The Incidence of the Border Tax – EU Multinationals Win, US Multinationals Lose


The destination based cash flow tax (DBCFT) with border tax adjustment (BTA) as outlined in the so-called Ryan blueprint[1] (named after its main proponent Rep.

ByJohannes BeckerandJoachim Englisch

Paul Ryan) is perhaps the most exciting policy proposal of the last decade – and it is certainly the least understood. There is a wide variety of contradictory claims concerning the DBCFT’s effects on behavior and distribution. Whereas proponents hope that the DBCFT could end multinational firms’ tax avoidance activity once and for all, its opponents fear a disruption of trade, price hikes[2]and other problems. President Trump himself has sent ambiguous signals with regard to the policy proposal. After expressing his sympathy for fundamental tax reform during the campaign, he has revealed doubts about the Ryan blueprint in an interview with the Wall Street Journal. Specifically, he suspects that the border tax adjustment implies that the US is “adjusted into a bad deal” and that it is “too complicated”.[3] More recently, he seems to have switched back to a more favorable opinion while his advisors are apparently divided over this issue.[4]

Similar confusion is with the question who actually bears the burden of a DBCFT with BTA. Martin Feldstein, former CEA chairman under President Reagan, suggests in a WSJ piece in February that “(f)oreign exporters would pay for the Republicans’ proposed trillion dollar corporate tax cut”.[5] In contrast, Alan Auerbach and Mike Devereux, the two intellectual fathers of the new policy proposal, respond in a recent NYT article that the DBCFT’s “burdens would fall squarely on the owners of corporate capital”.[6] So who is right?

A closer inspection of the illustrative example provided by Feldstein himself in the WSJ piece mentioned above shows that Auerbach and Devereux are right. A fully implemented DBCFT reduces consumption out of above normal profit income – but there is an additional feature: it does so only for domestic, i.e. US investors (see Auerbach and Devereux 2015).[7] Due to adjustment in the exchange rates or the general price levels, foreign investors are effectively exempt from the DBCFT.

The difference to the current system is striking. Today, the US source based tax effectively raises income from foreigners. Under a DBCFT this is not the case. Accordingly, foreign investors would profit from a switch to the DBCFT even if tax rates stay constant (and independent of the cash flow tax aspect of the reform). Since the DBCFT indirectly is based on the world wide income of US investors, it is a priori unclear whether the US treasury or US firms have to compensate for the tax break for foreigners (again, under the assumption of constant tax rates).

And it gets even better (or worse from the US point of view), as we show in Becker and Englisch (2017).[8] Assuming that the strategic battles for market share are fought on markets where multinational firms are prevalent, a DBCFT may hurt the US even more. To see this, consider first a European multinational with affiliates in both the US and Europe. Under a source based tax system, the firm pays taxes in both locations according to where the tax accounting rules locate the tax base. An American switch to a DBCFT would lead to a dollar appreciation that effectively compensates the European firm for the DBCFT payment. [9] Thus, the DBCFT effectively exempts the European firm from tax (from the perspective of the European investor).[10] At the same time, though, the European source based tax system only taxes the base allocated to the European affiliate. That is, the European multinational’s income remains partly untaxed.

Now, take the US multinational. Seen through the lens of the US owner[11], the firm is taxed by the DBCFT based upon his or her world wide income (again, partly indirectly through the depreciation of its non-dollar income). In addition, the EU style source based tax system levies a tax on the US firm’s European affiliate’s income. Thus, the American firm is double taxed.

Non-US firms gain, US firms lose – this effect of the DBCFT have, so far, been overlooked in the debate. It may, however, be decisive since President Trump has committed itself to strictly “America first” policies – which is at odds with shifting the burden form foreign owned firms to US firms.

So why do Auerbach et al. (2017) then claim that the switch to a DBCFT is the “ultimate move in a tax competition game” (p. 44)? From the above, it follows that shifting tax base (by reallocating activity or adjusting transfer prices) reduces the tax burden for both, the EU and the US multinational. Thus, under DBCFT, the US would have the same pull (with regard to tax base) as a zero-rate tax haven under a conventional source-based tax system.

To conclude, a switch from the current source-based system to a DBCFT shifts the burden from non-US investors to domestic investors. There is, however, a strong incentive for all firms to shift tax base to the US.

[1] GOP (2016): A better way – Our vision for a confident America, 24 June 2016.

[2] For instance, lobbyists of large US retail companies like Walmart claim that the border tax adjustment would increase import prices and, thus, consumer prices.New York Times: New Approach to Corporate Tax Law Has House G.O.P. Support, 12 December 2016.

[3] R. Rubin and P. Nicholas: Donald Trump Warns on House Republican Tax Plan, Wall Street Journal, 16 January 2017.

[4] D. Matthews: Steve Bannon is the White House’s biggest fan of Paul Ryan’s tax ideas,, 28 February 2017.

[5] M. Feldstein: The Illusory Flaws of ‘Border Adjustment’, Wall Street Journal, 26 February 2017.

[6] A. J. Auerbach and M. P. Devereux: The Case for a Border-Adjusted Tax, New York Times, 6 March 2017.

[7] A. J. Auerbach and M. P. Devereux (2015). Cash flows taxes in an international setting, Oxford University Centre for Business Taxation.

[8] J. Becker and J. Englisch (2017). A European Perspective on the US Plans for a Destination Based Cash Flow Tax, Oxford University Centre for Business Taxation Working Paper No.17/03.

[9] Here we adopt the assumption by Auerbach and Devereux that the US$ appreciates by t/(1-t) per cent (where t is supposed to be the DBCF tax rate). This is the case if there is a perfectly competitive, constant returns to scale sector in the background producing goods tradable at zero cost.

[10] In other words, the firm’s income measured in Euro is not reduced by the DBCFT.

[11] By assumption, the US owner evaluates her income in US$ units. Her worldwide profit income (in the sense of an above-normal return) measured in US$ is proportionally reduced by the DBCFT. In addition, taxes have to be paid on source income in Europe.


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