Revenue Implications of Destination-Based Cash-Flow Taxation

Abstract

We estimate the revenue implications of a Destination Based Cash Flow Tax (DBCFT) for 80 countries. On a global average, DBCFT revenues under unchanged tax rates would remain similar to the existing corporate income tax (CIT) revenue, but with sizable redistribution of revenue across countries. Countries are more likely to gain revenue if they have trade deficits, are not reliant on the resource sector, and/or-perhaps surprisingly-are developing economies. DBCFT revenues tend to be more volatile than CIT revenues. Moreover, we consider the revenue losses resulting from spillovers in case of unilateral implementation of a DBCFT. Results suggest that these spillover effects are sizeable if the adopting country is large and globally integrated. These spillovers generate strong revenue-based incentives for many-but not all-other countries to follow the DBCFT adoption.

A destination-based allowance for corporate equity

“…Even if the appreciation negates the tax advantage of incurring costs in such country, the non-taxation of the rent remains attractive. Hebous, Klemm, and Stausholm (2018) estimate the size of these effects and discuss possible reactions by countries. These include, for most countries, strong incentive to reduce tax rates, or more effectively also to adopt a DBCFT.…”

How Should Business Profit Be Taxed? Some Thoughts on Conceptual Developments During the Lifetime of the IFS*

“…Hebous et al. () estimate the effect of introducing a DBCFT in 80 countries. They find that, with unchanged tax rates, total revenue would be comparable with the existing system.…”

“…52 In contrast to experiences of pure cash flow taxes, several countries have experimented with ACE-type systems. Hebous and Klemm (2018) document an ACE being introduced in 12 countries, with seven countries still currently retaining the system. 53 What about criteria beyond implementation?…”

“…71 See Bond and Devereux (2002), Auerbach, Devereux and Simpson (2010), Auerbach (2010), Auerbach et al (2017a) and Auerbach and Devereux (2018). An alternative to this cash flow treatment would be to introduce an ACE, but with the same border adjustments for exports and imports; this destination-based ACE has been analysed by Hebous and Klemm (2018). 72 In the absence of a floating currency, these effects would take longer to achieve, through changes in nominal prices.…”

“…As neither of these elements is contrary to WTO law, it is not clear why the combination might be. Hebous et al (2019) estimate the effect of introducing a DBCFT in 80 countries. They find that, with unchanged tax rates, total revenue would be comparable with the existing system.…”