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On the incentive compatibility of universal adoption of destination-based cash flow taxation

Author

Listed:
  • Eric W. Bond

    (Vanderbilt University)

  • Thomas A. Gresik

    (University of Notre Dame)

Abstract

We analyze the incentives for an individual country to deviate from destination-based cash flow taxation (DBCFT) in a two-country model in which both countries have adopted DBCFT. A change in a country’s corporate tax rate, degree of taxation of capital income, and/or level of border adjustment generates welfare effects through fiscal effects, a price level effect, and relative price effects. We establish that at least one country will have an incentive to deviate from universal DBCFT by reducing the deduction for capital investments, even with asymmetric countries. For a deviation involving a reduction in border adjustments, we show that both countries will have an incentive to deviate in the symmetric case. Universal DBCFT will not be incentive compatible in a one-shot tax setting game, so commitment mechanisms will be required to sustain it as an equilibrium.

Suggested Citation

  • Eric W. Bond & Thomas A. Gresik, 2023. "On the incentive compatibility of universal adoption of destination-based cash flow taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(6), pages 1576-1600, December.
    • Handle: RePEc:kap:itaxpf:v:30:y:2023:i:6:d:10.1007_s10797-022-09766-6
    DOI: 10.1007/s10797-022-09766-6
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    Cited by:

    1. Manon Francois, 2021. "Profit Shifting and Equilibrium Principles of International Taxation," CESifo Working Paper Series 9211, CESifo.

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    More about this item

    Keywords

    Destination-based taxes; Source-based taxes; Cash flow taxes;
    All these keywords.

    JEL classification:

    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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