Can corporate tax reform boost your standard of living? The Dallas Fed explains

The United States could boost its standard of living by 6 to 9 percent using one simple trick, a new report by the Federal Reserve Bank of Dallas found.

OK, so it’s not really that simple, if we’re being honest: The trick is fundamentally turning around the way we tax corporations.

And while it could boost living standards, it could have unintended ripple effects on trade.

“If tax reform were easy, people would have done it a long time ago,” said Jason Saving, a Dallas Fed economist and a co-author of the report.

Though the Fed is staunchly apolitical and doesn’t make formal public policy recommendations, the report acknowledges that “corporate tax reform has become a high-profile issue amid fears that firms are increasingly taking their headquarters and production facilities offshore and booking profits abroad.”

President Donald Trump has vowed to lower what he describes as a sky-high tax rate for companies and has made a habit of publicly flogging big companies he says are offshoring jobs.

According to the report — one of the bank’s periodic, “economic letters” — it’s true that, relative to other countries, the U.S.’s corporate tax rate, 39.1 percent, is “easily the highest among developed world competitors and almost double the rate that prevails in the U.K.”

Chart by Federal Reserve Bank of Dallas

However, the letter sets that against the average effective U.S. tax rate, which is closer to 27.7 percent.

What’s going on there, the report says, is that “tax avoidance,” or liberal use of corporate tax loopholes and other strategies, means corporations actually pay much lower than the actual rate.

So the report explores a few corporate tax reform ideas that could meaningfully boost revenue without sending corporate tax attorneys into overdrive looking for ways to sock away money overseas.

The report mentions some commonly discussed measures, such as lowering the corporate tax rate, as the president has suggested.

But those would attack the problem, the report says, “in piecemeal fashion.”

Chart by Federal Reserve Bank of Dallas

Lowering the corporate tax rate by itself would “increase the nation’s fiscal imbalance unless coupled with revenue-raising measures such as a broadening of the tax base,” for instance.

Instead, the report examines the root idea of taxing the money that companies bring in — as opposed to building a tax structure based on the destination of products and cash.

One such measure the report explores is what’s called a “destination-based cash-flow tax,” or a DBCFT.

What it would do is tax goods or services sold in the U.S., regardless of where they’re produced and not tax things that are exported.

That, the report says, would even out corporate taxes between the U.S. and other countries. It would also encourage investment and reduce the incentive for companies to, as Saving put it, “park … money overseas.”

“By having more investment and saving over time, it pays off and the economy becomes larger than it would have been without doing that,” Saving said. When the economy grows, the economy’s stakeholders (in this case, Americans) benefit. And that’s how such a tax system would increase our standard of living.

But if we’re just taxing stuff we sell in the U.S. regardless of where it’s made, doesn’t that make the DBCFT a tariff, or a tax on imports?

Sort of, the report says.

In the short term, the tax system would benefit companies that send their products abroad and would hurt companies that import stuff and services.

In the longer term, though, such a system would likely send the value of the U.S. dollar climbing so high that it would offset some of those effects, because exchange rates will make the stuff U.S. exporters sell more expensive for foreign buyers.

Saving said this particular type of tax system hasn’t been tried in developed countries — although most countries have tax systems pretty similar. Still, he said, it’s tough to say exactly how it would play out in the U.S.

And, like any tax system, it creates economic winners and losers.

“Of course, compensation could in theory be paid from winners to losers to offset the harmful side effects of whatever tax reform is adopted,” the report concludes. “But history suggests that such payment is unlikely.”