As the weather starts to heat up in Northeast Ohio, so do the chances for significant reforms to both the nation’s tax code and one of its most influential pieces of trade legislation, the North American Free Trade Agreement (NAFTA). After making the renegotiation of NAFTA and the simplification of the U.S. tax system two cornerstones of his presidential campaign, it appears President Donald Trump is moving forward on both fronts at once. Despite staunch opposition from some corners, it is widely accepted that this summer will present the best chance in decades for reform in both areas. The country has experienced marked changes since the passage of NAFTA in 1993 and President Ronald Reagan’s 1986 Tax Reform Act. The rise in globalization along with the internet age has eased the movement of goods and capital across borders. Many of the world’s most profitable companies do not deal in tangible goods at all. Rather, the value in these companies resides in their intangible property — patents, licensing, and mobile capability — which can easily fall through the cracks of the current tax code and escape taxation.
The current tax code was not built to properly account for such free movement of people, services and capital across boarders, which is why the leading Republican proposal promoted by House Speaker Paul Ryan to modernize the U.S. tax system, called “A Better Way,” or more commonly the House “Blueprint,” has introduced the idea of repealing the corporate income tax and replacing it with a Destination Based Cash Flow Tax (DBCFT). The idea behind the DBCFT is to change the focus from taxing businesses from an “origin based” system, in which goods and services are taxed based on the domicile of company, to a “destination based” system, in which tax is levied based on where the product or service is actually consumed or sold. By shifting the focus of taxation to the customer base, which is less mobile and more easily defined than determining the citizenship of a multinational entity, proponents of the proposal believe that the DBCFT is more efficient, easier to administer, and less prone to tax evasion than the current system.