There are two ways in which the US Tax System stands out. The US corporate tax rate is the highest in the Western World, but unlike in the EU there is no VAT. Traditionally, the VAT has been unpopular with the Republicans in particular, who fear it will cause an increase in overall taxes and spending (as was the case, when Denmark introduced the VAT in the late 1960s).

During his campaign President-elect Trump promised to lower the corporate tax rate and according to the Wall Street Journal the incoming Administration is also considering changes to the corporate tax base. If you add the moves considered by the new Administration up, they almost amount to replacing the corporate tax system with a VAT (even if this is not mentioned in the article).

Here is what is being considered:

Capital expenses to be deductible immediately rather than through depreciations, whereas interest payments should not be deductible. Exports are to be exempted from taxation, whereas imports should be included in the tax base.

That adds up to a VAT system. The only – albeit huge – element missing is the wage bill. In a VAT system it is not deductible, as the VAT is formally a tax on the value added. Basically the proposal is a VAT with a wage subsidy to domestic wage earners. It could easily be transformed to a VAT proper by including the wage bill in the tax base.

Could it not, however, be seen as a cash flow tax instead? Not exactly. A true cash flow tax is in effect a tax on rents (extraordinary profits that is). In a cash flow tax system – while the wage bill is excluded – exports are not. Yet in the proposed system income from exports would remain untaxed, while imports will be taxed in full. It could be transformed into a cash flow tax as well though, if export revenues are included in the tax base, while import revenues are made deductible.

One thing is certain. The proposed system would not imply neutrality between imports and domestic goods, as claimed by Kevin Brady, House Ways and Means Committee chairman in the WSJ piece. That is pure nonsense. Both imports and domestic goods will be taxed, alright, but domestic producers would be allowed to deduct expenses such as their wage bills. To domestic producers, the Trump tax would work like a cash flow tax, leaving only rents to be taxed. To make the proposed system neutral, it would have to be turned into a VAT proper or cash flow tax proper.

Interestingly a move by a future Trump Administration to a semi-VAT as layed out would in effect remove the entire US corporate taxation as we know it. That would inevitably speed up the ongoing – and beneficial – international tax competition. It is a well-known fact that corporate taxation is an inferior kind of taxation. As shown by Kotlikoff et al., the World, including its wage earners, would be better off without corporate taxation, even if both wage and consumption taxes were raised to compensate for the revenues lost.

Still – in the case of the US – the risk is of cause that a VAT proper would generate a lot of revenue, creating political incentives to increase spending.

Another looming threat is the blatant protectionist element of the present proposal (wiz. the non-neutrality vis-a-vis traded goods) if the semi-VAT is not turned into a VAT or cash flow tax proper. Not only would that make everybody worse off, but could set off a new round of protectionist moves around the World.