Care, period. And what aggravates me the most is they think about themselves, period. And the editor of the Tax Policy Centers blog, tax walks. And ill be the host, moderator for this panel. Our format will be very simple, were just going to have a discussion, informal discussion here about when we heard so far this morning. And then well leave some time for questions for you all. Let me just briefly introduce the panelists. You know them all, im sure. To my immediate left is rosanne altshuler, professor of economics at rutgers and former director of tax policy center. Always great to have her back. John buckley, tax counsel with the house ways and means committee. Pam olson is the u. S. Deputy tax leader at pricewaterhousecoopers. And former assistant secretary for tax policy at treasury. And alan viard, resident scholar at the American Enterprise institute. I should also mention that rosanne many years ago was one of the authors of the get, which was a predecessor to the destinationbased cash flow tax. So we can perhaps talk a little bit about that as well. I wanted to start actually by asking rosanne about an alternative to what we have been hearing about this morning. She and her coauthor have talked for some years about the idea of a minimum tax on international transactions. So if you could take a couple of minutes and just put that on the table and then we with discuss some of the relative merits of the proposals. As howard just said, in a i think a recent paper, not that many years ago, harry and i evaluated a variety of reforms for the Current System of International Taxation. The starting point, we have talked about this a little bit, with alan, the Current System is a mess. Not a lot of revenue, extraordinarily complex, incentives for aggressive income shifting interferes with firms as they allocate, try to allocate efficiently their capital around the world. As they try it avoid the repatriation tax coming home, thats a burden that we have to worry about. And the system in fact may discourage productive investment abroad. And it seems im not in washington, but when i come to washington and just read the newspaper that there is only one horse in town these days and that one horse in town is the destinationbased cash flow tax. We compared we have another reform and it is not a consumption tax, it is a reform within the Current System. And what we have 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. And that reform would start by adopting dividend exemption and then we would impose so no tax on dividend repatriations from abroad, we get rid of that burden immediately. And then we would impose a minimum tax of, say, 15 . We had a 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. You have to have some sort of a base erosion provision in any dividend exemption system. Thats our base erosion provision. And 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 some sanity to the Current System, at least a positive, not negative affect of tax rates. It could be imposed on per country or overall basis. The per country leads to basis leads to less income shifting. But we actually came around to thinking that the overall is an attractive alternative that is simpler. Let me just say, i know only supposed it be a couple of minutes, that in the paper that we put forward, comparing all of these different reforms and putting forward the minimum tax, we suggested a system which would allow expensing on investment abroad, so only the 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 that are generated from ip. And so we would not tax normal returns abroad, where we want firms to be competitive on these are firms making more more competitive situations but we would tax those mobile returns, the access returns. And 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 costs. So we thought it was a very Good Alternative as in terms of reform within the income tax. And if you wanted, you could add we talked about this recently, you could certainly, if you wanted to tax royalties at a lower rate, you could tax royalties at a lower rate, minimum tax could be at any rate you decide is most efficient. But i think it is worth keeping in mind as an alternative as we go down the road, or seem to be going down the road to putting forward a tax that as was we talked about this morning, not wto compliant. It just is not. Well be having problems with that. The question is, what happens in a after the wto cases put forward, we have to wait two years, what are we going to do after that . Are we going to reform the destination based cash flow tax, where will we be after that . And there may be maybe there shouldnt only be one horse in town these days. Let me ask you, im sure you looked at both of these proposals. What are the kind of relative pros and cons of each way to do it, the minimum tax versus the destinationbased cash flow tax . The destinationbased cash flow tax is a more wide ranging reform. Bigger reform, which means that it has, i think, the potential for both bigger benefits and also bigger problems. So if you look at the rosanne and harrys plan, it seems reasonable to view it as a step forward, because it gets rid of the silly notion that were going to tax the foreign earnings only when theyre repatriated, which is something that doesnt make any sense. And says, you know, instead, lets tax have a minimum tax, earnings occur, put in a 15 , obviously there are still some of the distortions of the Current System are in place, there is still a u. S. Tax penalty on being a u. S. Resident corporation because youre subject to the minimum tax on your subsidiaries overseas earnings if youre a u. S. Resident but not if you manage to shed your u. S. Residence or never were a u. S. Resident to begin with. The destination based cash flow tax is much more wide ranging reform, which is tax reform as Allen Auerbach has to sweep away the current distortions of the tax, and it is a much more difficult transition, and number of issues moving towards it, but it is a pretty big asset on the value, stland a tax on americans who hold the foreign currency denominated assets when it is introduced and then a substantial tax cut at the expense of the u. S. Treasury and the american taxpayers to foreigners who are dominated asset whence the border adjustment is introduced the and so you have bigger issues to address there, and on the other hand, the potential of bigger economic benefits. So we did not have the benefits of who sits where, and two economistses on the outside and two lawyers inside. So we will start with the lawyers and the panel then. And from the nit ti gritty perspective, can we make the transition as big as we can to the destination tax flow based tax . Le with, we can, but we will be hitting a lot of disruptions along the way. There was an article in the New York Times written by neil irwin about what a great tax reform this was and the things that get in the way of implementing it, so that all of the decisions with are respect to tax policy have been locking us in and making a tran stoigs the systemer very difficult. The problem is that, i think of this as, you know, art hritis i the right knee, and so i start favoring my right knee which then causes the problem on the left hip and then when i a adjust for the left hip, because of the right, and at some point, you to stop what you are doing, and fix what is broken. And that is what i think that the destination tax flow does, a it is a really dramatic change, and now maybe too dramatic a change, and i wonder if there is way to get partway there and so instead of doing this 100 , we do it halfway, and so we have half of a border adjustment, and half depreciation expensing, and half interest limitation, and then we can have a piece of it and half a wage deduction, so a piece of it that does look very much like a v. A. T. And i have the book and it is not a box and it is not a v. A. T. , but it will look and operate an awful lot like a vat and satisfy the wto compliance issues with the respect to the portion of it and then the rest of it would be income tax to have some benefit, because we would get an antibase e erosion without the complexities of the minimum tax and we would also get a system that is a lot more rational than the Current System in how to treat worldwide income. And so in the phased transition . No, not phased transition, but halfway. And now holly. Can i play howards role here. We need to compare and contrast this halfway to adopting a vat and lowering the rates. Yes, that is right. We could also pick up ben k cardins al a terntive from a couple of years ago and that is the same economic halfway. So we need to be perfectly clear, because as allen said, we are getting rid of the Corporate Income tax, and so the halfway and this is not my role, but i am jumping in here, and i think that all roads are leadinging to the v. A. T. And are we talking about adopting a credit method or the halfway v. A. T. . Well, that is the political questions, and im not the political expert in the house. I am sure that there are some here, but politically, can you say it is not a va a. T. And make it look more like a credit invoice v. A. T. , perhaps. And let me ask you and not the political question yet, but the practical effects of this. Can we make a leap like this in the real world . I frankly dont think that you can, and that is why i think that roseannes alternative may not be the leading horse among the e economist, but others on capitol hill, it is, because it is reform of the existing system and far less disruptive than going to this system. So many parts of this that are really untested. I tran cli dont thifrankly don small countries could hedge against the Foreign Exchange rate changes. I would suggest they would be foolish to start doing it now when the prospects for enactment are iffy at best. We continue to focus on the border adjustment, and ignoring the other aspects of this, and like loss of the Interest Deduction. That in any other world that would be consuming our attention. That this is a dramatic change in our laws. It would give rise, i think to extraordinary avoidance techniques that would result, require very complex rules to are preare vent. Companies will not want to pay tax on the net economic income, and if you lose the Interest Deduction, you essentially do that. The loss of the Interest Deductibility for Small Businesses who dont have access to the equity markets, and it is hard to say that it evens the Playing Field when they only have one avenue for raising capital. It will be extraordinarily controversial. And so saying all that, im very pleased that evan and roseanning a e gree that there are real benefits to are reform of current quite illogical treatment of foreign income. I agreele completely with al allen that the only having tax only on the distribution makes little to no sense. However, you have to have some base erosion benefits or you will simply e erode the entire Corporate Tax base. So i think that is where the debate ultimately will come down to. What do you think of pams idea about going halfway . Well, you know, i think that it keeps half of the distortions and problems of the current law and half of the probably unanticipated problems of moving to a cash flow tax. Would only half of the interest be deductible . That is one possibility and this is partly what you would work through in the economic expense half of the cost and depreciate half of the other . Yes, and the bonus depreciation, and we have that right now, and so if you are significantly reducing the tax, you have significantly reduced the incentives to erode, et cetera, et cetera. Yes. And so it is also possible to have the income tax changed over to the cash flow tax come meetly, and then a partial e erosion, and border there so that is one aspect to do a partial mixture instead of the income and the cash flow to coexist, you could have a cash flow exist, and this then a partial border adjustment. Le with, you could do the originbased cash flow tax with the v. A. T. For instance. You could also do that, sure. At a lower rate. Yes, and many equivalence here, and the v. A. T. Is one of the fundamental ones, and even if we do the House Republican blueprint in full, and you can describe it as a combination of the income tax system on the individual side and then a cash flow tax. And then of course sh, that can rewritten as a combination of the income tax system and a v. A. T. And not conceptually different from ben cardin or michael cratz or others have been doing. And that should inform our understanding of a number of issues, i think. Some of the difficulties under the cash flow tax are not as serious as imagine, because many of them are handled under the v. A. T. And the Interest Deduction is certainly allowed, and no one else allows it. It is not the same as other country, because you are using the v. A. T. Method which is inferior to the current method, and of course, you are allowing a wage deduction. And michael cratz has done a paper where it is very are read about the knowns and unknowns. And he raises an issue the off the shelf credit v. A. T. That most countries v and why not just can adopt that, and not put yourself in a position to where you are raising the questions that no one else has tlied to answer. So you have to be the first mover in all of the complex unanticipated questions. All allen, we can start with you. Well, frankly, it is is going to make a lot of sense to consider that path, but the advantages are numerous when you think about them. If you had it as a straight forward vat, and then allowed offsetting wage krcredit, then you would use the same as most countries do with the v. A. T. To make the enforcement easier, and the need to provide full refund for exporters which would not happen under the cash flow tax, and not under the blueprint as written would easily happen under the vat, and the exporters will get the cash refunds all of the time, and everyday under vats around the world, and nobody blinks at that. The concerns about the large tax remittances of importers which is one of the big political concerns today would abate, because the retailers have the same remittances and the credit resource vats around the world, and nobody blinks at that, and other advantage, too, and there is frankly a lot to be said about, that and also wto compliant of course. And if people really do dislike the vword i think that you could taifd vword. I am not sure why the vword is so taxic. We saw ted cruz and rand paul, and before that herman cain, and actually back to 2011 paul ryan and all of them propose the valueadded taxes that they did not call them that. It is called the businesssomething taxes, and it is always the business something. And so i think that you could easily do the vat, and call it whatever you wanted. Yes, i think that i spent two years trying to develop a valueadded tax for the then ranking democratic member of the ways and means committee, gibbons, who was firmly convinced as the people on the pabl that the valueadded tax to replace the current income tax is the way to go. And it is one problem after another. If you dont care about the progressivety, it is an efficient system, but approximately half of americans dont pay income tax, but they would pay the valueadded tax. So if you care about progressivety, you do care about the system, because you are bringing in millions of people who are not in the system now, that will be brought into the system to get a vat rebate unless you dont care about the distribution. You have to have a Corporate Income tax of some size, and in order to enforce an individual income tax, and otherwise, we will all incorporate, and cheerfully have a large essentially deductible ira of deductible sizes, and you have all of the issues that i have to say that economist, and this is part of the division between the economists, and the lawyer, and 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 that it is a complicated tax system that you will end up with. And and, i dont think that there is any kun fcountry in th world, developed country who has repeal ed ted the rp corporate and relied only on the value added tax. Value added taxes overseas are a product of a much larger scale of government overe seas. They have payroll tax, and income taxes comparable to ours, and they add a large value added tax on top. So there are real problems. So i just want to get back to the growth and the investment tax for a second that with put forward in 2005, and the terrible name of the git and it is the growth and investment tax, and we could not come up with a bert namtter name, and a auerbach did push back more than we did against the git, and what they did is to highlight some of the problems. We came around at the end of the tax reform panel, and the staff and many of the member, but i dont know if they would say this to thinking that a better alternative is adopting a credit invoice vat and lowering the rates, and this is not what allen vilard was thinking. Well, you could keep a lower income tax. And the recommendations that you put forward the sit and the git were unanimous, and the panel said that they wanted everything to be unanimous, and we came close to having a third proposal which is a credit and a vat and very, very close, and the reason is not that we came in saying that we wanted a vat, but it is basically the problems that we saw with the git with the destination tax flow tax. And what do you think of this idea of pulling it off of the shelf of the credit invoice vat. Well, there is a lot to be xhepded, because certainly, the issues that have to be a addressed in drafting the statutory language in the inv investment tax and the entirety are the same issues that have to be addressed in the vat, and addressed in the countries that have vats as, and a lot of implications implementing the vats, and those are complications that 163 kcountris have thought through in the past, so we know where to get the answers, but trying to implement them in the destination investment tax, but if we were to pivot and go to explicit ly adopting a vat, we would have off of the shelf statutory language and understanding of how the systems best function. So there is a lot to say of that. And i am sure that the people drafting on the hill are borrowing from that learning as they are implement iing the destination based cash flow tax statutory language, but i think that it is a lot more simpler, and more straight forward if we do what the rest of the world has seen fit to do. Part of the concern is that like, 20 income tax rate sounds like a good rate, and 20 consumption tax going from zero to 20 is not, and that is part of the disruption that is causing a loft the concercause ing a lot of the concern, and if you are starting something more modest by investing the vat and keeping the income tax at some rate, then you can start a much l lower vat rate that does not have the shock to the system. And again, the benefits of protecting the tax base which i think that will eliminate some of the things for the minimum tax which roseanne and harry have done on the minimum tax, but i continue to think that it is a problem. It is both too broad and too narrow, and so it is going to be sweeping in things that will put u. S. Ownership at a disadvantage and it is going to fail to set a base that helps to defend the u. S. If we want to keep an income tax, and fail to defend the u. S. Base against other countries that are using vats or state aid are going after the more simple tax base. Is that working for you to maintain a relatively low vat as well as relative income as well . Well, you have to do that. You cannot substitute a value added tax for income tax. I wanted to go to the raw politics for a moment. Which, in my opinion, it is quite important in the development of the tax reform plan. Because if you cannot sustain it politically, whats the purpose. There is virtually no support for the valueadded tax on the hill. I believe that the two allens would not have engaged in all of the intellectual active the ti they would have done on the cash flow destination based tax if they thought that the value added tax was a viable alternative. It is not. I can see a value added tax coming in the future if sit is o support the social programs or the entitlement programs where the recessivity of the program would match the progressivety and just like we tolerate the payroll taxes because they finance a progressive benefit. One reason why other countries, the people tolerate regressive value added tax is because they see it as buying a very progressive benefit package. If it is just the devoted to rate reduction, you dont have to read much into senator wydens remarks this morning to suggest that it is, you know, a nonstarter. I mean, the one thing that senator wydens remarks this morning reinforce d in my mind s that most members of congress, republicans and democrats, focus far more on the impact on their individual constituents, than they do on the arguments of the Corporate Income tax. That is why the 1986 tax reform had a shift of net tax burden from the corporate sector to the off of the individual sector on to the corporate sector. That is why dave camps reform tax plan had the same, and although he supercharged it a little bit compared to 1986. That is what is a primary concern. And 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. So lets go to the question, and the elephant in the room, and allen talked about it in the presentation, but the question of whether or not currencies would adjust. So let me, and this is a plebiscites, but for fun, all of you in the audience that are economists, keep your hands up for a second. And those who are economists, how many of you believe that the currencies would adjust . Raise your hands so i can see. And now those of you who are not economists, how many of you believe that the currencies would adjust . I would see one or two tentative hands up and three or four. And so therein lies the problem. We have a situation where the economists are absolutely convinced that this will occur, and no one else believes it. But i do believe that there is some division among the economists, and a minority view over the question of whether or not it will immediately adjust or whether it is going to adjust in the long run. And let me is interrupt you for a second, because i want to the respond to what allen said, because he suggests it will happen before the tax takes effect. And a even before the tax becomes law, and given the vagaries of the political process, that, i doubt that would happy to be truthful, but the question is, is it immediate . There are a couple of reasons why it wont be, and the first is that i am kind of repeating something that allen wrote in the tax notes. For it to get an immediate currency appreciation, your border adjustment has to be both certain and permanent. I think that roseanne is quite correct, this is not wto compatible, and that is a legal discussion, and not economic discussion. I dont know many people who think it is compatible with the wto, and so there is clearly that uncertainty in the picture. Not many people in the room would have had jobs or if our tax laws were permanent, and it is. There would be lau [ laughter ] a sharp reduction in the Legal Community in washington, d. C. , if our tax laws were clearly permanent. I dont believe that a border adjustment act can be enacted without a lot of exceptions for raw materials. I mean, if people want to see what the future of the tax law would be with the border adjustment tax, i suggest they look at the trade schedule yules, the tariff schedules where there is a different rate of tariffs on every different component. And the argument always has been successfully, there shouldnt be a tariff if there is not a u. S. Producer to adapt. So the reason that you wont see an immediate reduction is the fact that the imports and the exports are predominantly priced in dollars. There because brog polog post fe new yorker recently that said that the u. S. Fluctuations dont quickly translate into red reductions into the dollar prices of imports or exports. I mean, to put it simply, does anybody in the room believe that the price of crude oil will drop by 20 in dollar terms the day that President Trump signs the border adjustment . I fran i cli dont think it will. Well, the price of oil bounces around everyday and i find it surprising to say that the price of oil is rigid. It is ridgid by supply and demand, but the question is will the price drop by 20 . Why do you say that the price is rigid . I dont well, i said that it is based on the supply and demand. And so in that case, there would be a 20 reduction. It is dollardominated. Sure. And so the dollar price would decline by 20 . Well, i think that a lot of people should start hedging that in addition to the currency risk s. Well, there is at lot of maybe needless confusion about this issue, and it is not quite clear to me as an economist what system of the concerns are r and the thing about the fact that the border adjustment may not be permanent and that makes sense, a partial adjustment if there is some doubt about the permanence. And it would be reasonable that it would be, and the with wto is not going to have it in its own current form, and maybe it would be turned into a vat or Something Like that, but maybe it is scrapped, but it would be hard to for me to see the rig rigidities that would slow down the production to any extent. Certainly, the understanding of the market may slow down the adjustment to some extent, but the prices, the price of oil or the Exchange Rates of most of the trading partners, and they are not rigid. If you are telling me that the price of oil is fluctuating and set by supply and demand, then 20 reduction. Suzanne . Yes, sut true that i will raise another point that there is no ra real world example of this. So from what i understand the vats put in place were first sl slowly, and they replaced the retail sales taxes, and so it would be nice if we were able to turn to some real world experiences. And in Allen Auerbachs paper with the coauthors, they do talk about some similar experiences where there is not a complete adjustment, but there is and a adjustment. I didnt know, and i fool like if i say anything that doesnt agree with the 100 currency adjustment immediately Allen Auerbach will take away my ph. D. And i worked long and hard for it. So i am not ready to give it up. But i cant say that, with are particularly good at the shortterm predictions. And economists dont always know the exact timing and i agree that nobody know if if it is the same day, and you can imagine some reasons for the short run lag. And the notion that the rates will never adjust is hard to fathom, that this is the one unique policy in the universe that would somehow throw the markets out of equilibrium and stay out of equilibrium for all of eternity. That is just and i have not seen anyone explain why we should hold that kind of strange view. But you say it is the lags well, i think that you and i are actually agreeing, and i am not saying that it wont adjust in the long run. Well, not the long run or in the short run. Because it has to adjust pretty quick for politics. Or it is not going to and we are ascribing an awful lot of information for the traders. I know one economist who believes that the currency adjustment happen ed by the evening of november 8th. Certain ly the markets are movig all of the time and into the space they believe it is going, and sometimes it is right and sometime it is wrong. The people who get it right earn some money, and those who get it wrong will lose money. And the adjustment will happen fairly quickly. I have been listening to the discussions about the benefits and the detriments of the 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, i mean, if you are talking to the business people, businesspeople think that a vat with the border adjustment gives the producers in other countries an advantage they dont have. So, you know, to the certain extent, the business reaction is premised on the disbelieving the economists. And so when you are looking at the debate going on in washington today, the importers are very worried about it. Why . Because they dont believe the economists. The exporters are enthused, and why . Because they dont believe the economists. So in the business community, it is consensus. And it is true that nobody believes but it is important to understand that the reason that most of the e kconomists dont take seriously the lack of belief of the noneconomists is the nature of the prediction put forth. And the economists will put forth a model saying that someone who is confronted with a certain set of choices will behave a certain way or we have empirical evidence and introspective of that people wont bea haif that way, and that is serious, because of course, the theory going to be breaking down. Here though, we have a simple set of assumptions of how the people behave and the consumers choose between the domestic, and the foreign goods based on the e relative price, and the consumers are going to be making decision based on the relative product, and it is simply what the equilibrium of that has to b and namely if the people behave that way, a a tnd the only way supply and demand can have on that balance is for the, change rate at equilibrium to occur. So at that ook eke, you dont have to believe in the equilibrium to get there. And not believing in it may slow the adjustment process a lit wille bit, but you will get to the equilibrium, and so since everybody is accepting that the theory is right of how people are behaving the theory is right for the equilibrium does follow. And so we say that the devil is in the details, and one of the slides we saw this morning was the house plan has different rates on different entity forms, and is that a problem . E, where the lack of export funds is a problem, and the immediate border foreformed a justment is going to immediately result in a one for one with the prices, and in other words, the prices paid and received by americans will rise relative to the prices paid and received in any common currency. Obviously, if you have any deviations from that in terms of the perm nance per ma nance and so it requires that the border adjustment needs to apply to all imports at the same ra rate, and entity to the exporter rate and those two rates need to be the same. And one thing that we can be certain of is that allens proposal as written is not adopted by congress whatever else happens. That is an important caveat. And we only have a few minutes left, and we will give the audience an opportunity to have the question. And john at the beginning of the discussion mentioned the other piece of the destination cash flow tax and it has gotten no attention, and which is the cash flow piece of, and as john said, the House Republicans poses this dramatic idea where they are going to go to the full expensing for the business, and illumination of the Interest Deduction, and no one is talking about it. So i wonder if we could spend a couple of e minutes to talk about it. And john talked a little bit about the politics of it, and what about the substance and the merits of it, suzanne . Well, it is not dramatic for the economists and tax 101 and this is the way to get to point where the tax on the normal return to investment is zero, and you are not distorting the investment decision, and you have, and you are only taxing the excess returns or whatever you want to call it, excess profits. And they are not going to affect the decision of whether or not to invest. So go for it. This is the nirvana for it. And john, nirvana . Well, i want somebodiles to bring up the accounting problem, and do you actually have the interest to get rid of the Interest Deduction . I want to give everybody else a chance. I will give you my view as a lawyer here. First of all expensing for some incorporation is a mat over indifference, and it is a matter of deduction 245s you fairly go back promptly to right where you were before, and now, i took 101 economics so long ago, i dont know why that is equivalent to the repeal of the tax on ordinary returns, the capital. So, for most businessmen, they only see the two pieces. The loss of the Interest Deduction which is a permanent increase in their Tax Liability in contrast to the timing change of the expensing. In the abstract, it is in isolation not a choice that many wish to make. Goldman sachs did a study of what would be the impact of this. Just the cash flow piece . No, the expensing alone. And that is the cash flow piece . Yes, the cash flow piece. Yeah, yeah. And so the cash flow piece, and the suggestion is that in the long run, and in the short run, it is maybe some modest benefit, because it does dump some cash into the corporate sector, but in the long run, or even the medium run, the debt of the interest allowance is going to benefit the expensing, and negative for the investment in the United States. That is where there is a difference between the security people, and the economists. The difference here is not just between the lawyers, i hate to say it. Debt capital is the cheapest capital that most companies have and the only capital available to noncorporate businesses. You can disallow the Interest Deduction, and that is the cheapest capital available to companies, and you only increased the cost of capital. I frankly think that change in return for the timing change and the expensing is not i think that these are important arguments. But you disa agree . No. And the taxes are clearly important that most companies dont care about expensing relative to the depreciation, because it does not have a financial impact, but the loss of interest does have a financial impact. So they are trade nog benefit for timing on the timing of the Interest Deduction, but one thing that we have not talked about is how it fits into the broader plan, and how it fits into the broader plan, the tax on interest that the individual level is going down from, you know, the top 39. 6 to 16. 5 under the house blueprint, and that would mean, you know, lower interest premium to kocover the tax that would be owed. So there is that benefit, and if in fact, it reduces the amount of the debt outstanding, it could also result in a reduction of Interest Rates. So if the company were to run a model of how it would play out, they might conclude it is still beneficial to them, because when they factored in the decline in the Interest Rates, it might still have a positive Financial Statement impact, but then we are into the category of who knows what is going to happen. And so it is interesting that i think that john takes the view that the Financial Statements also take which is the d difference of the expensing and the depreciation is just a timing difference, but of course, with the Interest Rate that is greater than zero, that is a change in the present value of the Tax Liability, so it is a real change, and the fact that you can label it as being temporary instead of permanent does not detract from the reality, and on the other hand, the loss of Interest Deduction is a real loss which it is if the Interest Rate is greater than zero which is the exact situation of the depreciation versus expensing matters. And the question of that you will get a lot of the benefits, and going to get the benefits of going from the destination tax flow, you will get a lot of them from the origin base tax, and the detinue tral ti and the return where there is no disincentive to invest or disin s disinsentive to place them in the United States for the return of the investment, but the drawback is that there is still an incentive to place the above normal investments abroad, and to book those above abroad. And by not doing the adjustments you are sidestepping the various implementation of the wto, and whether you will get the, port refunds, and also, the wealth transfer of the cross border asset holdings. It is a tricky question of the cash flow tax or the origin based really comes out ahead, but there is a lot of advantages of going to one or the other tax flow issues. Time for one quick question from the audience. Anybody . Yea yeah . One thing that nobody has mentioned is that under the destination based tax, instead of us buying our books and downloads from the amazon u. S. , we will be buying them from amazon uk and how under this system is the government going to collect the 20 tax on my payment to amazon uk . Well, my answer, and that is a challenge, and a challenge of the 160 countries face under their vat. So i imagine that we would adopt the same response as they do which is that they would neither be more or less effective than and the answer is that you are exactly correct, but their response has been just as effective as the attempts by state governments to collect their sales tax on out of state purchases. That is a challenge for any vat. Not at all. And that is how people will do it, but how is that consistent with the taxing treaties to be taxing uk for sending its stuff into the u. S. Without p. E. We have not issued the tax treaty issues, but there are iss issues with the tax flow destination as well. We would have to the adopt the response that other countries vats have adomted is to t have adopted which is to collect from the consumer, and so there are many challenges with the vat, and those challenges are going to be trading over the destination tax flow based tax. And a large body of work of 160plus countries to draw on to fig ur out how to make it work, and they are looking agent the drafters to make sure that there is not a shift from amazon uk to amazon u. S. And the drafters will have a legal answer to the issue that there will be a tariff inl posed probably on purchase by nontaxable u. S. Persons. And i include both governments. That san issue, too. And the governments and the tax exempt organizations and internet sales, and there has to be some tariff imposed, and now, it is much easier, and i speak as a old legislative drafter to impose the tariff as to collect it. [ laughter ] and if the tariff liability is on the u. S. Consumer, because you cant tax the foreign internet seller, because they have no nexus here to tax, and if it is on the consumer, the likelihood of its being collect ed is extremely low. I think that you could enforce a tariff assuming political wilton purchase by tax exempt and governmental entities. It wont be terribly popular, but i the they it would be enforceable. And this is not a fatal flaw for any of the 160 countries and so it would not be a fatal flaw here. And they have other tax instruments that they are relying on, too, and so they also have a Corporate Tax. Well, in this context. Well, if you are losing that revenue, for instance, and the bottom line is that you are not doing a good job to get the revenue, there are other ways of getting the revenue is what i am saying. I am not sure of this collective use. Well, the netflix taxer for example as it is socalled in australia and adopted in a few other countries is intended to go after exactly mikes concern. Other questions . Yes, sir. Mike, right behind you. And it would help if you would introduce yourself. Eddie, and im not a professional and im an amateur. 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 true. And what about the u. S. Trade deficit . So this is the fascinating question. All of the economists when asked about the effect on the trade deficit say that there is no effect, and the politicians who support it say that it will be having tremendous effects on the trade deficits. And the politicians that oppose it suggest that it will have tremendous increases in the costs to the consumers and business businesses. Yes. Exactly. And it is interesting how the debate on this has flipflopped. Back, i dont know, eight or ten years ago, my experience was that whenever economists pointed out that the Exchange Rate would adjust and no reduction in the trade deficit, it was invariably view viewed as an argument against the border adjustment, and the supporters would denounce that argument as being, you know, intellectual, you know, talk that was not real world, and the oppone opponents of the border adjustment seem to welcome that. Today, and im not sure that everyone in the debate is selfconsistent, and now it is the supporters who like what they like about the Exchange Rate adjusting, and the opponents who reject it. And the economic theories the same, and in my eyes, and allens eyes and other economists eye, it remains valid. Yeah, you wont see a reduction in the trade deficit from the border adjustment, and that is good. There is no inherent reason that retusing the trade deficit in and of itself should be an objective of ours. Any other thoughts on that . Well, the interesting thing is that of course, if we did go to the trade balance, it would not generate the revenue. Yes, there is a revenue issue here. And the house blueprint plan as a whole is going to ip crease the trade deficit, because it is going to boost investment in the United States and so on the one hand, that is great news, and it might still bring in other revenue that people expect, and although it is inherently transsoir because of the balance in the long run, but it could be bad news for those supporters of the border who are hoping to see the trade deficit go down. The blueprint would have the opposite effect which is final from the economic perspective. I am told to remind the audience watching us online f they have questions to submit to events urban. Org. Another question for the audien audience, yes, sir . Rick from yahoo finance. Since Many Companies are saying that we dont want to be the n guinea pig and dont test it out on us, and there some way to build a backstop into the idea so that if it is not going to work as predicted the people harmed are somehow protected . I think it is the political process. If it does not work as advertised, they will have little long, but a fairly short life. Maybe a mechanism to make some assumption which is certainly to be wrong about what the Exchange Rates would have done had this plan not been adopted, and lets wait and compare the actual, change rate to this baseline projection that we made up out of thin air. And then 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. I mean, you cant determine whether this quote, unquote worked by looking at the actual Exchange Rate matching some proje projection that somebody came up with out of thin air, and any number of events could have created or caused changes in the Exchange Rate that would have accompanied the change caused by the plan. If you have an idea of whether the firms would choose in and or out of the system, that is a bad idea always. Yes, horrible. That is wone thing that you will find unanimous agreement on. And i dont know how the design it, but to make sure that is not a thought. I a i do dread the different adjustment adjustments made to the plan as it is moving forward and john mentioned the xem shurngs and the idea of exemptions if there is no domestic substitute for the product which is not a rational grounds to distinguish among them, and the noex opting in or out is the worst of all and i want to echo roseannes comments from there. And two questions from the online audience. Two question, and the panel will take the first and pass on the second, but i will ask them. And wont a destination cash flow cash tax raise Interest Rates, and how do you plan to dross cross the borders for taxes which i am sure is a whole different subject. Well, what allen and roseanne and maybe pam has said or maybe one of you, and i believe that because of the neutralizing treatment to equity, you could see a, you know, some downward pressure on the Interest Rates, and probably slight downward pressure, and not a dramatic one. There would be an increase in the Overall Investment demand which all else equal might drive up the Interest Rate, but the elimination of the preference for debt should go in the other direction, and i think, overcome that. Roseanne, you agree . Yes. Nothing to add to that. Okay. I mean, you know, i dont want to answer the financial institutions. But with the challenge, it is coming up with a system of taxing financial institution, and under the cash flow taxes, and really taxed properly under tincome tax which is hard to do and the todays income tax system wont work. And so if you came up with working closely with the economy and some systems that do it in theory, and they have some issues trying to put them in realty, and if you are coming up with a system that does that in the closed economy, then applying the border adjustment, you know, on top of the system, that is really the easy part. The challenge is coming up with the underlying rules in a closed economy. We have another online question, and it is going back to the question of the interest reduction. Many investments today are already expensed and in advertising and the like, and they are subsidized under the current law and is there an indication of moving to the tax go to zero, and while it would raise revenue, would it be efficient . Yes, it would be more efficient. One of the advantages of the cash flow tax which is downplayed, but it probably should get, you know, a mention is that it also neutralizes the treatment across different investment investments. We have been talking about the overall tax burden on the investment, and the debt equity distinction, and the location of the investment in the United States versus abroad, and also the oldfashioned advantage of treating investments neutrally saying that everything is expensed. Regretly, the blueprint seems to backtrack on that, because it appears to say that the inventories will not be expensed, but forced the stay on lifo, and so there is some glitch that we assume will be removed as we are moving forward and it is an attraction to say that everything is expense and treated neutrally. And when you move to neutral treatment, there are losers of those getting the preferences to d tod today. And that is what it means to move no neutral tax system. If you are not willing to take away some peoples preferential treatment, you wont get to neutral tall ti. And so it does keep the r d adjustment. So it will keep that. And probably not all of the time types that get the credit, but some research have external spillover benefits. So we have been taking allens name in vain for the last hour, and do you want to take a minute to respond to what you have heard . Wait for the mike. One thing they wanted to say, the issue has come up a couple of times about the credit invoice vat versus this, and first of all, i should say that i agree with the spirit of the various comments that if you wanted the go partway, two ways to do it. One is to adopt the cash flow tax, and have a 50 rather than 100 border adjustment which is going to give you, to echo allen, the advantages of the cash flow tax completely, and then it would give you part of the advantage of the destinationbased tax, and also part of the adjustment issues. The alternative way of doing it is to cut the Corporate Tax and introduce the v. A. T. And offsetting payroll subsidy. That has advantages in the sense of at least except for the vat working with the existing systems. One of the things that once you keep it in mind is that the vats are varying a lot across the world, and some vats are narrow, and the imples zif part is a broadbased vat by International St standard, and it has, and therefore it is a better vat than the credit invoice vats that have a lot of exclusions. And when the credit invoice vats get introduced, it is imperative to go to the zero rate to exempt lots of the commodity, and that is not good tax policy, but it is hard to resist. And so once you keep it in mind, and in thinking the about whether a krcredit invoice vat desirable alternative. I wanted to say something, also, about the nature of the revenue raise b raised by the border adjustment, and whether you think it is permanent. I think that there is a tendency and allan has alluded to it, that it is a temporary revenue gain, because you cant run the trade deficits forever, and the trade deficits followed by trade deficits in the future, and so it depends whether you are cutting down on the trade deficits, and that language results in the models of trade, and loft a lot of the the trade related to the desired in which the u. S. Parent in quotes serving the intellectual Property Services from the irish or the luxembourg subsidiary is not really an important. It is not going to have to be replaced by the exports at some point in the future, and no real liability being accumulate edd the foreign parties, and the revenue pick up from that is permanent. In the sense that we are disallowing a deduction for something that we are currently allowing, and that is one of the and if one wants to think of who are the losers from this kind of the change, that is identifying one group of losers which is multinationals taking big advantage of their opportunities to engage in transfer pricing manipulation. All right. So we have 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, and talked about some of the economics of it. Let me ask each of the panelists to give us a sense of what they believe is going to happen a year from now, and what kind of a tax change will we have seen . Roseanne do, you want to start . It seems interesting that the destination cash flow tax is the only horse in town. But i just dontle really see it being the senate going along. So maybe some sort of, maybe the minimum tax of some sort of a [ laughter ] john, what do you think . Well, i think that it is largely depends upon what the Trump Administration does. If the Trump Administration came out full force behind the border adjustment tax, it has a chance, a chance, and 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 are doing nit reconciliation, you still need 50 votes. They only have a twovote majority, and i doubt that Many Democrats would vote for it, so you have to have virtually unanimity among the Senate Republicans. If it looks like there is not that unanimity, i dont believe it will pass the house. I mean, there is, an old verb that i think that older people would recognize as being btud. In 1994, the house pass ed the clinton administrations proposal for a btu tax which is a crude carbon tax in substance. It had no support in the senate, and so they took the difficult vote. But not accomplishing any policy perspective, and that became a verb being btud. And i think that you are already beginning, and i can hear nit discussions already of nervousness of the House Republicans of being btud on the border adjustment tax. And pam, what do you think . Well, you know, i cant tell what is going to happen. I mean, i think that im please ad that this outside of the box idea has taken the discussion by storm, because i do think that we need a broader discussion about what the tax system should look like, and i think that the idea of introducing a consumption tax element is something that whose time, and i dont know whether it has come or not, but if it has not, it is coming soon and i hope that the whole discussion will help to move us in that direction, but i think that at this point, the perspective of all of the companies that i talk to in the business community, the system is broken and broken relative to the rest of the world. And what the rest of the world does is to rely on the consumption tax. So if we can find a way to put a consumption tax element into the system, but maybe in a way that is less can disruptive than going cold turkey towards one, i think that would be a really wise way for us to go. Whether it is politically feasible is to be determined. And the last word, allen . Yes, im not a political forecaster, and it seems more uncertainty than usual in todays environment. And it seems that the border tax adjustment is running into a lot of resistance, and not because for the most part, it is real disadvantages, but because of the various imaginary disadvantages. It is the open question is that if it does end up failing in the end, where do you go from there . One possibility is just a straight tax cut that adds to the deficit which is unwise given the fiscal outlook that we already face. A much more palpable alternative would be an effort to reform the International Tax rules on a revenueneutral basis, and that i imagine would end up looking generally similar to what roseanne and harvey talked about and some variant of that. Thank you. And i would like to thank allen and pam and john and roseanne for a[ applause ]
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