Increase the Foreign-Derived Deduction Eligible Income Exclusion to 50 Percent

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 increases the FDDEI exclusion rate from 33 percent to 50 percent, while leaving the 21 percent corporate rate unchanged, corresponding to a 10.5 percent effective US tax rate on eligible FDDEI income. The more competitive tax rate on FDDEI would help attract more mobile intangible income to the US, and encourage more tangible investment as well, but it may distort business investment decisions toward deduction-eligible income rather than the best economic use.

Tax Foundation modeling reflects only a partial profit-shifting response to a reduced FDDEI rate, but not dynamic effects. As with other international options, the economic implications are complex and not captured in our model.

On a conventional basis, this option would increase the primary deficit by $69.0 billion over the budget window. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 176.5 percent by 2056.