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

Eric Bond and Thomas Gresik

International Tax and Public Finance, 2023, vol. 30, issue 6, No 5, 1576-1600

Abstract: 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.

Keywords: Destination-based taxes; Source-based taxes; Cash flow taxes (search for similar items in EconPapers)
JEL-codes: F23 H21 H73 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10797-022-09766-6 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: On the Incentive Compatibility of Universal Adoption of Destination-Based Cash Flow Taxation (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:itaxpf:v:30:y:2023:i:6:d:10.1007_s10797-022-09766-6

Ordering information: This journal article can be ordered from
http://www.springer. ... ce/journal/10797/PS2

DOI: 10.1007/s10797-022-09766-6

Access Statistics for this article

International Tax and Public Finance is currently edited by Ronald B. Davies and Kimberly Scharf

More articles in International Tax and Public Finance from Springer, International Institute of Public Finance Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().