Why Should the World Care? Analysis, Mechanisms and Spillovers of the Destination Based Border Adjusted Tax

37 Pages Posted: 15 Aug 2017

See all articles by Ursel Baumann

Ursel Baumann

European Central Bank (ECB)

Alistair Dieppe

World Bank

Allan Dizioli

IMF; University of Pennsylvania - Department of Economics

Date Written: August 7, 2017

Abstract

Members of the US House of Representatives have proposed a major overhaul of the US corporate tax system, the so-called “destination-based border-adjusted cash-flow tax” (DBCFT). The literature on the economic implications and spillovers of such a DBCFT is scarce. This paper aims to provide a comprehensive analysis of the mechanics of such a tax, its macroeconomic implications as well as its global spillovers using a fully structural global multi-country model. Our results suggest that the short term macroeconomic impact of the reform would depend primarily on how permanent agents perceive the policy to be. Robustness scenarios show that the magnitude of the short term impact will also depend on the extent to which exporters are reimbursed by their domestic costs; what categories of goods are excluded from the reform; how the government uses the revenues generated by the border adjusted tax; and the pricing system used by exporters. Moreover, global spillovers will depend on how easy it is to replace imported goods by domestic production; whether US trading partners retaliate, and how financial markets in emerging economies react. If there is disequilibrium in relative prices in the short term, global economic activity spillovers could be strongly negative and world trade could decline substantially.

Keywords: Fiscal policy, International business cycle, Spillovers model based analysis

JEL Classification: C68, E47, F41, F44, F62, O41

Suggested Citation

Baumann, Ursel and Dieppe, Alistair and Dizioli, Allan, Why Should the World Care? Analysis, Mechanisms and Spillovers of the Destination Based Border Adjusted Tax (August 7, 2017). ECB Working Paper No. 2093, Available at SSRN: https://ssrn.com/abstract=3018500

Ursel Baumann (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 20
Frankfurt am Main, D-60311
Germany

Alistair Dieppe

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Allan Dizioli

IMF ( email )

700 19th Street NW
Washington, DC 20431
United States

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

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