Zucman advises adoption of Sales Factor Apportionment.
Gabriel Zucman, the world-renowned French economist, publicly advised his homeland on how to handle the U.S. tax reform moves. In the major paper, Le Monde, Zucman proposed France beat the U.S. by adopting Destination Based Sales Factor (DBSF). This is known by some as Destination Based Profit Tax. Zucman believes the border adjusted tax is an attempt to turn the U.S. into a major tax haven. Instead of reading stories of Ireland and Luxembourg stealing American corporate profits, he believes that the U.S. would create a de facto tax haven with the Border Adjusted Tax. The Border Adjusted Tax is part of the overall GOP tax reform plan known as Destination-Base Cash Flow Tax (DBCFT).
The inherent distortions of the Border Adjusted Tax allow serious tax avoidance both here and abroad. For example, Domestic companies could purchase “soon-to-be” exports from companies who can’t use the tax break. This would effectively end the taxes they have to pay to the U.S. As long as the costs of the export can count against the domestic taxes, you have a giant loophole. Proponents of DBCFT argue this can be fixed. But any fix runs afoul of World Trade Organization (WTO) rules. And while the WTO has many flaws, we cannot easily withdraw or get into a fight.
Winning the Race to the Bottom tax game
Meanwhile, Zucman doesn’t view any of the alternative simple tax reduction plans as anything more than a Race to the Bottom. If we lower our taxes, instead of lowering theirs, he says France should do something different. He gave France the blueprint towards beating the U.S. Some might say he took the playbook from us.
If France were to adopt Destination Based Sales Factor while the U.S. adopted the Destination-Based Cash Flow Tax, it could be disastrous for the U.S. DBCFT has some serious WTO implications. By trying to give the domestic producers a benefit and burdening importers, trading partners could challenge the plan in the WTO. However, DBSF doesn’t burden importers and can avoid other WTO problems by simply not considering exports as part of the tax base. While the U.S. is facing a major WTO challenge, France could be getting all the benefits of a smart, simple and effective tax system. Businesses do love tax breaks, but more than anything they love stability. If France is first to a stable tax system, the U.S. will have to work twice has hard to get them back.
Zucman believes France could beat the U.S. to implementing Destination Based Sales Factor. While possible, it is concerning that the U.S. might implement a problematic tax reform solution while a competing country gets to the better solution first.