The Ryan-Brady Cash Flow Tax: Disguised Protection, Exaggerated Revenue, and Increased Inequality

The proposal by Speaker of the House Paul Ryan and House Ways and Means Committee Chairman Kevin Brady to replace the corporate profits tax with a 20 percent tax on cash flow with no deductibility for imports but complete deduction of exports is misguided for several reasons. First, it is protectionist, because it imposes the tax on the entirety of import value but only on the corporate profit component of domestic production, violating the concept of “like treatment” between imports and domestic goods. Second, a nonprotectionist version would involve a much lower rate and far lower revenues and, in principle, would have to vary sharply across sectors. Third, the tax would punish sectors particularly dependent on imports, especially the retail sector, automobiles, and oil refining. Fourth, the tax would be regressive, by shifting the burden to consumers and away from the holders of corporate shares with respect to the traded part of production and consumption. Fifth, the tax is unlikely to induce a fully compensating rise in the dollar against other currencies such that imports would be no more costly (and exports no more profitable) than before. Because of its protective structure, the proposal is likely to run afoul of rules against protection at the World Trade Organization, of which the United States is a signatory. Nevertheless, because the Ryan-Brady proposal continues to be a priority of Republicans in Congress, and in view of the Trump administration’s mixed signals on the proposal, it is important for the public to understand its elements and the dangers they pose.