Professor Rebecca Kysar’s article on the new international tax regime was published in The Yale Law Journal.
The Tax Cuts and Jobs Act of 2017 (TCJA)1 significantly changed the way the United States taxes multinational corporations on their cross-border income. The legislation, however, both failed to solve old problems in the international system and opened the door to new ones.
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One of the most disappointing aspects of the legislation is its immense cost. The TCJA’s tax cuts will shrink revenues over the next decade by $1.9 trillion.2 The actual decrease in revenue is likely to be much greater if the law’s expiring provisions, or a portion of them, are made permanent.3 Additionally, the new legislation has created numerous tax planning opportunities that will result in a loss of further revenue.
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The new “pass-through” deduction, which was intended to create parity with the new lower rate available on corporate income, inefficiently and arbitrarily punishes workers and certain industries and allows for significant tax planning opportunities. Individuals may also now be able to use corporations as tax shelters to avoid the top rate, thereby undermining the individual income tax system.
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Other developed nations have increasingly relied on consumption taxes, like VATs, as supplements to traditional business income taxes.
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A VAT is often dismissed as a political nonstarter in the United States, but the destination-based cash flow tax proposal of the House is essentially a modified VAT with a deduction for wages. This new type of consumption tax progressed surprisingly far in the reform process.
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Finally, the international system of taxation is predicated on divisions of taxing jurisdiction that have no bearing in the modern global economy. A longer-term objective should be to develop a consensus as to how to tax remote businesses selling into markets from abroad. This should include serious re-examination of our double tax treaty regime, which reinforces archaic conceptions of how income should be allocated among states.