1.4 percent. That is how much larger the US economy would be in the long run if the country swapped its business income tax for a destination-based cash flow tax, according to the Tax Foundation. The Washington-based think tank also puts the 10-year deficit reduction at $3.9 trillion on a dynamic basis, interest savings included.
The bottom line: few reforms in its policy guide, Options for Reforming America’s Tax Code 3.0, raise revenue and grow the economy together. This one does both.
What the tax changes
A destination-based cash flow tax, or DBCFT, rewrites the corporate income tax in three ways. Companies deduct investment immediately rather than spreading it over years. The deduction for interest paid disappears, and so does the tax on interest received. And a border adjustment taxes income by where goods and services are consumed. One version denies the deduction for imported goods and services and leaves export sales out of taxable income.
The Tax Foundation says immediate expensing drives most of the growth effect.
The reform also folds non-corporate businesses into the same system. It replaces the individual income tax on that income with the same 21 percent tax that corporations pay, collected at the entity level, and repeals the Section 199A deduction along the way. Integration is not built into a DBCFT, the analysis notes, but it keeps the tax neutral across business forms. General business tax credits would go too.
Where the current code falls short
Today’s system taxes the profits businesses earn and, in some cases, the investments they make. The One Big Beautiful Bill Act made deductions for equipment and research permanent and immediate. It left out structures, which are written off over 27.5 to 39 years. Qualified production property is the exception, with temporary expensing.
Slow write-offs cost businesses real money. Inflation and the time value of money erode a deduction taken years later, so firms never recover the full cost of what they build. The tax lands on the normal return to investment.
Debt gets a break that equity does not. A company that borrows deducts the interest. A company that raises the same money by selling shares cannot deduct dividends. Borrowing becomes cheaper for tax reasons alone. Ending the interest deduction would narrow that gap by pushing debt costs toward the cost of equity.
Profit shifting
Then there is the problem of profits moving offshore. A company can park its patents in a Bermuda subsidiary and have its US arm pay hefty fees to use them. The US profits end up taxed in Bermuda. Transfer pricing rules and economic substance requirements try to stop this, yet tens of billions of dollars in federal revenue are still lost, though estimates vary widely.
The border adjustment attacks the problem at its root. Because it taxes only income tied to goods and services consumed in the US, imports and exports drop out of the calculation of taxable income. Many of the transactions that make profit shifting work would no longer change what a company owes. Value-added taxes reach a similar destination basis by collecting at the border and refunding tax on exports.
