WASHINGTON, September 13 — Replacing the US business income tax with a destination-based cash flow tax would grow the economy by 1.4 percent over the long run and cut the 10-year deficit by $3.9 trillion on a dynamic basis, including interest savings, according to a new Tax Foundation analysis. The bottom line: it is one of the few reforms the Washington-based tax policy research organization identifies that can raise revenue and expand the economy at the same time.
The analysis, titled Options for Reforming America’s Tax Code 3.0: A Policymaker’s Guide to Tax Reform Trade-Offs, evaluates major options for overhauling the US business tax system. The destination-based cash flow tax, or DBCFT, stands out among them.
Three changes to the corporate code
The DBCFT makes three changes to the corporate income tax. It provides immediate expensing for investment instead of depreciation over time. It eliminates both the deduction for interest paid and the taxation of interest received.
And it applies a border adjustment, which can be implemented in several ways; one approach is to deny the deduction for imported goods and services and exclude exports from taxable income. Expensing drives most of the growth effect, according to the Tax Foundation.
The current code taxes businesses on profits they earn and, in some cases, on the investments they make. The One Big Beautiful Bill Act removed the tax on some types of investment with permanent, immediate deductions for equipment and research, but it left out structures. Those must be deducted across 27.5 to 39 years, except for qualified production property, which temporarily qualifies for expensing.
Because inflation and the time value of money shrink the value of a deduction over time, businesses cannot deduct the full real cost of what they build, so the business tax falls on the normal return to investment.
The debt bias and profit shifting
The current code is also biased toward debt over equity. A company that borrows deducts its interest payments, while a company that funds the same investment by selling equity cannot deduct its payments to equity, such as dividends. That makes debt an artificially cheaper source of financing for tax reasons alone.
Ending the deduction for interest would reduce the bias by raising the cost of debt financing, bringing it closer to the cost of equity financing. Profit shifting is the third problem the analysis targets.
Corporations have incentives, and some means, to move profits from high-tax countries to low-tax ones. A company can house its patents in a Bermuda subsidiary and have its US operation pay large fees for using them, so its US profits are taxed in Bermuda instead. Transfer pricing rules and economic substance requirements try to limit the practice.
Tens of billions of dollars in US federal tax revenue are still lost to it, though exact estimates vary widely. The border adjustment makes the business tax destination-based and curtails profit shifting, because it then taxes only a subset of income attributed to goods and services consumed in the US.
Import and export transactions are ignored in the calculation of a business’ taxable income, so many transactions that make profit-shifting possible would no longer be relevant for tax liabilities. Value-added taxes achieve a similar destination basis. The option also integrates the US business tax by replacing the individual income tax on non-corporate business income with the same tax collected at the entity level for corporations, eliminating the Section 199A deduction in the process.
Business tax integration is not inherent to a DBCFT, the analysis notes, but it is important to ensure neutrality across business forms. The option also eliminates general business tax credits. What to watch next is whether lawmakers take up the DBCFT as part of a broader business tax overhaul, and how they weigh its revenue and growth estimates against the design changes it would require.
