Okay. Lets get started. Thank you all for coming. My name is howard glutman. Ill be the host moderator for this panel. Our format will be very simple. Just going to have a discussion, informal discussion here about what we heard so far this morning. And then well leave some time for questions for you all. Let me just briefly introduce the panelist, you know them all, im sorry. To my immediate left. Professor of economics at rutgers and former director of tax policy center. Always great to have her back. Chad buckley former chief democratic counsel. Pam olson is the u. S. Deputy tax leader and pri pricewaterhousecoopers and former secretary of tax policy. And resident scholar of American Enterprise institute. Row san, ma row san many years ago was an author of the get which was a predecessor to the destination based cash flow tax. Talked a little bit about that as well. I wanted to start by asking about an alternative to what were hearing this morning. We had a talk for years about the idea of a minimum tax on international transactions. If you could just take a couple of minutes and put that on the table, we can discuss some of the relative merits of proposals. As howard just said, in a i think recent paper, not that many years ago, we evaluated a variety of reforms for the Current System of International Taxation. The starting point, weve done this, weve talked about this a little bit with allen. The Current System is a mess. Not a lot of revenue. Extraordinary complex. Interferes with firms as they try to allocate efficiently their capital around the world. As they try to avoid the tax coming home, thats a burden we have to worry about. The system discourage productive investment ray broad. It seems in washington, but when i come to washington and just reading the newspaper, only one horse in town these days. That one horse in town is the destination base cash flow tax. We compared. We have another reform and its not a consumption tax. Its a reform within the Current System. What we found in this paper is that were able to make improvements around all of the margins that i just talked about. Income shifting in particular. That reform would start by adopting dividend exemption and then we would impose so there would be no tax on dividend repatuation from abroad. Get rid of that burden immediately. Then we would impose a minimum tax of say 15 . We had Corporate Tax of 30 in our proposals. On all foreign income. So the minimum tax would be on all foreign income. This is actually what this is is a base erosion provision. Youre going to have to have some sort of base erosion division in any dividend system. Thats base erosion system. So as a result of the minimum Tax Companies are going to lose some of the tax benefits that they currently enjoy by putting ip like patents and tax havens and other forms of income shifting. We think it restores sanity to the Current System at least positive not negative effect of tax rates on investments abroad and low tax countries. Could be imposed on a per country or overall basis. The per country leads to basis leads to less income shifting. We actually came around to thinking they overall is an attractive alternative to simpler. Let me just say, i know only supposed to be a couple minutes, that in the paper that we put forward, comparing all of these different reforms and putting ford the minimum tax. We suggested a system which would allow expensing on investment abroad. Only excess returns to investment abroad would be taxed. And we thought that made sense because these are the returns that are likely the most easily shifted. Typically the ones generated from ip. We would not tax normal returns abroad where we want firms to be competitive. These are firms making more in more competitive situations, but we would tax those mobile returns, the excess returns. So going through the paper what we found was that this gives us the benefits of dividend exemption and the benefits of full inclusion, but without all of the cost. So we thought it was a very Good Alternative in terms of reform within the income tax. If you wanted, you could add a harry and i have talked about this recently. You could certainly want to tax royalties at a lower rate. Tax royalties at a lower rate. Minimum tax could be at any rate you decide is most efficient. I think its worth keeping in mind as an alternative as we go down the road, seem to be going down the road to putting forward a tax that as was we talked about this morning, not wto compliant. I mean, it just is not. Were going to be having problems with that. The question is what happens in after the wto pace is put forward. Were going to have to wait two years. What are we going to do after that . Reform the destination based cash flow tax. Where are we going to be after that. There maybe there shouldnt only be one horse in town these days. Let me ask you, youve looked at both these proposals. What are the relative pros and cons of each way to do it. Minimum tax versus cash flow. Cash flow tax is certainly a more wide ranging reform. Its bigger reform. Which means it has potential for both bigger benefits and also bigger problems. So if you look at their plan, it seems reasonable to view it as a step forward because it gets rid of the sill long island notion that were going to tax the foreign earnings only when repate yalted. Which is something that just doesnt make any sense. Says instead lets taken have a minimum tax earnings occur. Put in a 15 . Obviously there are still some of the distortions of the Current System in place. Theres still u. S. Tax penalty on being a u. S. Resident corporation because youre subject to the minimum tax on your subsidiaries overseas earnings in your u. S. Resident, but not if you manage to shed your u. S. Residents or if you never were a resident to begin with. The destination base cash flow tax is much more wide ranging reform. Really sweeps away virtually all the distortions the current tax system has. It is a more difficult transition. Theres a number of implementation issues moving towards it, but theres also a pretty big impact on asset values. Theres a new tax effectively on americans who hold foreign currency denominated assets when its introduced and then theres a very substantial tax cut at the expense of the u. S. Treasury and american taxpayers to foreigners Holding Dollar denominated assets when the board adjustment is introduced. Youve got bigger issues to address there. And on the other hand, the potential of bigger economic benefits. We didnt have anything to do with the decision of who sittings where. Its interesting. To economists on the outside and two lawyers on the inside. Let me ask the lawyers. And well start with you. From just a practical perspective. Nittygritty perspective. Can we make a transition as big as we would have to make to Something Like a destination based cash flow tax. Certainly we can, but i think well have an awful lot of disruptions along the way. Article in the New York Times a couple weeks ago written by neil err win about what a great tax reform this was. All the things that will get in the way of implementing it. All the decisions we made with respect to tax policies over the year locked us in and make a transition to this kind of a system. Very difficult. The problem is that i think of this as ive got arthritis in my right knee so i start favoring my right knee which then causes a problem on my left hip and then when i try to adjust for my left hip causes a problem on my right. At some point you just got to stop what youre doing and fix whats broken. Thats what i think the destination based cash flow tax does. Really dramatic change. Now, it may be too dramatic a change. I wonder whether theres a part way to get for. Do it halfway. Half interest limitations. And then we can have a piece of it and half a wage deduction. Piece of it that does look very much like a vat. Weve got this book here. Not a box. Well say its not a bat. It will look and operate a lot like a bat and maybe satisfy the wto compliance situation issues with respect to that portion of it. Then the rest of it would be an income tax which could also have some benefits because we would get an antibase erosion without the complexities of the minimum tax. And we would also get a system thats a lot more rational than our Current System with respect to how we treat worldwide income. So just to be clear. Al was asked during his presentation about a phase transition. Im not talking about a phase transition. Im talking about going halfway. Can i just play howards role here for a second. Compare and contrast this halfway to adopting a vat and lowering rates. Thats right. We could also just pick up bens alternative from a couple of years ago and that would be the same economic halfway. So if you do half of destination base, i think we need to be perfectly clear what were talking about with the destination base cash flow tax. So many beautiful things about it. Its what were doing is as she said, getting rid of Corporate Income tax. Half wway im not sure. Ive heard people talk about it. This is not my role, but im jumping in here. All roads lead to a vat. Are we talking about a credit invoice vat or halfway subtraction method vat. Then you get to political questions and im not the political expert in the house. Im sure there are some here. You know, politically, can you say its not a vat, but make it look a lot more like a credit invoice method vat. Perhaps. Let me ask you, not the political question, but just about the practical effects of this. Can we make a leap like this in the real world. I dont think you can. Thats why i think her alternative may not be the leading horse among economists, but i think when it comes to capitol hill and most others, it is. Its reform of existing system. Far less disruptive than going through the system. You know, there are so many parts of this that are really untested. I frankly dont think many small countries could hedge their liability against Foreign Exchange rate changes. I would suggest that would be really foolish to start doing it now. When prospects are if iffy at b. We focus on border adjustments and ignoring other aspects of this like loss of the interest reduction. That in any other world, that would be consuming our attention and is a dramatic change in our laws. It would give rise to extraordinary avoidance techniques that would require very complex rules to prevent. Companies will not want to pay tax on more than their net economic income. If you lose the Interest Deduction, you essentially do that. Interest plus and Interest Deductibility for Small Businesses who dont have access to the equity markets, its very hard to say it evens the Playing Field when they only have one add in you for raising capital. Well be extraordinarily controversial. Saying all that, im very pleased that evan agrees there are real benefits to reform of current quite illogical treatment of foreign income. I agree completely with him that only having tax only on distribution, makes little or no sense. However, you have to have some base Erosion Provisions or you simply erode our entire Corporate Tax base. I think that is where the doebae ultimately will come down to. What do you think about pams idea of going halfway . I think it keeps half of the distortions and problems of current lay and half of the probably unanticipated problems of moving to a cash flow tax. Dont want to only half of the interest be deductible . That certainly one possibility. This would be what you work there. Would the expense have to cost and appreciate the other half. Yes. If you want this conversation, we have that right now. If you significantly reduce the tax, youve also significantly reduced the incentives to erode, et cetera, et cetera. It would be possible to have the income tax changed over to cash flow tax completely, but then only do a part of water adjustment. One could have a origin and destination based taxation. That would be one aspect where it would be easier to do a partial mixture instead of having the income and cash flow tax coexist. You certainly could have a cash flow tax and do a partial border adjustment. You could do an origin based cash flow tax with a vat for instance. You could also do that. Sure. Its theres my equivalences here. The vat is one of the fundamental ones, i think. Even if we do the House Republican blueprint in full, you can describe that as a combination of income tax system on the individual side and then a cash flow tax, but, of course, that can also be rewritten as combination of income tax system and vat. Its really not conceptionally different from the things that others have been proposing. So i mean one of the i mean, that should inform understanding of a number of issues, i think. Its some of the difficulties that are side under the clash flow tax probably not as serious. Many of them arise under vats handled today. Lack of interest option is characteristic vats have around the world. No vat allows interest option. Of course not the same as other countrys vats because youre using a subtraction method inferior enforcement method to the current invoice method and you are of course allowing wage reduction. Michael has done a paper thats become pretty well known in the last few weeks about 30 questions about the unknown. I think he does raise an interesting issue. Which is there is an off the shelt credit invoi shelf credit invote to tice to. Why not adopt that and put yourself in a position where youre raising questions that no one else has tried to answer. You have to be the first mover in all these complex anticipated questions. I think that frankly it makes a lot of sense to consider the path. The advantages really are pretty numerous when you think about them. If you had this as a straightforward vat and providing relief in the system, use the credit invoice method as all the countries do. That would make enforcement easier. The need to provide full refunds to exporters which probably wouldnt happen under the cash flow tax and doesnt happen turned blueprint as written easily would happen under the vat. Exporters get full cash refunds all the time every day under vats around the world and nobody blin bi blinks at that. The large concern today i think would also retailers have same tax remittences under credit invoice vats around the world and nobody blinks at that. So i think theres other advantages i could list too. Frankly i think theres a lot to be said for that. It would also be wto compliant, of course. So if people really do dislike the d word, i think you could still avoid the d word. Not sure why its so toxic. We saw ted cruz and rand paul and herman kaine and paul ryan when all proposed value added taxes that didnt call value added taxes, they were all called business something taxes. Business something. Always business something. Yeah, i think you could easily do the vat and called it whatever you wanted. You know, i spent two years trying to develop a value added tax for the then ranking democratic member of the need committee saying who was firmly convinced as i think many of the people on the panel that a value added tax to replace the current income tax is the way to go. It was one problem after another. If you dont care about progress, its a very efficient system. Approximately half of americans dont pay income tax, but they would pay value added tax. So if you care about progressivety, you actually increase the overall complexity of tax system. Because youre bringing in millions of people who arent in the system now that will be brought into the system to get a vat rebate. Unless you dont care about distribution. You have to have a Corporate Income tax of some size in order to enforce an individual income tax. Otherwise we all all incorporate and have a large essentially deductible ira of unlimited size. You have all of those issues that have to say economists dont this is part of the division between economists and lawyers. I meant, lawyers begin to think of what does one do if you repeal a Corporate Income tax and substitute a value added tax and the answer is it is a very complicated tax system that you will end up with. And i dont think there is any country in the world, developed country, that has repealed its Corporate Income tax and republicaned only on a value added tax. Value added tax is overseas are a product of a much larger scale of government overseas. They have payroll taxes and income taxes comparable to ours and they just add a large value added tax on top. So there are real problems. I just want to get back to the growth and investment tax for a second. We put forward in 2005 that we had a terrible name. The get. Nontaxes growth investment, we were tired. We couldnt come up with a better name. Thats actually the truth. I think allen and coauthors have done a great job of pushing the thinking forward more than we did on the get, but one thing theyve done very well is highlight some of the problems. And we came around at the end of the whole tax reform panel. The staff and many of the members, i dont know if they would say this, to thinking that a better alternative is adopting a credit invoice vat and lowering rates. Thats not i think what allen was just saying. You could easily thats a very end that one could pursue. It was not the recommendations we put forward to simplify were all unanimous. The panel said they have to they wanted everything to be unanimous. We came close to have a third proposal. And that third proposal would be adding a credit invoice vat. We came very, very close. The reason why was not because we came in saying we want a vat. It was basically the problems that we saw with the get, with the destination cash flow tax. What to you think about this idea. Just pulling off the shelf of credit invoice vat. I think theres a lot to be commended because certainly the issues that have to be addressed in drafting statutory language for destination based cash flow tax in entirety are many of the same issues that have to be addressed in a vat. That have already been addressed and countries that have vats. Now theres a lot of complications with implementing a vat, but those are complications that whatever 160 sown tries have fought through in the past. We know where to go to get those answers. Trying to implement them in the context of destination based cash flow tax is a little bit more complicated. So if we were to pivot and go to explicitly adopting a vat, we would have some off the shelf language and understanding of how the systems best function. So theres a lot to be said. Im sure the people who were drafting on the hill are borrowing from that learning. As they implement the destination based cash flow tax. Statutory language. I just think its a lot simpler and a lot more straightforward if we do what the rest of the world has seen fit to do. Other things. Part of the concern is that like a 20 income tax rate sounds like a really good rate. 20 consumption tax going from 020 is not. Thats part of the disruption causing a lot of concern. So if you start with something much more modest, by adopting a vat and keeping the income tax at some rate, then you can start with a much lower vat rate that doesnt have the shock to the system. And, you know, again, has the benefits i think of protecting the tax base which i think will eliminate some of the need for things like a minimum tax. Which i love all the work that they have done on the minimum tax, but i continue to think it is a problem. It is both too broad and too narrow. So its going to sweep in things that will put u. S. Ownership at a disadvantage and its going to fail to set a base that helps to defend the u. S. If we want to keep an income tax, fail to defend the u. S. Base against other countries that using are going after some of our tax base. Does that work for you . A relatively low rate have a the to maintain income tax as well. First of all, you cant do that. You cant substitute value added tax for income tax. What i was going to go to raw politics for a moment. Which in my opinion, quite important the development of a tax reform plan. If you cant sustain it politically, whats the purpose . I would say theres virtually no support for value added tax on the hill. I believe the two would not have engaged in all of the intellectual activity theyve done on the cash flow destination base tax if they thought a value added tax was vital alternative. Its not. I can see the value added tax coming many the future. If it is to support social programs, entitlement programs, where the regress of the tax would be offset by progress of the use of the tax program. The tax reseats just like equity tolerate regressive payroll taxes because they finance a very progressive benefit. I believe one reason other countries the people tolerate regressive value added taxes is because they see it as buying a very progressive benefit package. If its devoted to rate reduction, you dont have to read much into senator bidens remarks this morning to suggest sit a nonstarter. The one thing bidens remarks this morning reinforced in my mind, is most members of congress, republicans and democrats, focus far more on the impact of individual con constituents than they do on arguments of the Corporate Income tax. Thats why the 1986 tax reform haed a shift and tax burden from the corporate sector to off the individual sector on to the corporate sector. Thats why dave camps tax reform plan essentially had the same. Although i think he super charged it a bit. That is what is a primary concern. That is why the border adjustment tax raises a lot of concern on the hill because they see it as a tax that will be passed on to their constituents in the face of higher prices. Lets go to this question. The elephant in the room. Talked about it a little bit in his presentation. It is the question about whether or not currencies would adjust. Let me for fun ask all of you in the audience to raise your hands. All of those who are economists that have hands up. How many thing you currencies would substantively adjust. Raise your other hand so i can see. And now those of you who are you not economists, how many of you think currencies would adjust. I see, one, two sort of tentative hands up. Maybe three, four. There inlies the problem. We have a situation where none of us are absolutely convinced this will occur. And no one else believes it. I do think there is some division among economists. Its a minority view. Over the question whether it will immediately adjust. Or whether it will adjust in the line long. Let me interrupt for a second. Allen suggested we adjust even before the tax took effect. Okay. Even before the tax becomes law. Given the political process, i doubt that would happen to be truthful. The question is is it immediate. I think there are a couple reasons why it wont be. To get an immediate currency depreciation. Your border adjustment has to be both certain and permanent. I think shes correct. This is not wto compatible. A legal discussion, not an economic discussion. I dont know many people who think it is compatible with wto. So there clearly is that uncertainty in the picture. Not many people in this room would have had jobs or if tax laws were permanent, it would be there would be a sharp reduction in the Legal Community in washington, d. C. If our tax laws were clearly permanent. I think a border adjustment tax can be enacted without a lot of exceptions. For raw material. If people want to see what the future of tax law would be with a border adjustment tax, i suggest they look at trade schedules, the tariff schedules. Theres a different rate of tariffs on every different corner. And the argument always has been successfully there shouldnt be a tariff if theres not a u. S. Producer to protect. I think also the reason why you wont i dont think you see a permanent cut in immediate reduction is the fact that our imports and exports are predominantly priced in dollars. And there was a blog post for the new York Federal Reserve recently that suggested that currency fluctuations really of imports or exports. I mean, to put it very simply, does anybody in this room believe that the price of crude oil will drop by 20 in dollar terms the day the that President Trump signs the border adjustment . I frankly dont think it will. The price of oil bounces around every day. Find it surprising to say the price of oil is rigid. It is rigid by supply and demand, but the question is will the price drop by 20 . Why do you see the price as being rigid. It is rimgd bagid based on s and demand. It is dollar, the dollar price would decline by 20 . Okay. I think a lot of people should start hedging that and in addition to currency risk. I think there is a lot of needless confusion about this issue. Its not quite clear to me, i guess, as an economist what the concerns are. The thing about the fact the border adjustment miegts not be perfect. That makes perfect sense. You would expect there would only be a partial adjustment. Wto is not going to accept it in current form. Maybe it would then be rejiggered turning it to vat or something else. Maybe scrapped. Thats a legitimate concern. If people did expect it to be permanent, its hard for me to see rigidities that slow down the adjustment process to any significant extent. It is possible the lack of sort of the markets understanding of it would slow down the adjustment to some extent. You look at a lot of prices, the price of oil, the Exchange Rates that we have with trading partn partners, theyre not rigid. If you tell me the price of oil does fluctuate. Then youre saying 20 reduction. It is true that we dont just raise another issue. It is true we dont have a good real world experiment thats done Something Like this. Thats fair. From what i understand the vats that were put into place or first put in slowly and replaced retail sales taxes, would be nice if we were able to turn to some real world experiences and i think that in our back paper with the coauthors, they do talk about some similar experiment experiences where theres not a complete adjustment, but there is an adjustment. I dont know i feel like if i say anything that did you want agree with the adjustment immediately, theyll take away my phd. I worked long and hard for that. Im not ready. I can say were particularly good on this shortterm predictions. Economists, dont know the exact timing. I agree. Nobody knows if its going to be like that same day. You could easily manage reasons. The notion that Exchange Rates are never going to adjust, just hard to fathom what that means. This is somehow the one unique policy in the universe that would somehow throw markets out of equilibrium and stay out for all eternity. That just havent seen anyone explain why we should hold that kind of strange view. Or in the short run. Has to adjust pretty quick for politics. Or its not going to i think were es kriebing a lot of information to the traders and maybe more information than they actually have. They do an awful lot on the basis of anticipation. One economist thinks the currency adjustment that happened by midnight on november 8. Certainly markets move all the time. They move in anticipation of where they think things are going. Sometimes they get it right. Sometimes they get it wrong. People that get it right profit and ones that get it wrong lose money. I do think there will be an adjustment. I think the adjustment will happen fairly quickly. Interesting to think back. Been listening to discussions about the benefits and detriments of vats for longer than i can remember. I remember allen coming in to make a presentation to the secretary of the treasury at my invitation when i was at treasury on the cash flow tax. And, you know, if you talk to Business People, Business People think that a vat with the border adjustment gives the producers and other countries an advantage they dont have. So you know, to a certain extent, the busy reaction is premised on disbelieving the economist. Look at the debate thats going on in washington today. Business Community Seems to be consens consensus. The reason they dont take seriously the lack of belief among noneconomists is the nature of prediction involved. Put forth models saying rationally someone confronted with a certain set of choices should behave in another way. Someone may say we have evidence of strong i wentuations based on people not behaving that way. Thats a serious objection. If people dont behave the way the theory says the theory is going to break down. Here we have a Pretty Simple set of assumptions about how people behave, consumers choose between domestic and foreign goods based on relative prices and producers make prices. Straightforward production of economic theory is what the equilibrium of that has to be. Namely that if people behave that way. The only way supply and demand request remain in balance is for this Exchange Rate or equivalent price adjustment to occur. If that equilibrium, you dont have to believe to get there. Not believing in it may slow the adjustment process a little bit, but you still get to the equilibrium. Since everyone seems to accept the theory is right about how people are behaving then the theory says about equilibrium does follow. So we always say the devil is in the details. One of the slides we saw this morning was the house plan has different rates on different entity forms. Is that a problem . Its a problem. Lack of exporter refunds is a problem. The theory says immediate permanentdown form adjustment will result in immediate one for one change in Exchange Rates or otherwise in prices. In other words, the price is paid and received by american would rice relative to prices paid by foreigners. Obviously if you have any deviations from that. In terms of the perm in answer, in terms of the uniformity, which is an issue with differential rates and also an issue with exporter refunds, uniformity requires the investment to apply to all imports at the same rate. City needs to apply to all exports at the same rate those two rates need to be the same. I think the one thing we can be certain of is that the proposal, as written, is not going to be adopted by congress. Cash flow piece has gotten no attention and as john said, House Republicans proposed this dramatic idea where theyre going to go to full expansing for business and elimination of the interest reduction. No one is talking about it. I wonder if we could spend a couple of minutes talking about it. John talked a little bit about the politics of it. What about the substance and merits. Its not a dramatic idea for economists. Tax o normal investment is zero. Not distorting any investment decision. Youre only taxing the excess returns, whatever you want to call it. Excess profits. And there, thats not going to affect the decision whether or not to invest. Go for it. This is anywhere vnirvana for u im letting someone else bring up the accounting problems and do you actually have the interest get rid of the interest reductions. Give everybody else a chance. Ill give you my view as a lawyer here. First of all, expenses for Many Corporation is a matter of sum indifference. It is a temporary increase of depreciation deductions you go back to where you were right before. I took economics 101 so long ago, i dont understand why thats equivalent to repeal on tax on ordinary returns of capital. For most businessmen, they only see those two pieces. They see the loss of the Interest Deduction, which is a permanent increase in their Tax Liability in contrast to timing change of the expensing. In the abstract, in isolation, its not a choice many wish to make. Goldman sax did a study of what would be the impact of this and. Just the cash flow piece. Exemptings interest alone. Thats the cash flow piece. Okay. The cash flow piece. The suggestion is in the short run, it may have some modest benefit because it does dump some cash in the corporate sector. In the long run, or even the medium run, i think. The detriment of the interest is disallowance, exceeds the benefit of the expensing and would be negative for investment in the United States. Thats where theres a difference between the security people and the economist. The difference here sr. Not just between lawyers. I hate to say. Debt capital is the cheapest capital that most companies have. Its the only capital available to noncorporate Small Businesses, you can disallow the Interest Deduction and debt still is the cheapest capital available to companies. Youve only just increased the cost to capital. I frankly think that change in return for the timing change expensing is not i think these are really important arguments. You disagree. No, hear from allen the allu those are important. Most companies dont care about expensing relative to depreciation because it doesnt have a Financial Statement impact and john indicated the loss of the Interest Deduction does have an impact. Trading no benefit on the timing for loss of benefit on the Interest Deduction. One of the things we havent talked about how it fits into the broader man. If we think about the fit of the broader plan, the tax on interest that the individual level is under the house blueprint and that would mean lower interest premium to cover the tax, so there would be that benefit and if in fact it reduces the debt thats outstanding it could also result in a reduction in Interest Rates. If a company were able to run a model to try to figure out how this stuff played out they might conclude it was still beneficial because when they factored in a decline in Interest Rates it might still have a positive Financial Statement impact. But then were into the category of who knows whats going to happen. John takes the view that the Financial Statements take, between depreciation, it is a real change. The fact that you can label it as being temporary instead of permanent detract from the reality. It is a loss if the Interest Rate is greater than zero, thats exactly under which expensing versus depreciation matters. I think you get a lot of benefits from going to a destination cash flow tax you get a lot as opposed to the origin base, you get the normal return so theres no disincentive to invest or for the United States for normal return investments. The draw back is that theres still an incentive to place the above normal investments abroad. By not doing the border adjustment you sidestep the various implementation of the wto and export funds an substantive by the wealth transfer on the initial cross set order holders. Its a tricky question whether the destination cash flow tax or organ cash flow tax comes out ahead but it goes to one or the other. One quick question from the audience. One thing nobody has mentioned is that under the destination based tax instead of buying our books and down loads from amazon u. S. We will be buying from amazon u. K. And how is the government going to collect the 20 tax on my payment to amazon u. K. . Thats a challenge the 160 with countries face. I would imagine we adapt the same response and would be neither more or less effective. And the answer youre exactly correct but their response has been just as effective as the attempts by state governments to collect their sales tax on other state purchases. Its a challenge. Thats what everybody will do. How is that consistent with income tax treaties, were taxing amazon u. K. Without a p. E. Here . We havent mentioned tax treaty issues, but there are with destination tax flow base as well. The responses that other countries are adopting they have accommodated those which i assume is trying to collect the tax from the consumer. Again, theres many challenges that you face with a vat and those challenges of course are going to carry over to the destinati destination tax base flow. And there are countries to draw to, and im sure they are looking into it. The drafters are looking at it and i assume they will have a legal answer to the issue that there will be a tariff imposed on purchases by nontaxable u. S. Persons. And i include both governments governments tax exempt exemptions, to impose the tariff than to collect it. And if the tariff liability is on the u. S. Consumer because you cant tax the foreign internet seller. They have no nexus here of tax. If it is on the consumer, the likelihood of its being collected is extremely low. I think you could enforce a tariff. I assuming theres political will. On purchases by tax exempt and governmental entities. Wont be terribly popular but i think would be enforceable. And hasnt been a fatal flaw for the 160 countries and pretty confidence it wouldnt be a fat fatal flaw here either. If youre losing that revenue if the thing is youre not doing a job of getting the revenue theres other ways of getting the revenue. The netflix tax for example socalled in australia and adopted in other countries is intended to go after exactly mikes concerns. Other questions . By the way it would help to introduce yourself. Andy im not a professional im an amateur and what frightens me is when i see a good thing and i dont see the downside. So, i dont know it looks too good to be truche. What about the u. S. Trade deficit . This is a fascinating question. All the economist when asked about the fekaffect on the trad deficit say there is no affect. The politicians who support it say its going to have tremendous affects. And the politicians that oppose it suggest it will have tremendous increase in acrosses to the assumer and busies. Consumers and businesses. My experience was ten years ago whenever the economist pointed out that the Exchange Rate would adjust, that was invariably viewed as an argument against the border adjustment they would denounce that argument as being intellectual talk and the opponents seemed to welcome that today im not sure everyone in this debate is being selfconsistent but now seems the supporters who like what the economists say about the Exchange Rate adjusting, the economic theory has remained the same and in my eyes and allens eyes and other economists eyes it remains valid. Theres no inherent why reducing the trade deficit in in and of itself should be an objective of ours. The interesting thing is if we did come to trade balance exactly theres a revenue issue here. The house blueprint plan as a whole is likely to increase, without having a commensurate increase so o i guei guess that news because it might bring in more revenue. But it could be bad news for some supporters of the adjustment who really are hoping to see the trade deficit go down. I think the blueprint would have a opposite affect. Im told to tell the audience to go to event urban. Org for questions. Rick newman yahoo finance. Since a lot of companies asort f saying we get the theory but dont want to test this out on us, is there some way to build a backstop into this idea so if it doesnt work as predicted people who might be harmed are somehow protected . I think it is the political process if it doesnt work as advertised it will have little long have fairly short life. I think it may be a mistake to put in some mechanism where we said lets make some assumption about what Exchange Rates would have done had this plan not been adopted lets wait an compare it to this baseline projection we made up out of thin air and the operation of the reform will be altered or suspended or ended based on whether that baseline projection played out. I cant see why interjecting that degree of uncertainty would serve any useful purpose. You cant determine whether this quote unquote worked by looking at cl the actual Exchange Rate matches some projection that somebody came up with out of thin air. Any number of events could have caused changes in the Exchange Rate that would have companied it. If i did would be able to choose in or out of a system. Thats always a bad idea. I think thats one thing we will find unanimous agreement on. Just to make sure thats not a thought. I do almost dread the adjustments that could be made to this plan as it moves forward. The exemptions, if theres no domestic substitute which is not a rational ground. This option of you could opt in or opt out, is the most horrible of all. Actually two questions. I think the panel will take the first and may pass on the second. First wont a destination cash flow tax raise Interest Rates drastically, and how do you intend to treat the Financial Sector of a cross board section . What affects on Interest Rates do you think there will be . I tend to agree with what pam has already said, because out of the neutralizing treatment in k equity i think you could see some downward pressure, slight, not a dramatic one and there would be p an increase in over l investment demand, but the elimination of preference for debt should go in the other direction and i think overcome that. Rose anne do you agree . Yes, i dont really want to t d that . The challenge is coming up with properly taxed income tax, todays income tax doesnt achieve, but if you come up with a system that works in a close economy and certainly there are systems that do that in theory around i know they have some issues trying to put them into reality but if you come up with a system that does that in a closed economy then i think applying the border adjustment on top of that system would really be the easy part. The challenge would be coming up with the other rules that you wouldply apply. This goes back to the Interest Deduction, many investments are expensed, as a result moving to a cash flow tax from negative to zero, this would race revenue, would it be more efficient . It would be more efficient. One of the advantages of the cash throw tax, really down played but should get mentioned. Is it neutralizes i want across weve been talking about the location investment the United States versus abroad but the old fashion of treating different investments nucheutra, it appears to say that inventories will not be expensed but instead force today stay on lipo, lets assume thats some kind of glitch that will be removed as we move forward that i think it is an attraction to say that everything is going to be exexpensed whenever you move to neutral treatment, of course there are going to be losing, like if youre not willing to take away some peoples preferential treatment youre not groioing to get to nuceutra. Weve been taking allens name in vain the last hour, do you want to take a couple of minutes to respond to anything you have heard . Sure. One thing i wanted to say, the issue has come up a couple of times about the invoice vat, first of all i should say i agree with the spirit of various comments that if you wanted to go part way you could there are two different ways to do it one would be to adopt a cash flow tax 50 percent rather than 100 border adjustment, to echo allen that would give you the advantage of a cash flow tax completely and part of a destination based tax and also only part of the adjustment issues. The alternative way of doing it is to cut the Corporate Tax, introduce a v. A. T. , offsetting payroll subsidy, that has advantages in the sense of at least except for the v. A. T. Working with existing systems. One of the things one should keep in mind is that v. A. T. S vary across the world and some are relatively narrow, the implicit included in the blueprint is a very broad based v. A. T. By International Standards and there afore is a better v. A. T. Than the credit invoice v. A. T. That has as a lot of executions, when they get introduced theres a political imperative to exempt lot where zero rate is used lots of commodities. Once you keep that in mind and whether it is a desirable alternative. Also i wanted to Say Something and the nature of the revenue raised by border adjustments and one should think of that as permanent. I think theres a tendency and allen sort of alluded to it as a temporary, you cant follow tra trade deficits forever. The trade deficit, that language refers to sort of our models of trade and but a lot of trade that goes on is related party trade and the extent that the trade deficit as a result of a u. S. Parent intellectual Property Services or luxen bebe subsidiary its really not an im important and not going to have to be replaced by exports, no real liability accumulated to foreign parties, we are disallowing a deduction for something were currenting allowing, who are the losers from this kind of exchange . You just identified one group of losers, multinationals currently taking very big advantage of their opportunities to engage in transfer pricing manipulation. Just a few minutes left and i cant resist but to ask the political question. We have talked about what we would like to see happen, talked about some of the economics of it. Let me ask each of the panelists to give me a sense of what think think is going to happen a year from now, what kind of a tax change will we have seen . It does seem increasingly to me that the destination based cash flow tax is the only horse in town, but i just dont really see it being the senate gone wrong, so maybe some sort of maybe there will be the minimum tax. John, what do you think . You know, i think it largely depends on what the Trump Administration does. If the Trump Administration came out full force behind the border adjustment tax i think it has a chance. A chance. Not a likelihood but a chance. Without that, the Senate Republicans are pretty much significant number of them are lining up in opposition. And even if you do it in reconciliation you still need 50 votes. And they only have a twovote majority. I doubt Many Democrats would vote for it, so you have to have virtually unanimity among Senate Republicans. If it looks like theres not that unanimity, i dont think it will pass the house. There is an old verbal other people would recognize as being b. T. U. d. And passed the clintons proposal for the b. T. U. Tax its essentially a carbon tax, it had no support in the senate so they took the difficult vote but not accomplished any policy perspective. And that became a verb of being b. T. U. d and i think youre already beginning. I hear it in discussion already in nervousness amongst House Republicans are being b. T. U. d on the border adjustment tax. What do you think is going to happen . I cant really tell, im pleased this this outside the box discussion has been taken by storm because i think we do need an idea. I hope it its going to come soon i hope and i hope this whole discussion will help move us in that direction, but i think at this point our from the perspective of all of the companies that i talked to in the Business Community our system is really broken and really broken relative to what the rest of the world and the rest relies significantly on a consumption tax so if we can find a way to put a consumption tax element into our system but maybe in a way thats less disruptive than going cold turkey, towards one, i think that would be a really wise way for us to go whether its politically feasible is to be determined. Last word . Im not a political forecaster and seems more uncertainty in todays environment. It does seem like the border adjustment tax is running into a lot of resistance not because of its real disadvantages but because of its imaginary disadvantages, the question is if it does fail in the end where do you go from there . One is it goes straight to the tax cut, which i think would be unwise given the fiscal out look we already face, the other would be to reform our International Tax rules on a revenue neutral basis and that i would imagine would end up looking generally somewhat similar to what rose anne and harry have talked about. Thank you to our terrific panel and thank you all. I think were going to go to our next event. Its my pleasure to announce the next speaker. Introduce the next speaker. He is Douglas Holtz eagan,