Eliminate the Foreign-Derived Deduction Eligible Income Exclusion

Foreign-derived deduction eligible income (FDDEI) was originally a measure designed to encourage corporations to locate their intangible assets, and thus more international income, within the US. However, recent changes to FDDEI in the One Big Beautiful Bill Act have made it resemble an export subsidy by extending its benefits to export income from more “tangible” assets. It allows companies to exclude 33 percent of their deduction-eligible income, corresponding to a 14 percent effective tax rate on eligible export income.

This option eliminates the FDDEI provision. As modeled here, none of the eligible FDDEI base would be excluded from the corporate income tax base. The higher rate on export income would discourage mobile intangible income from being located in the US. However, it would equalize rates between domestic and export income, which would remove a distortion that favors exports over domestic production. As with other international options, the economic implications are complex and not captured in our model.

On a conventional basis, this option would decrease the primary deficit by $166.6 billion over the budget window. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 174.6 percent by 2056.