Every few years, Washington rediscovers a “big idea” in tax policy that promises to fix everything from trade imbalances to corporate inversions. The latest revival comes from former House Speaker Paul Ryan and economist Kyle Pomerleau, who recently used the Wall Street Journal to champion a destination-based cash-flow tax—an elegant-sounding reform they claim would strengthen U.S. manufacturing and make tariffs unnecessary.
It sounds clever: tax goods where they’re consumed, not where they’re produced. Under the plan, imports would no longer be deductible for tax purposes, and exports would be exempt. On its face, that looks like a tariff-and-subsidy pair—imports penalized, exports rewarded. Economists rush to insist, “No, it’s neutral,” arguing that the dollar would appreciate enough to offset both effects.
Here’s the theory. Once exports are exempt and imports nondeductible, foreigners buy more American goods, while Americans buy fewer foreign ones. That increases demand for dollars and decreases supply, causing the dollar to appreciate roughly by the tax rate—say 20 percent. The stronger dollar then makes imports cheaper again in dollar terms and exports dearer abroad, offsetting the tax asymmetry. In this model, the exchange-rate shift exactly cancels the DBCFT’s trade effects. Imports and exports end up priced the same as before; the tax base simply moves from production to consumption.
That neat counterbalancing is what replaces the tariff as a vehicle for encouraging firms to produce and export from the United States. Instead of imposing duties, the DBCFT relies on a theoretical currency movement to tilt incentives toward domestic production. Ryan’s broader motivation was to encourage investment and reshoring—to make the U.S. a more attractive place for both domestic and foreign firms to build and export from, while importing less. The policy promised tariff-like benefits without calling them tariffs.
The problem is that currencies don’t behave like algebra. Exchange rates don’t move instantly or precisely by policy design; they respond to capital flows, expectations, and interest-rate differentials. A sudden 20 percent appreciation would hammer U.S. multinationals’ foreign earnings. Dividends from overseas subsidiaries, interest on intra-company loans, and royalties—all denominated in foreign currency—would convert into fewer dollars. Under accounting standards (ASC 830), those translation losses flow through other comprehensive income, cutting equity and distorting balance sheets even if operations abroad remain strong. For entities whose functional currency is the dollar, the hit appears directly in earnings.
In plain English: what looks “neutral” on paper could vaporize billions in reported profits for global companies headquartered in the United States. The very firms expected to invest and export more could see their reported capital eroded by accounting translation effects the model ignores.
Economists admire the DBCFT because it eliminates interest deductions, allows full expensing, and limits profit-shifting. But tidy models are dangerous when they ignore the rough edges of markets and accounting. A policy that counts on perfect exchange-rate precision is less reform than wishful arithmetic.
History offers a warning. When Ryan’s House blueprint floated this idea in 2016–2017, it collapsed within months. Retailers, refiners, and import-heavy industries protested that it was a disguised tariff; CFOs warned of balance-sheet chaos; even sympathetic economists conceded that “neutrality” required heroic assumptions.
Real economics—the kind CFOs and investors live with—is messy. Exchange rates overshoot, consumers react to prices, and financial statements reflect volatility, not theoretical balance. Policymakers should focus on clear, productivity-based incentives—accelerated expensing, stable rates, research credits—rather than a currency miracle that substitutes theory for experience.
Economic models may be neat. Real economics is not. When tax reform depends on a magic exchange-rate adjustment to make its math work, it’s not neutral—it’s naïve.
