Unilateral Introduction of Destination Based Cash Flow Taxation

17 Pages Posted: 16 Nov 2018

See all articles by Johannes Becker

Johannes Becker

University of Muenster - Institute of Public Economics

Joachim Englisch

University of Muenster - Faculty of Law

Date Written: October 26, 2018

Abstract

We analyze the unilateral introduction of a destination-based corporate cash-flow tax system (DBT), as recently proposed by Auerbach and Devereux (AEJ Policy 2018). We show that, first, the DBT rate is decision-neutral only if the source-tax country makes the DBT payments deductible from its tax base. Second, a unilateral DBT introduction is, in many aspects, equivalent to completely abolishing the corporate tax and, instead, taxing domestic investors based upon their worldwide profit income, net of foreign taxes and on accrual. In this sense, the DBT is actually a pure residence based tax. This implies that, from a foreign investor's perspective, the DBT country is like a zero-rate tax haven and has the same gravitational power on taxable (and shiftable) profits and economic activity. The location of profit and activity within its borders is, however, without any fiscal value for the DBT country. Third, the introduction of a DBT system reduces national income. Finally, the DBT country can only individually benefit from its new tax system if public goods provision is substantially increased.

Keywords: business taxation, destination taxation, tax competition

JEL Classification: H25, H32, H87

Suggested Citation

Becker, Johannes and Englisch, Joachim, Unilateral Introduction of Destination Based Cash Flow Taxation (October 26, 2018). Available at SSRN: https://ssrn.com/abstract=3273409 or http://dx.doi.org/10.2139/ssrn.3273409

Johannes Becker (Contact Author)

University of Muenster - Institute of Public Economics ( email )

Wilmergasse 6-8
Muenster, 48143
Germany

Joachim Englisch

University of Muenster - Faculty of Law ( email )

Universitaetsstr. 14-16
Muenster, 48149
Germany

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