Replace the Corporate Income Tax with a Destination-Based Cash Flow Tax

The US corporate income tax is a source-based, or “territorial,” system, taxing corporate profits where goods and services are produced. The One Big Beautiful Bill Act increased the amount of capital investment that can be deducted immediately, but some portions remain deducted gradually over time. Interest payments are partially deductible, while returns to equity are not, creating a bias toward debt financing. The business tax system also involves complex provisions to address cross-border taxation.

This option replaces the current corporate income tax and individual income taxes on non-corporate businesses with a destination-based cash flow tax. It provides full and immediate expensing for all business investment, flips the treatment of interest so that interest paid is not deductible and interest received is not taxable, removes foreign income from the tax base, removes general business tax credits, removes the Section 199A pass-through deduction, and is border adjusted. The border adjustment, which exempts exports and taxes imports, ensures the tax applies where goods and services are consumed rather than where they are produced.

The resulting measure of profit faces a flat 21 percent tax on all business cash flow. Taxing cash flow and providing full and immediate deductibility for business investment would significantly reduce the cost of capital and incentivize new domestic investment. It would render complex profit-shifting rules unnecessary.

On a conventional basis, this option would decrease the primary deficit by $2,334.7 billion over the budget window. Long-run GDP would rise by 1.4 percent, while long-run GNP would also rise by 1.4 percent. On a dynamic basis, the primary deficit would decrease by $3,276.6 billion from 2027 through 2036, $935.9 billion more than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 150.6 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 1.4 percent. The top quintile of taxpayers would experience a 1.2 percent decrease, whereas the bottom quintile would experience a 5.4 percent decrease. On a long-run dynamic basis, taxpayers would see a 0.5 percent decrease on average.