Destination-based cash flow taxes, border adjustments, and trade in two common trade models.

Abstract: We analyze the effects of imposition of a destination-based cash flow tax (BDCFT) with border adjustment taxes (BAT) in two common international trade models: the specific factors model and the Melitz model of monopolistic competition. We extend our earlier work on analysis of DBCFT with BAT to a specific factors model with capital mobility and to a Melitz-style model of monopolistic competition with heterogeneous firms and with entry and exit. Our objectives are to analyze the effects (or lack thereof) of imposition of the tax plan on trade flows and tax revenues, and to evaluate to what extent these effects match up with the popular claims of proponents and opponents of the DBCFT/BAT. While the extension of the specific factors model to include capital mobility does not change the basic neutrality result that says that trade flows are unaffected by impositionof the DBCFT/BAT, it does allows us to address welfare effects on owners of capital. Because this model includes a non-traded goods sector, we can address the recent concerns about to what extent the DBCFT effect on capital accumulation is diminished by the presence of this sector. We also address the question of incidence, and show that even in the presence of a current account deficit, the incidence falls on domestically-owned factors. This is true both as a static result and as a steady-state result. While the specific factors model is interesting, it is not as widely used in trade as Melitz's monopolistic competition model. Hence we investigate the effects of a DBCFT/BAT on a monopolistic competition model. The key result from the monopolistic competition model is that the neutrality with respect to trade flows of the DBCFT/BAT remains, even with endogenous entry and exit. We plan extensions to address questions of transfer pricing among multinationals, capital accumulation, and the effects on asset holdings.