A Destination-Based Cash Flow Tax Can Be Structured to Comply with World Trade Organization Rules

Abstract

This paper briefly outlines alternative approaches to enacting a destination-based cash flow tax that are more clearly compatible with the World Trade Organization rules than the approach that has previously been described in the literature. The first structural alternative involves expanding the universe of businesses subject to the tax by clearly defining both the base of the new U.S. business tax and its tax nexus requirement as domestic consumption, and thereafter treating foreign importers and other sellers equivalently, rather than imposing a deduction disallowance or an import tax. The second alternative involves adopting a business activities tax, and then enacting a business-level incentive for encouraging employment that is as a legal matter separate from the tax. Either approach avoids the key World Trade Organization concerns.

Keywords: cash flow tax, tax reform, WTO, destination-basis taxation, international economic law, trade law

JEL Classification: F5, H2, K3