The Wall Street Journal, each percentage point cut in the 35% rate raises revenue up to a point.   To cut the rate below 25%, simply cap interest deductions.  Expensing ends up raising more revenue after 20 years, so Congress could extend the window if they want expensing.

So, the first way to pay for a tax rate below 30% is to lower the rate. And that has nothing to do with whether or not a lower corporate tax rate raises economic growth, thought it would.  

The “Laffer Curve” revenue gains from cutting a 35% corporate tax rate are not due to faster economic growth, but reduced tax avoidance. Revenue gains from cutting the 35% rate to about 25% (23-29%) are not about macroeconomics but microeconomics.

The Joint Tax Committee makes this distinction: “A conventional [‘static’] JCT estimate incorporates behavioral responses in projecting tax revenues, but assumes that these tax and behavioral changes do not change the size of the US economy.”  

Less-conventional “dynamic” estimates from The Tax Foundation do allow behavioral changes to change the size of the US economy, but do not usually incorporate “microeconomic” behavioral responses that the JCT includes.  By combining the macroeconomic responses of the Tax Foundation with the microeconomic details of the JCT we could get closer to the truth.  

When the tax rate goes up, corporations find ways to report less taxable income. They do that by moving profitable activities other countries, by booking expenses in the U.S. and revenues abroad, by diverting profitable activities to pass-through entities, and by taking-on more tax-deductible debt and maximizing other deductible expenses such as travel and entertainment.

Economists have begun to estimate the “elasticity of taxable income” (ETI) for corporate marginal tax rates, as they have for individual tax rates on salaries and capital gains.  A joint paper by the Congressional Budget Office and Joint Committee on Taxation, for example, found the elasticity of realized capital gains to be arguably high enough for a lower tax rate to generate more revenue.  That is not because a lower capital gains rate raises GDP growth (though it does), but because it tax raises the volume and frequency of asset sales.

Similarly, a lower tax rate on corporate income can increase the amount of reported taxable income by reducing accounting gimmicks, corporate relocation, partial or complete conversion to unincorporated status, and superfluous deductions (e.g., interest expense on Apple’s needless borrowing).

Elena Patel and Matt Smith from the Treasury Department’s Office of Tax Analysis wrote a 2014 study about the Elasticity of Corporate Income. They include only taxable domestic income and focus on 2 million smaller C-corporations (83% of the total).  This study’s “baseline estimate of the corporate elasticity is 0.5, suggesting the corporate income tax distorts behavior and may cause substantial deadweight loss.”  

Such high elasticity of reported corporate earnings is quite consistent with Brill’s estimates of a revenue-maximizing tax rate.

If we also take account of faster growth of investment and GDP, of course, the case for lower tax rates becomes even stronger.

Phil Gramm and Michael Solon noted that even if lower marginal tax rates on labor and capital “closed only half the gap between the current [CBO projection of a ]1.8% GDP growth rate and the 3.4% GDP growth rate that the economy averaged for the previous 64 years, that alone would deliver $2.3 trillion in new revenues due to higher growth over the next 10 years.”  That sum is twice as large as those doubtful back-of-the-envelope estimates of a 10-year $1 trillion revenue windfall from a BAT, which blithely assume nothing bad happens – such as mass layoffs among afflicted retailers, automakers and refiners.  

March 24, 2017 4:33PM

CBO Projections: Unhealthy Basis for Health Policy

In the political hullabaloo over efforts to shift costs of health care to someone else, the argument for keeping Obamacare’s compulsory insurance and ever-expanding Medicaid enrollment relies naïvely on notoriously comical Congressional Budget Office (CBO) 10-year “projections.” 

CBO claims the initial House Republican plan would eventually cause 3 million to “lose” health insurance simply because they would no longer be fined up to 2.5% of income for not buying a policy designed by and for politicians. This not a loss, but a gain – in freedom of choice.

CBO claims the GOP plan would “lose” another 14 million by not expanding Medicaid enrollment as rapidly as Obamacare hopes to. The federal government pays about 57% of the cost of Medicaid for poor people, but 90-93% (until 2022) to the 31 states that provide Medicaid to those earning up to 138% of the poverty line. That has added 17 million to the Medicaid rolls, and enriched big health insurers and Kaiser Permanente.

Since expanded Medicaid added only 17 million, how could the Republican plan’s modest frugality possibly subtract 14 million?  Only because CBO assumes that if nothing changes then more and more states will leap on this stalled bandwagon, thus shoving millions more on Medicaid.  This seems politically unlikely (few Republican governors have done so), but also unhealthy. All those new patients on Medicaid may have to drive very far to find an MD who accepts Medicaid. Having a third-rate health insurance card is not “health care.” It’s a card.  

Some of the biggest public policy blunders of recent years resulted from taking CBO’s crystal ball far too seriously.  Higher 1991 tax rates on high incomes and luxuries worsened the recession and lost revenue, for example, yet seemed courageous by the low standards of faulty CBO bookkeeping. 

An even better example of CBO dominating policy decisions was the foolishly phased-in and poorly-targeted 2001 Bush tax cuts.

In January 2001, CBO predicted that budget surpluses would add up to $5.6 trillion by 2011. That absurd CBO forecast made their (overestimated) $1.35 trillion 10-year revenue loss from look puny – merely nibbling away at 24% of projected surpluses.  Little wonder the 2001 law was a grab-bag of feel-good giveaways (10% tax rate, refundable credits, etc.) thanks in large part to the CBO’s blurred vision of endless surpluses.

Why does this have anything to do with health insurance policy?  Because CBO projections for the Affordable Care Act (ACA) have also been embarrassingly wrong. In March 2010 CBO estimated only 21 million would be uninsured by 2016, but the actual number turned out to be 27 million.  CBO expected 21 million policies on the Exchanges by 2016, but the actual number turned out to be 12 million.  

By using CBO projections as the baseline, as is being done with the GOP plan, it could be said that Obamacare “lost coverage” for 6 million people in 6 years –compared with 2010 CBO projections.

In short, the CBO has always grossly overestimated the success of Obamacare. And they still do.  They appear to underestimate how much larger federal subsidies to Medicaid and the Exchanges “crowd out” other insurance – luring people out of unsubsidized insurance into subsidized insurance, or into seemingly “free” expanded Medicaid in 31 states. 

The CBO’s rosy scenario about the future success of Obamacare exchanges, and about future growth of expanded Medicaid coverage, results in a grossly exaggerated estimate of the number of policies to be "lost" by reducing compulsion, mandates and taxpayer subsidies.  Good policy requires more good judgment, not more bad estimates.

March 7, 2017 9:19AM

The House GOP Leadership’s Health Care Bill Is ObamaCare‐​Lite — Or Worse

During the presidential campaign, Donald Trump promised legislation that “fully repeals ObamaCare.” Monday night, the Republican leadership of the House of Representatives released legislation it claims would repeal and replace ObamaCare. Tuesday afternoon, Vice President Mike Pence will travel to Capitol Hill to pressure members of Congress to support the bill. On Wednesday, two House Committees will begin to mark-up the legislation. House and Senate leaders are hoping for quick consideration and a signing ceremony, maybe by May, so they can move on to other things, like tax reform and confirming Supreme Court nominee Judge Neil Gorsuch.

Everyone needs to take a step back. This bill is a train wreck waiting to happen.

The House leadership bill isn’t even a repeal bill. Not by a long shot. It would repeal far less of ObamaCare than the bill Republicans sent to President Obama one year ago. The ObamaCare regulations it retains are already causing insurance markets to collapse. It would allow that collapse to continue, and even accelerate the collapse. Republicans would then own whatever damage ObamaCare causes, such as when the law leaves seriously ill patients with no coverage at all. Congress would have to revisit ObamaCare again and again to address problems they failed to fix the first time around. ObamaCare would consume the rest of Congress’ and President Trump’s agenda. Delaying or dooming other priorities like tax reform, infrastructure spending, and Gorsuch. The fallout could dog Republicans all the way into 2018 and 2020, when it could lead to a Democratic wave election like the one we saw in 2008. Only then, Democrats won’t have ObamaCare on their mind but single-payer.

First, let’s look at how the main features of this bill fall short of repeal.

Medicaid Expansion

ObamaCare expanded Medicaid to able-bodied adults below 138 percent of the federal poverty level. The federal government covers a much larger share of the cost of covering Medicaid-expansion enrollees than enrollees in the “old” Medicaid program—currently 95 percent, bottoming out at 90 percent in 2020. So far, 31 states have chosen to implement the Medicaid expansion; 19 have declined.

The House leadership’s bill would not even start to repeal ObamaCare’s Medicaid expansion until 2020, more than two and a half years from now, and even then would repeal it only one enrollee at a time. In 2020, states could no longer enroll new able-bodied adults into the Medicaid expansion. Yet the federal government would continue to pay for each and every continuously covered able-bodied adult who enrolled in the expansion before then. And it would do so at the enhanced ObamaCare matching rate, in perpetuity, until an enrollee leaves the program. If the House leadership has its way, we may be decades away from full repeal of the Medicaid expansion.

For the two-plus years between enactment and 2020, the House leadership bill would continue to allow states both to opt into the expansion and to go on an enrollment binge, for which the federal government could be paying for decades. It is likely that the number of states participating, and the number of people enrolled in the Medicaid expansion will be higher after “repeal” than before.

Which means the Medicaid expansion may never disappear at all. By 2020, the constituency for preserving the Medicaid expansion would be much larger than it is now. More states, more voters, and more special interests will resist repealing the expansion than do today. As I discuss below, Congress will likely be more Democratic than it is today.

When eventually we see a Congressional Budget Office score of the bill (House leadership has numbers, but they’re not sharing them), it may show a reduction in federal spending on the Medicaid expansion after 2020. I would not bet on that happening.

Medicaid Reform

Currently, Congress matches states’ spending on their Medicaid programs. When a state spends $1 on its program, Congress contributes between $1 and $3. This creates a pay-for-dependence incentive. It encourages states to expand both enrollment and benefits far beyond what they would if states bore the full marginal cost.

The House leadership bill would reform the Medicaid program by converting it to a system of “per capita block grants.” It would give each state a fixed amount of money per enrollee, with the amount varying by the type of enrollee (aged, blind, disabled, children, non-expansion adults, and expansion adults).

A per-capita block grant would therefore resemble ObamaCare’s Medicaid expansion. States would get additional federal dollars for each additional person they enroll in their programs. But states would face the full marginal cost of providing new or existing benefits to enrollees. Just as ObamaCare’s Medicaid expansion creates incentives for states to expand their programs to able-bodied adults, while reducing access to care for the aged, blind, disabled, children, and pregnant women, the House leadership bill would create (or preserve) an incentive to expand enrollment to less vulnerable populations while cutting benefits for more vulnerable populations.

Private-Insurance Overhaul

Economists describe the basic architecture of ObamaCare’s overhaul of private health insurance as a three-legged stool. The three legs of the stool are (1) “community rating” price controls that force insurers to charge healthy and sick people of a given age the same premium, and only allow premiums to vary from older to younger enrollees by a ratio of 3 to one, (2) an individual mandate that penalizes taxpayers who do not purchase a government-designed health plan, and (3) subsidies to help low-income people purchase that compulsory, overpriced health insurance. The House leadership plan retains all three legs of the stool, as well as many other ObamaCare provisions designed to mitigate the damage done by the community-rating price controls.

The first thing the House leadership’s bill does is expand ObamaCare by appropriating funds for the law’s so-called “cost-sharing” subsidies, something no previous Congress has ever done.

The House leadership bill retains the very ObamaCare regulations that are threatening to destroy health insurance markets and leave millions with no coverage at all. ObamaCare’s community-rating price controls literally penalize insurers who offer quality coverage to patients with expensive conditions, creating a race to the bottom in insurance quality. Even worse, they have sparked a death spiral that has caused insurers to flee ObamaCare’s Exchanges nationwide, including driving all insurance companies from the market in 16 counties in eastern Tennessee. As of next year, 43,000 Tennesseans in those counties could have no way to obtain coverage. Nearly 3 million Exchange enrollees are just one more carrier exit from the same fate.

The leadership bill would modify ObamaCare’s community-rating price controls by expanding the age-rating bands (from 3:1 to 5:1) and allowing insurers to charge enrollees who wait until they are sick to purchase coverage an extra 30 percent (but only for one year). Even with these changes, however, premiums would remain high, ObamaCare would continue to make it easier for people to wait until they are sick to purchase coverage, and the law would continue to penalize high-quality coverage for the sick. In fact, the House leadership’s decision to leave ObamaCare’s community-rating price controls in place while relaxing its “essential health benefits” requirements would cause coverage for sick to deteriorate even faster than ObamaCare does.

It is because the House leadership would retain the community-rating price controls that they also end up retaining many other features of the law. Observers have started to notice that successive iterations of the bill look increasingly like ObamaCare.

For example, the House leadership bill retains and modifies another leg from the three-legged stool: ObamaCare’s advanceable, refundable, and means-tested tax credits for health insurance. Though they sound like tax cuts, ObamaCare’s tax credits are actually 94 percent government outlays and only 6 percent tax reduction. The House leadership’s tax credits are likely to be similarly lopsided.

House leaders are retaining all that government spending—again, we don’t yet know how much ObamaCare spending the bill retains—largely because retaining community rating drives premiums unnecessarily high. Ironically, due to congressional budget rules, the fact that there are tax credits in the bill makes it impossible for Republicans to repeal ObamaCare’s community-rating price controls and other regulations. The CBO reportedly has projected that if the bill repealed those regulations, the price of insurance would fall so much that many more people would take advantage of the tax credits, and the bill would run afoul of budget rules by increasing federal deficits. Republicans evidently cannot repeal ObamaCare’s regulations if they hold on to health-insurance tax credits.

The tax credits could create a very thorny problem for both House and Senate Republicans. The House leadership bill prohibits the use of its tax credits for health plans that cover abortion. Due to an arcane Senate rule, Democrats likely can and will strip any such restrictions from the bill before final passage. This means that if the House bill ever makes its way to President Trump’s desk, it could subsidize abortion even more than ObamaCare does.

To the extent the bill’s modified tax credits are tax reduction, however, they are the functional equivalent of ObamaCare’s individual mandate. The flip side of tax credits that are available solely to those who purchase health insurance is that those who do not purchase insurance must pay more to the IRS than those who do. Just like a mandate. And since the effective penalty is just an increase in the taxpayer’s income-tax liability, tax credits for health insurance are actually more coercive than ObamaCare’s individual mandate, because the IRS has many more tools it can use to collect the penalty.

Conservatives deny any similarities between an individual mandate and a tax credit for health insurance. But consider the following. ObamaCare’s individual mandate penalty for single adults is $695 or 2.5 percent of income, whichever is greater. Suppose that instead, Congress had simply enacted a tax with those features, and then come back and provided an equivalent tax credit for anyone who purchases health insurance. The end result would be identical to ObamaCare’s individual mandate. But which would it be, a tax credit or a mandate?

Like ObamaCare’s tax credits, the House leadership’s tax credits would involve burdensome projection and verification of the taxpayer’s income (taxpayers above a certain threshold are ineligible for credits) as well as whether the taxpayer has an offer of qualified health insurance from an employer (taxpayers with an offer of coverage from an employer are ineligible).

Finally, the House leadership creates a new program of matching grants to states to fund things like Exchange subsidies, insurer bailouts, high-risk pools, and perhaps a “public option,” even after Republicans spent years railing against many of these things. If states don’t use the money, the federal Centers for Medicare & Medicaid Services can use the funds for insurer bailouts. The funding formula for this new grant program appears to reward high-cost states.

Taxes

The House bill zeroes out the individual and employer mandates and outright repeals all manner of ObamaCare taxes, including: the tax on over-the-counter medications; the additional 10-percent tax on non-medical HSA withdrawals; the limits on health flexible spending arrangement contributions; the medical device tax; the tax on poor and/or sick patients (the AGI threshold for the medical-expenses deduction reverts from 10 percent to 7.5 percent); the “Medicare” “payroll” tax; the net-investment tax; the tanning tax; the tax on insurance-executive compensation; the health-insurance tax; and the pharmaceutical-manufacturers tax.

In a pretty crass budget gimmick, the bill retains the “Cadillac tax” on high-cost health plans but delays its onset until 2025.

Swallowing the Republicans’ Agenda

Republicans don’t seem to have any concept of the quagmire they are about to enter with this bill.

ObamaCare’s Exchanges are already on the brink of collapse. Since this bill does not repeal the community-rating price controls, repeals the individual mandate, shifts the benefits from ObamaCare’s tax credits up the income scale, and tasks states with devising new bailout schemes of uncertain timing and efficacy, the threat of death spirals will remain. Even where the individual market does not collapse, the coverage will get increasingly worse for the sick. If the tax credits (read: subsidies) for low-income Americans are less than under ObamaCare, many more low-income patients will lose coverage. Premiums will continue to rise. Republicans will take the blame for all of it, because they will have failed to repeal ObamaCare, or learn its lessons, when they had the chance.

The leadership bill therefore creates the potential, if not the certainty, of a series of crises that Congress will need address, and that will crowd out other GOP priorities, in late 2017 before the 2018 plan year begins, and again leading up to the 2018 elections. If Congress gets health reform wrong on its first try, health reform could consume most of President Trump’s first term. Pressure from Democrats, the media, and constituents could prevent Republicans from moving on to tax reform, infrastructure spending, or even Supreme Court nominees.

Partial Repeal Is the Road to Single Payer

Flubbing ObamaCare would at once united and embolden Democrats while dividing the GOP base, driving the former to the polls in 2018 and 2020 while causing the latter to stay home. If ObamaCare is not doing well, and Republicans take the blame, it will create the potential for the sort of wave election Democrats experienced in 2008, when they captured not just the House and the presidency, but a filibuster-proof, 60-vote supermajority in the Senate. If that happens, and ObamaCare is not doing well, Democrats will be less interested in rescuing ObamaCare than repealing and replacing it themselves—with a single-payer system.

ObamaCare opponents often muse that supporters designed the law to fail because it would give them the excuse to enact a single-payer system. Republicans have a choice. They can either prevent that future from unfolding, or they can help it along.

Conclusion

Widespread voter dissatisfaction with ObamaCare produced Republican gains in 2010 and 2014, and a GOP sweep in 2016. President Trump and congressional Republicans pledged full repeal of the law, and to replace it with free-market reforms. The parts of the country that stood the most to gain from ObamaCare swung the most to President Trump. That looks suspiciously like a mandate. The good kind.

Source: The Economist

Source: The Economist

If Republicans care about covering people with expensive medical conditions, they should stick to that promise. Making health care better, more affordable, and more secure requires first repealing all of ObamaCare’s regulations, mandates, subsidies, and taxes. Next, Congress should block-grant the Medicaid program, giving each state a fixed sum of money that does not change from year to year, combined with full flexibility to target those funds to the truly needy. (If states want to cover less-needy populations, like able-bodied adults, they can pay 100 percent of the marginal cost of that coverage.)

Finally, and crucially, Congress needs to enact reforms that make health care more affordable, rather than just subsidize unaffordable care. To make health insurance more affordable, Congress should free consumers and employers to purchase health insurance licensed by states other than their own. To drive down health care prices, Congress should expand existing tax-free health savings accounts into “large” HSAs. Large HSAs would be a larger effective tax cut than the Reagan and Bush tax cuts combined, adding $13,000 to the wages of a typical worker with family coverage. Large HSAs would drive down prices by making consumers cost-conscious at every margin, and would reduce the problem of preexisting conditions by freeing consumers to buy portable coverage that stays with them between jobs. Sen. Jeff Flake (R-AZ) and Rep. Dave Brat (R-VA) have introduced legislation to create Large HSAs.

The House Republican leadership bill does not replace ObamaCare. It merely applies a new coat of paint to a building that Republicans themselves have already condemned. Since the most important asset health reformers have is unified Republican opposition to ObamaCare, at least in theory, it would set the cause of affordable health care back a decade or more if Republicans end up coalescing around this bill and putting a Republican imprimatur on ObamaCare’s core features. If this is the choice, it would be better if Congress simply did nothing.

But this can’t be the only choice. Right?

January 4, 2017 2:43PM

Concerns about the”Border Adjustable” Tax Plan from the House GOP, Part II

I wrote yesterday to praise the Better Way tax plan put forth by House Republicans, but I added a very important caveat: The "destination-based" nature of the revised corporate income tax could be a poison pill for reform.

I listed five concerns about a so-called destination-based cash flow tax (DBCFT), most notably my concerns that it would undermine tax competition (folks on the left think it creates a "race to the bottom" when governments have to compete with each other) and also that it could (because of international trade treaties) be an inadvertent stepping stone for a government-expanding value-added tax.

Brian Garst of the Center for Freedom and Prosperity has just authored a new study on the DBCFT. Here's his summary description of the tax.

The DBCFT would be a new type of corporate income tax that disallows any deductions for imports while also exempting export-related revenue from taxation. This mercantilist system is based on the same “destination” principle as European value-added taxes, which means that it is explicitly designed to preclude tax competition.

Since CF&P was created to protect and promote tax competition, you won't be surprised to learn that the DBCFT's anti-tax competition structure is a primary objection to this new tax.

First, the DBCFT is likely to grow government in the long-run due to its weakening of international tax competition and the loss of its disciplinary impact on political behavior. ... Tax competition works because assets are mobile. This provides pressure on politicians to keep rates from climbing too high. When the tax base shifts heavily toward immobile economic activity, such competition is dramatically weakened. This is cited as a benefit of the tax by those seeking higher and more progressive rates. ...Alan Auerbach, touts that the DBCFT “alleviates the pressure to reduce the corporate tax rate,” and that it would “alter fundamentally the terms of international tax competition.” This raises the obvious question—would those businesses and economists that favor the DBCFT at a 20% rate be so supportive at a higher rate?

Brian also shares my concern that the plan may morph into a VAT if the WTO ultimately decides that is violates trade rules.

Second, the DBCFT almost certainly violates World Trade Organization commitments. ...Unfortunately, it is quite possible that lawmakers will try to “fix” the tax by making it into an actual value-added tax rather than something that is merely based on the same anti-tax competition principles as European-style VATs. ...the close similarity of the VAT and the DBCFT is worrisome... Before VATs were widely adopted, European nations featured similar levels of government spending as the United States... Feeding at least in part off the easy revenue generate by their VATs, European nations grew much more drastically over the last half century than the United States and now feature higher burdens of government spending. The lack of a VAT-like revenue engine in the U.S. constrained efforts to put the United States on a similar trajectory as European nations.

And if you're wondering why a VAT would be a bad idea, here's a chart from Brian's paper showing how the burden of government spending in Europe increased once that tax was imposed.

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In the new report, Brian elaborates on the downsides of a VAT.

If the DBCFT turns into a subtraction-method VAT, its costs would be further hidden from taxpayers. Workers would not easily understand that their employers were paying a big VAT withholding tax (in addition to withholding for income tax). This makes it easier for politicians to raise rates in the future. ...Keep in mind that European nations have corporate income tax systems in addition to their onerous VAT regimes.

And he points out that those who support the DBCFT for protectionist reasons will be disappointed at the final outcome.

...if other nations were to follow suit and adopt a destination-based system as proponents suggest, it will mean more taxes on U.S. exports. Due to the resulting decline in competitive downward pressure on tax rates, the long-run result would be higher tax burdens across the board and a worse global economic environment.

Brian concludes with some advice for Republicans.

Lawmakers should always consider what is likely to happen once the other side eventually returns to power, especially when they embark upon politically risky endeavors... In this case, left-leaning politicians would see the DBCFT not as something to be undone, but as a jumping off point for new and higher taxes. A highly probable outcome is that the United States’ corporate tax environment becomes more like that of Europe, consisting of both consumption and income taxes. The long-run consequences will thus be the opposite of what today’s lawmakers hope to achieve. Instead of a less destructive tax code, the eventual result could be bigger government, higher taxes, and slower economic growth.

Amen.

My concern with the DBCFT is partly based on theoretical objections, but what really motivates me is that I don't want to accidentally or inadvertently help statists expand the size and scope of government. And that will happen if we undermine tax competition and/or set in motion events that could lead to a value-added tax.

Let's close with three hopefully helpful observations.

Helpful Reminder #1: Congressional supporters want a destination-based system as a "pay for" to help finance pro-growth tax reforms, but they should keep in mind that leftists want a destination-based system for bad reasons.

Based on dozens of conversations, I think it's fair to say that the supporters of the Better Way plan don't have strong feelings for destination-based taxation as an economic principle. Instead, they simply chose that approach because it is projected to generate $1.2 trillion of revenue and they want to use that money to "pay for" the good tax cuts in the overall plan.

That's a legitimate choice. But they also should keep in mind why other people prefer that approach. Folks on the left want a destination-based tax system because they don't like tax competition. They understand that tax competition restrains the ability of governments to over-tax and over-spend. Governments in Europe chose destination-based value-added taxes to prevent consumers from being able to buy goods and services where VAT rates are lower. In other words, to neuter tax competition. Some state governments with high sales taxes in the United States are pushing a destination-based system for sales taxes because they want to hinder consumers from buying goods and services from states with low (or no) sales taxes. Again, their goal is to cripple tax competition.

Something else to keep in mind is that leftist supporters of the DBCFT also presumably see the plan as being a big step toward achieving a value-added tax, which they support as the most effective way of enabling bigger government in the United States.

Helpful Reminder #2: Choosing the right tax base (i.e., taxing income only one time, otherwise known as a consumption-base system) does not require choosing a destination-based approach.

The proponents of the Better Way plan want a "consumption-base" tax. This is a worthy goal. After all, that principle means a system where economic activity is taxed only one time. But that choice is completely independent of the decision whether the tax system should be "origin-based" or "destination-based."

The gold standard of tax reform has always been the Hall-Rabushka flat tax, which is a consumption-base tax because there is no double taxation of income that is saved and invested. It also is an "origin-based" tax because economic activity is taxed (only one time!) where income is earned rather than where income is consumed.

The bottom line is that you can have the right tax base with either an origin-based system or a destination-based system.

Helpful Reminder #3: The good reforms of the Better Way plan can be achieved without the downside risks of a destination-based tax system.

The Tax Foundation, even in rare instances when I disagree with its conclusions, always does very good work. And they are the go-to place for estimates of how policy changes will affect tax receipts and the economy. Here is a chart with their estimates of the revenue impact of various changes to business taxation in the Better Way plan. As you can see, the switch to a destination-based system ("border adjustment") pulls in about $1.2 trillion over 10 years. And you can also see all the good reforms (expensing, rate reduction, etc) that are being financed with the various "pay fors" in the plan.

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I am constantly asked how the numbers can work if "border adjustment" is removed from the plan. That's a very fair question.

But there are lots of potential answers, including:

  • Make a virtue out of necessity by reducing government revenue by $1.2 trillion.
  • Reduce the growth of government spending to generate offsetting savings.
  • Find other "pay fors" in the tax code (my first choice would be the healthcare exclusion).
  • Reduce the size of the tax cuts in the Better Way plan by $1.2 trillion.

I'm not pretending that any of these options are politically easy. If they were, the drafters of the Better Way plan probably would have picked them already. But I am suggesting that any of those options would be better than adopting a destination-based system for business taxation.

Ultimately, the debate over the DBCFT is about how different people assess political risks. House Republicans advocating the plan want good things, and they obviously think the downside risks in the future are outweighed by the ability to finance a larger level of good tax reforms today. Skeptics appreciate that those proponents want good policy, but we worry about the long-run consequences of changes that may (especially when the left sooner or late regains control) enable bigger government.

P.S. This is not the first time that advocates of good policy have bickered with each other. During the 2016 nomination battle, Rand Paul and Ted Cruz proposed tax reform plans that fixed many of the bad problems in the tax code. But they financed some of those changes by including value-added taxes in their plans. In the short run, either plan would have been much better than the current system. But I was critical because I worried that the inclusion of VATs would eventually give statists a tool to further increase the burden of government.

January 3, 2017 4:27PM

Concerns about the“Border Adjustable” Tax Plan from the House GOP, Part I

The Republicans in the House of Representatives, led by Ways & Means Chairman Kevin Brady and Speaker Paul Ryan, have proposed a "Better Way" tax plan that has many very desirable features.

And there are many other provisions that would reduce penalties on work, saving, investment, and entrepreneurship. No, it's not quite a flat tax, which is the gold standard of tax reform, but it is a very pro-growth initiative worthy of praise.

That being said, there is a feature of the plan that merits closer inspection. The plan would radically change the structure of business taxation by imposing a 20 percent tax on all imports and providing a special exemption for all export-related income. This approach, known as "border adjustability," is part of the plan to create a "destination-based cash flow tax" (DBCFT).

When I spoke about the Better Way plan at the Heritage Foundation last month (my portion of the panel starts about 1:11:00 if you want to skip ahead), I highlighted the good features of the plan in the first few minutes of my brief remarks, but raised my concerns about the DBCFT in my final few minutes.

Allow me to elaborate on those comments with five specific worries about the proposal.

Concern #1: Is the DBCFT protectionist?

It certainly sounds protectionist. Here's how the Financial Times described the plan.

The border tax adjustment would work by denying US companies their current ability to deduct import costs from their taxable income, meaning companies selling imported products would effectively be taxed on the full value of the sale rather than just the profit. Export revenues, meanwhile, would be excluded from company tax bases, giving net exporters the equivalent of a subsidy that would make them big beneficiaries of the change.

Charles Lane of the Washington Post explains how it works.

...the DBCFT would impose a flat 20 percent tax only on earnings from sales of output consumed within the United States... It gets complicated, but the upshot is that the cost of imported supplies would no longer be deductible from taxable income, while all revenue from exports would be. This would be a huge incentive to import less and export more, significant change indeed for an economy deeply dependent on global supply chains.

That certainly sounds protectionist as well. A tax on imports and a special exemption for exports.

But proponents say there's no protectionism because the tax is neutral if the benchmark is where products are consumed rather than where income is earned. Moreover, they claim exchange rates will adjust to offset the impact of the tax changes. Here's how Lane explains the issue.

...the greenback would have to rise 25 percent to offset what would be a new 20 percent tax on imported inputs — propelling the U.S. currency to its highest level on record. The international consequences of that are unforeseeable, but unlikely to be totally benign for everyone. Bear in mind that many other countries — China comes to mind — can and will manipulate exchange rates to protect their own short-term interests.

For what it's worth, I accept the argument that the dollar will rise in value, thus blunting the protectionist impact of border adjustability. It would remain to be seen, though, how quickly or how completely the value of the dollar would change.

Concern #2: Is the DBCFT compliant with WTO obligations?

The United States is part of the World Trade Organization (WTO) and we have ratified various agreements designed to liberalize world trade. This is great for the global economy, but it might not be good news for the Better Way plan because WTO rules only allow border adjustability for indirect taxes like a credit-invoice value-added tax. The DBCFT, by contrast, is a version of a corporate income tax, which is a direct tax.

The column by Charles Lane explains one of the specific problems.

Trading partners could also challenge the GOP plan as a discriminatory subsidy at the World Trade Organization. That’s because it includes a deduction for wages paid by U.S.-located firms, importers and exporters alike — a break that would obviously not be available to competitors abroad.

Advocates argue that the DBCFT is a consumption-base tax, like a VAT. And since credit-invoice VATs are border adjustable, they assert their plan also should get the same treatment. But the WTO rules say that only "indirect" taxes are eligible for border adjustability. The New York Times reports that the WTO therefore would almost surely reject the plan.

Michael Graetz, a tax expert at the Columbia Law School, said he doubted that argument would prevail in Geneva. “W.T.O. lawyers do not take the view that things that look the same economically are acceptable,” Mr. Graetz said.

A story in the Wall Street Journal considers the potential for an adverse ruling from the World Trade Organization.

Even though it’s economically similar to, and probably better than, the value-added taxes (VATs) many other countries use, it may be illegal under World Trade Organization rules. An international clash over taxes is something the world can ill afford when protectionist sentiment is already running high. ...The controversy is over whether border adjustability discriminates against trade partners. ...the WTO operates not according to economics but trade treaties, which generally treat tax exemptions on exports as illegal unless they are consumption taxes, such as the VAT. ...the U.S. has lost similar disputes before. In 1971 it introduced a tax break for exporters that, despite several revamps, the WTO ruled illegal in 2002.

And a Washington Post editorial is similarly concerned.

Republicans are going to have to figure out how to make such a huge de facto shift in the U.S. tax treatment of imports compliant with international trade law. In its current iteration, the proposal would allow corporations to deduct the costs of wages paid within this country — a nice reward for hiring Americans and paying them well, which for complex reasons could be construed as a discriminatory subsidy under existing World Trade Organization doctrine.

Concern #3: Is the DBCFT a stepping stone to a VAT?

If the plan is adopted, it will be challenged. And if it is challenged, it presumably will be rejected by the WTO. At that point, we would be in uncharted territory.

Would that force the folks in Washington to entirely rewrite the tax system? Would they be more surgical and just repeal border adjustability? Would they ignore the WTO, which would give other nations the right to impose tariffs on American exports?

One worrisome option is that they might simply turn the DBCFT into a subtraction-method value-added tax (VAT) by tweaking the law so that employers no longer could deduct  expenses for labor compensation. This change would be seen as more likely to get approval from the WTO since credit-invoice VATs are border adjustable.

This possibility is already being discussed. The Wall Street Journal story about the WTO issue points out that there is a relatively simple way of making the DBCFT fit within America's trade obligations, and that's to turn it into a value-added tax.

One way to avoid such a confrontation would be to revise the cash flow tax to make it a de facto VAT.

The Economist shares this assessment.

...unless America switches to a full-fledged VAT, border adjustability may also be judged to breach World Trade Organisation rules.

Steve Forbes is blunt about this possibility.

One tax initiative that should be strangled before it sees the light of day is to give a tax rebate to exporters and to impose taxes on imports. ...It's a bad idea. Why do we want to make American consumers pay more for products while subsidizing foreign buyers? It also could put us on the slippery slope to our own VAT.

And that's not a slope we want to be on. Unless the income tax is fully repealed (sadly not an option), a VAT would be a recipe for turning America into a European-style welfare state.

Concern #4: Does the DBCFT undermine tax competition and give politicians more ability to increase tax burdens?

Alan Auerbach, an academic from California who previously was an adviser for John Kerry and also worked at the Joint Committee on Taxation when Democrats controlled Capitol Hill, is the main advocate of a DBCFT (the New York Times wrote that he is the "principal intellectual champion" of the idea).

He wrote a paper several years ago for the Center for American Progress, a hard-left group closely associated with Hillary Clinton. Auerbach explicitly argued that this new tax scheme is good because politicians no longer would feel any pressure to lower tax rates. The very first subtitle of his paper even refers to "ending the race to the bottom."

This...alternative treatment of international transactions that would relieve the international pressure to reduce rates while attracting foreign business activity to the United States. It addresses concerns about the effect of rising international competition for multinational business operations on the sustainability of the current corporate tax system. With rising international capital flows, multinational corporations, and cross-border investment, countries’ tax rates and tax structures are of increasing importance. Indeed, part of the explanation for declining corporate tax rates abroad is competition among countries for business activity. ...my proposed reforms...builds on the [Obama] Administration’s approach...and alleviates the pressure to reduce the corporate tax rate.

This is very troubling. Tax competition is a very valuable liberalizing force in the world economy. It partially offsets the public choice pressures on politicians to over-tax and over-spend. If governments no longer had to worry that taxable activity could escape across national borders, they would boost tax rates and engage in more class warfare.

Also, it's worth noting that the so-called Marketplace Fairness Act, which is designed to undermine tax competition and create a sales tax cartel among American states, uses the same "destination-based" model as the DBCFT.

Concern #5: Does the DBCFT create needless conflict and division among supporters of tax reform?

As I pointed out in my remarks at the Heritage Foundation, there's normally near-unanimous support from the business community for pro-growth tax reforms.

That's not the case with the DBCFT.

The Washington Examiner reports on the divisions in the business community.

Major retailers are skeptical of the House Republican plan to revamp the tax code, fearing that the GOP call to border-adjust corporate taxes could harm them even if they win a significant cut to their tax rate. As a result, retailers, oil refiners and other industries that import goods to sell in the U.S. could provide a major obstacle to the Republican effort to reform taxes. ...The effect of the border adjustment, retailers fear, would be that the goods they import to sell to consumers would face a 20 percent mark-up, one that would force retailers like Walmart, the Home Depot and Sears...to raise prices and lose customers.

A story from CNBC highlights why retailers are so concerned.

...retailers are nervous. Very nervous. ...About 95 percent of clothing and shoes sold in the U.S. are manufactured overseas, which means imports make up a vast majority of many U.S. retailers' merchandise. ...If the GOP plan were adopted as it's currently laid out, Gap pays 20 percent corporate tax on the $5 profit from the sweater, or $1. Plus, 20 percent tax on the $80 cost it paid for that sweater from the overseas supplier, or $16. That means the tax goes from $1.75 to $17 for that sweater, more than three times the profit on that sweater. Talk about a hit to margins. ...Retailers certainly aren't taking a lot of comfort in the economic theory of dollar appreciation. ...the tax reform plan will dilute specialty retailers' earnings by an average of 132 percent. ...Athletic manufacturers could take a 40 percent earnings hit... Gap, Carter's , Urban Outfitters , Fossil and Under Armour are most at risk under the plan.

And here's another article from the Washington Examiner that explains why folks in the energy industry are concerned.

...the border adjustment would raise costs for refiners that import oil. In turn, that could raise prices for consumers. The border adjustment would amount to a $10-a-barrel tax on imported crude oil, raising costs for drivers buying gasoline by up to 25 cents a gallon, the energy analyst group PIRA Energy Group warned this week. The report warned of a "potential huge impact across the petroleum industry," even while noting that the tax reform plan faces many obstacles to passage.

Concern #6: What happens when other nations adopt their versions of a DBCFT?

Advocates of the DBCFT plausibly argue that if the WTO somehow approves their plan, then other nations will almost certainly copy the new American system.

That will be a significant blow to tax competition, which would be very bad news for the global economy.

But is also has negative implications for the fight to protect America from a VAT. The main selling point for advocates of the DBCFT is that we need a border-adjustable tax to offset the supposed advantage that other nations have because of border-adjustable VATs (both Paul Krugman and I agree that this is nonsense, but it still manages to be persuasive for some people).

So what happens when other nations turn their corporate income taxes into DBCFTs, which presumably will happen? We're than back where we started and misguided people will say we need our own VAT to balance out the VATs in other nations.

The bottom line is that a DBCFT is not the answer to America's wretched business tax system. There are simply too many risks associated with this proposal. I'll elaborate tomorrow in Part II and also explain some good ways of pursuing tax reform without a DBCFT.