274 COLUMBIA JOURNAL OF TAX LAW [Vol.8:257
As with the revenue estimates, there are several sources of
uncertainty associated with the distributional estimates. In the short-
run, the burden of the net revenue raised by the border adjustments
depends on how prices adjust. If exchange rates fully adjust to offset
the border adjustments, then domestic prices would remain unchanged
and the net revenue should be distributed similar to a cash flow tax that
does not burden wage income. However, if exchange rates do not fully
adjust, then domestic prices would rise, resulting in a burden more
similar to that of a broad-based consumption tax.
26
An alternative
approach would attribute zero burden to the border adjustments under
the view that current trade deficits are temporary and will eventually
be offset (with interest) by trade surpluses in the future. Additionally,
the plan is unclear on many details of the business tax changes, and
our methodologies differ for distributing changes in existing income
taxes and consumption-based taxes. Our analysis distributes the
changes in business taxes as incremental changes to the income tax
according to our established methodology,
27
but this approach does not
yield the same result as if the cash flow tax was distributed as a
replacement for the current income tax on business income.
28
In order to illustrate the uncertainty concerning the short-run
effects of the plan across the income distribution, we report the percent
change in after-tax income in 2017 under alternative assumptions
about the size of the changes in tax burdens due to the business tax
provisions and the border adjustments, and how those burdens are
distributed (Table 5). Overall, under the alternative assumptions the
26
Eric Toder, Jim Nunns & Joseph Rosenberg, Methodology for
Distributing a VAT, TAX POLICY CTR. (Apr. 2011),
http://www.taxpolicycenter.org/sites/default/files/alfresco/publication-
pdfs/1001533-Methodology-for-Distributing-a-VAT.PDF [perma.cc/89GU-JK3D]
27
Jim Nunns, How TPC Distributes the Corporate Income, TAX POLICY
CTR., URBAN INST. & BROOKINGS INST. (Sept. 13, 2012),
http://www.taxpolicycenter.org/publications/how-tpc-distributes-corporate-income-
tax/full [perma.cc/V2XX-VD8D]
28
Further, by convention, TPC’s distributional analyses do not include
short-run wealth effects. In particular, if exchange rates adjust to offset the effect
of the border adjustments on international trade, the appreciation of the dollar
would reduce the value of Americans’ foreign asset holdings. This reduction in the
value of existing (foreign) assets, which would primarily affect high-income
households, is not included in the distribution tables. In addition, replacing the
corporate income tax with a cash flow consumption tax could reduce the value of
old capital—another transitory effect; however, we assume that transition rules
(allowing existing asset holders to continue to deduct unused depreciation and
interest on outstanding loans) would largely offset this wealth effect. We are
reexamining our distributional assumptions and may revise our analysis in a future
report.