A proposed overhaul of the US corporate income tax system would slash the primary deficit by $3.3 trillion over a decade while boosting long-term economic growth by 1.4 percent, according to a new analysis published by the Tax Foundation. The plan would replace the current corporate income tax and individual taxes on non-corporate businesses with a destination-based cash flow tax set at a flat 21 percent rate. The system would tax goods and services where they're consumed rather than where they're produced, exempting exports and taxing imports through a border adjustment.
The Tax Foundation's modeling reveals the policy would decrease the primary deficit by $2.3 trillion on a conventional basis from 2027 through 2036. When economic growth effects are factored in, the primary deficit reduction climbs to $3.3 trillion over the same period—$935.9 billion more than the conventional estimate. Long-run gross domestic product would increase by 1.4 percent, and gross national product would rise by the same margin. When interest cost changes are incorporated, the publicly held debt-to-GDP ratio would fall below baseline projections, reaching 150.6 percent by 2056. However, the analysis also shows distributional trade-offs: in 2036, taxpayers would see their after-tax incomes decline by 1.4 percent on average, with the bottom fifth of earners experiencing a 5.4 percent decrease compared to a 1.2 percent drop for the top fifth.
The report explains the proposal would provide full and immediate expensing for all business investment, reverse the treatment of interest by making interest payments non-deductible while making interest received non-taxable, and remove foreign income from the tax base. The plan would also eliminate general business tax credits and the Section 199A pass-through deduction. According to the Tax Foundation's analysis, the border adjustment mechanism ensures the tax applies where goods and services are consumed rather than where they're produced, fundamentally shifting from a source-based to a destination-based system.
The policy would work by dramatically reducing the cost of capital and creating stronger incentives for new domestic investment, the report finds. Allowing businesses to immediately deduct all investment expenses—rather than gradually over time as current law requires—would make capital projects more attractive. The shift to cash flow taxation would make complex profit-shifting rules unnecessary, since the system wouldn't tax where production occurs. The report notes this would eliminate the need for intricate provisions addressing cross-border taxation that currently complicate the business tax system. The current setup creates a bias toward debt financing because interest payments are partially deductible while returns to equity aren't, a distortion the new system would remove by making neither interest paid nor received part of the tax calculation.
Looking ahead, taxpayers would see a 0.5 percent decrease in after-tax incomes on a long-run dynamic basis, substantially smaller than the 1.4 percent short-term impact measured in 2036. The proposal represents a fundamental restructuring of how the US taxes business income, moving from taxing profits where goods are made to taxing them where they're sold. For policymakers weighing deficit reduction against distributional concerns, the analysis suggests the trade-off is clear: substantial long-term fiscal gains and economic growth, but with disproportionate near-term costs borne by lower-income households.