In their October 14 Wall Street Journal op-ed, former House Speaker Paul Ryan and economist Kyle Pomerleau revived the long-dormant idea of a destination-based cash-flow tax (DBCFT) as a sophisticated alternative to tariffs. They argue that by shifting the corporate tax base to where goods are consumed rather than produced, the U.S. could strengthen manufacturing while keeping global trade “neutral.”
It’s clever in theory. Under the plan, companies would no longer deduct the cost of imports, and revenue from exports would be excluded from tax. On paper, imports become more expensive, exports more profitable, and domestic production more attractive. Economists insist this is not a tariff-and-subsidy pair because, they say, currency markets would instantly adjust. A stronger dollar, rising by roughly the same percentage as the new tax rate, would make imports cheaper in dollar terms and exports pricier abroad—offsetting both effects and restoring “neutrality.”
That is the heart of the argument: the dollar appreciates just enough to cancel the trade distortion. Imports aren’t really taxed; exports aren’t really subsidized. Nothing changes—except the tax base moves from where goods are produced to where they’re consumed.
But neutrality is no virtue if it neutralizes the benefits of trade itself.
The Ryan-Auerbach model assumes an equilibrium in which each country ultimately consumes what it produces. Exchange-rate adjustments wipe away the relative price differences that drive international commerce. In that theoretical world, there is no reason for trade to occur—each nation produces mainly for its own consumers, and the cross-border flows that power global specialization disappear.
That tidy equilibrium stands in direct contradiction to the law of comparative advantage, first articulated by David Ricardo more than two centuries ago. Ricardo demonstrated that nations prosper when they specialize according to their relative efficiencies and trade the surplus. Trade is not a zero-sum contest; it’s a cooperative engine that raises productivity, lowers prices, channels capital to its most efficient uses, and expands real incomes on both sides of the border.
By contrast, the DBCFT’s “neutral” world erases those differences. If exchange rates always move to equalize prices, comparative advantage disappears. When every country produces only what it consumes, specialization vanishes, global productivity stagnates, and the welfare gains from trade evaporate. Neutrality, in this sense, becomes self-defeating—a system that prizes balance over growth.
Even in practice, the supposed offset is far from benign. A stronger dollar may mathematically cancel the DBCFT’s border adjustment, but it still hurts exporters. Foreign customers must pay more of their own currency to buy U.S. goods, reducing demand abroad. Multinationals that earn profits in euros, yen, or pesos see their foreign earnings translate into fewer dollars. Under accounting standards (ASC 830), those translation losses hit “other comprehensive income,” eroding equity even when operations abroad remain healthy. For subsidiaries whose functional currency is the U.S. dollar, the hit flows directly into earnings.
In other words, what looks neutral on a blackboard can vaporize billions in reported profits for the very companies that employ Americans and invest in U.S. infrastructure. And if the dollar fails to adjust by exactly the right amount—overshooting or lagging—the DBCFT behaves exactly like a tariff: consumer prices rise, import-heavy sectors suffer, and trade partners retaliate.
Ryan’s political argument was that the DBCFT could replace tariffs as a market-friendly way to bring production home. Instead of imposing duties, it would let tax design and currency adjustment “reshore” global supply chains. In theory, foreign firms would move factories to the United States to avoid import nondeductibility, while U.S. exporters would expand at home to take advantage of full expensing and tax-free exports. But in reality, the stronger dollar that’s supposed to make the plan “neutral” would also make U.S. goods less competitive abroad. America might produce more—but sell less to the world.
That’s the fundamental contradiction. A perfectly neutral tax achieves no competitive gain; an imperfect one risks inflation and balance-sheet chaos. Either way, the outcome undercuts the very goals the plan was meant to advance.
Economists admire the DBCFT because it closes loopholes and curbs profit shifting. But tidy models are dangerous when they ignore how currency markets and corporate accounting actually function. A policy that depends on flawless exchange-rate precision is less reform than arithmetic wish-fulfillment.
Two centuries of empirical evidence confirm Ricardo’s insight: comparative advantage is not an inconvenience to be neutralized—it’s the source of prosperity itself. The DBCFT’s imagined equilibrium would strip trade of that function, replacing specialization and growth with sterile balance. A tax code that tries to cancel every difference ends up canceling progress.
Real economics thrives on difference. It’s friction—the messy interplay of costs, skills, and innovation—that drives productivity and raises living standards. When policymakers chase mathematical symmetry, they trade dynamism for stasis. In the name of neutrality, they abolish the very principle that makes markets work.
