Following-up on Joel's great post from a few days ago, here's more on the GOP tax plan, from Reuven Avi-Yonah and Kimberly Clausing:
The introduction to the Ryan proposal (the “Blueprint”) states that:
This Blueprint represents a dramatic reform of the current income tax system. This Blueprint does not include a value-added tax (VAT), a sales tax, or any other tax as an addition to the fundamental reforms of the current income tax system. The reforms reflected in this Blueprint will deliver a 21st century tax code that is built for growth and that puts America first.
This statement is important, because as will be discussed below, the business part of the proposal can be seen as a modified subtraction method VAT. If it were a VAT, it would not have problems with tax treaties or with the WTO rules. But since it declares itself not to be a VAT, and has at least one crucial feature that differs from a VAT, it may have problems with both.
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The business tax regime of the Blueprint can be seen as a modified version of a consumption tax - specifically, a subtraction method VAT (although the Blueprint explicitly denies that it is a VAT). Specifically, the Blueprint imposes tax on cash flow, allows expensing of capital expenditures, and disallows net interest expense. All of these are also features of a subtraction method VAT.
However, the Blueprint does allow a deduction for wages, while a subtraction method VAT would disallow them. This feature probably makes the Ryan tax not WTO compatible. Fundamentally, we need to consider the reason why a VAT, whether using a credit-invoice or subtraction method of calculating the tax, is border adjustable. Sales taxes, excises and VATs are border adjustable because the tax component in exports is measurable and the price of imports is measurable, and there is no distortion introduced by the tax; goods receive like tax treatment in the domestic market irrespective of where they are produced. By so limiting border adjustments, the WTO reduces opportunities for countries to subsidize exports or overtax imports.
