Michael Graetz

With U.S. tax reform looming on the horizon, the Richman Center gathered a panel of subject matter experts to explain major policy issues, challenges, and opportunities. Hear what panelists Mihir Desai (Mizuho Financial Group Professor of Finance, Harvard Business School), Michael Graetz (Columbia Alumni Professor of Tax Law, Columbia Law School), and Alex Raskolnikov (Wilbur H. Friedman Professor of Tax Law, Columbia Law School) have to say.

Common Ground

The panelists noted that an American tax overhaul could actually be one of the few bipartisan issues of our day. According to Graetz, “We’re seeing uniform consensus that the United States needs to lower the corporate tax rate.” Raskolnikov agreed, noting that “there are two big questions—revenue and distribution.”

The combination of a business-friendly president, a Republican Congress, and progressive reform features to placate Democrats could give tax reform a better chance than it has had in decades.

Background: 1986 Tax Reform

The last major U.S. tax policy reform was in 1986. This tax overhaul put the United States in a more competitive position with other countries, even giving it a leading role in corporate tax policy at the time. However, as other countries have continued to make progress with their handling of corporate taxes, the American tax system has fallen behind. With corporate tax rates stagnant since 1986, politicians and legislatures have called for a tax overhaul.

What is the Border Adjustment Tax?

In addition to lowering the corporate tax rate to 20 percent, the Destination-Based Cash-Flow Tax (DBCFT), also known as the House Blueprint, taxes goods and services in the jurisdiction where they are consumed—a major departure from the current system that bases taxes on where the goods and services are produced or where the company is headquartered. This so-called “border-adjustment feature” taxes imports and exempts exports.

The DBCFT effectively replaces the corporate income tax with a levy on consumers, but with major loopholes. In an effort to spur employment and development, companies can use the cost of wages as well as capital investments (rather than depreciating them over years) as tax deductions. However, interest costs would no longer be deductible. These features makes the DBCFT what Graetz calls “a cousin to a value-added tax (VAT),” making it progressive relative to a VAT, and suggesting that even some Democrats could embrace such a tax system.

The DBCFT has substantial support—and opposition as well. With its new lower tax rate and incentives for growth, “there’s no longer any reason for companies to transfer out of the United States,” explained Mihir Desai. “The US could become a tax haven.”