The Known Unknowns of the Business Tax Reforms Proposed in the House Republican Blueprint

Graetz, Michael J.

In 2002, referring to Iraq and its relationship to terrorism, Donald Rumsfeld declared “that there are known knowns, there are things we know we know. We also know that there are known-unknowns, that is to say we know there are some things that we do not know, but there are also unknown-unknowns—the ones that we don’t know we don’t know.” There was nothing new in what Rumsfeld said, and some thought he was uttering evasive gibberish, but Rumsfeld’s classifications are quite useful. Exploring known unknowns is, for example, much of the work of science. Donald Rumsfeld turned out to be a better epistemologist than a defense secretary. I shall begin briefly with some known knowns about the House Blueprint’s proposal then turn to known unknowns.

The business tax reform proposed in the Blueprint looks very much like a reform of the corporate income tax, but in reality it is closer to a repeal of the corporate income tax and the substitution of a cousin to a value-added tax (VAT). The Blueprint does retain some income tax features not found in a VAT; the taxation of net investment income and retention of flow through treatment of partnerships are important examples. The fact that the Republican proposal is more like a value-added tax than an income tax is difficult to explain to the public. Nevertheless, it is important to understand that the House Republican business tax reform—often referred to as a destinationbased cash-flow tax (DBCFT)—is equivalent to a subtractionmethod valued-added tax with a deduction for wages.


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Columbia Journal of Tax Law

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November 17, 2017