Candice Horbacz
The Tax Foundation’s new book, Options for Reforming America’s Tax Code 3.0: A Policymaker’s Guide to Tax Reform Trade-Offs, offers a comprehensive analysis of 86 different potential changes to the nation’s tax system, modeling their economic, distributional, and revenue effects. A central theme emerging from this extensive research is that not all tax adjustments yield the same economic dividends. Policymakers grappling with the twin challenges of fostering economic growth and ensuring sustainable government revenue must recognize that certain tax reforms possess significantly more powerful economic effects than others. This insight is crucial for crafting a tax code that is both growth-friendly and fiscally responsible.
The Imperative for Tax Reform: Navigating Economic Headwinds
The release of the Tax Foundation’s guide comes at a critical juncture for the U.S. economy. Persistent inflationary pressures, concerns about a potential recession, and an escalating national debt have intensified calls for thoughtful fiscal policy. The U.S. tax code, a complex tapestry woven over decades, has undergone significant changes, most notably with the Tax Cuts and Jobs Act (TCJA) of 2017 and more recently, the 2025 One Big Beautiful Bill Act (OBBBA). While these legislative efforts addressed various aspects of the tax system, debates continue regarding their long-term efficacy in promoting sustained growth, enhancing global competitiveness, and ensuring fairness.
The Tax Foundation, a leading independent tax policy research organization, aims to equip policymakers with data-driven insights to navigate these complex trade-offs. Their new guide employs a sophisticated modeling approach to assess the implications of various tax reform options on key economic indicators such as long-run Gross Domestic Product (GDP), capital stock, wages, and employment, as well as their impact on federal revenue and the primary deficit, considering both conventional and dynamic scoring methodologies.
One of the guide’s most striking findings is that a select group of reforms, primarily focused on the tax base, can deliver an outsized growth impact with minimal, or even positive, revenue implications, especially when accounting for the economic feedback effects. Among the 86 options analyzed, five stand out for their significant positive effect on long-run GDP. Intriguingly, three of these top five options transition from increasing the deficit conventionally to actually reducing it after factoring in the economic growth they spur. This does not suggest that tax cuts universally "pay for themselves"—a notion the Tax Foundation frequently refutes—but rather underscores the power of carefully designed, pro-growth tax policy.
Top Growth-Enhancing Tax Reform Options
The guide identifies specific pathways to unlock substantial economic growth, challenging conventional wisdom that often prioritizes broad rate reductions. The leading options emphasize structural changes to how businesses are taxed, particularly concerning investment.
1. Full Expensing for All Capital Investment (Option 53): The Growth Catalyst
At the forefront of the Tax Foundation’s recommendations for economic growth is the implementation of full expensing for all capital investment. This policy change is projected to deliver the largest GDP boost among all 86 options examined in the book.
The current U.S. tax code treats capital investment differently from other business expenses. While businesses can immediately deduct most operational costs, such as wages and raw materials, the cost of long-lived capital assets—like machinery, equipment, or buildings—must typically be "depreciated" over many years. Depreciation schedules assign a "useful life" to an asset, allowing only a fraction of its cost to be deducted annually. This system is problematic for several reasons: it fails to adjust deductions for inflation, eroding their real value over time, and it ignores the time value of money, meaning a dollar deducted in the future is worth less than a dollar deducted today. For instance, the original text highlights that deducting a $10 million residential building over 27.5 years effectively reduces its present value to about $5.5 million. This disparity acts as an implicit tax on long-term investments, discouraging businesses from making crucial capital expenditures.
Full expensing eliminates this inherent bias by permitting businesses to immediately deduct the entire cost of their investments in the year they are made. This ensures that only true economic profit is subject to taxation, leveling the playing field between current operating expenses and long-term capital investments. Recent legislative efforts have made strides in this direction: the 2017 Tax Cuts and Jobs Act (TCJA) expanded expensing, and the 2025 One Big Beautiful Bill Act (OBBBA) made expensing permanent for equipment and domestic research and development (R&D) and temporary for manufacturing structures. However, critical gaps remain, as foreign R&D is still subject to a 15-year schedule, and inventories and other long-lived assets are excluded from immediate expensing.
Extending full expensing to all capital investment is projected to significantly reshape the economic landscape. The Tax Foundation’s model estimates a 5.0 percent increase in the long-run capital stock, a robust 2.7 percent rise in GDP, a 2.2 percent increase in wages, and the creation of an additional 706,000 full-time equivalent jobs. This profound impact stems from the strong incentive for businesses to invest more in productivity-enhancing assets, leading to greater innovation, efficiency, and ultimately, higher economic output and living standards.
From a revenue perspective, the conventional cost of $1.4 trillion over the budget window is largely a timing effect. Immediate deductions shift taxable income to earlier years, but this is offset by higher taxable income in later years as the depreciable basis is exhausted. Crucially, when dynamic scoring is applied, accounting for the economic growth spurred by increased business investment, the picture changes dramatically. The boost in wages and employment leads to higher individual income and payroll tax collections, which more than offset the initial loss in business tax revenue. Consequently, the primary deficit is projected to fall by $321.1 billion. This makes full expensing not just a growth driver but also a fiscally responsible long-term policy.
2 and 3. Full Expensing and Neutral Cost Recovery for Structures (Options 54 and 55): Addressing the Heaviest Tax Burdens
Following closely behind the comprehensive full expensing option are two related reforms targeting capital investment in structures, both of which tie for the second and third most impactful growth options. Nonresidential buildings are currently depreciated over 39 years, and residential buildings over 27.5 years—these represent the longest depreciation schedules in the tax code. This extended recovery period has historically imposed the highest effective tax burdens on structures like factories, warehouses, and apartment complexes, despite temporary full expensing provisions for qualified production property (e.g., manufacturing structures).
Option 54 proposes extending full expensing specifically to all structures. Option 55, alternatively, advocates for adopting a neutral cost recovery system for structures. This approach retains existing depreciation schedules but adjusts each year’s deduction upward to account for both inflation and the time value of money. While differing in their administrative mechanisms, both options achieve the same fundamental goal: restoring the full present value of the deduction. Consequently, their economic effects are nearly identical. Both are projected to increase the capital stock by 2.8 percent, GDP by 1.5 percent, wages by 1.2 percent, and generate approximately 400,000 full-time equivalent jobs.
The primary differences between these two options lie in their timing and administrability. Full expensing (Option 54) front-loads the deduction, resulting in a conventional federal revenue reduction of $536.8 billion from 2027 through 2036. However, it can create a situation where a firm’s deductions exceed its taxable income, leading to net operating loss carryforwards that delay the full benefit. Neutral cost recovery (Option 55), in contrast, is backloaded, reducing revenue by a modest $2.2 billion within the initial 10-year window, with the nominal revenue loss growing over time due to inflation and real rate of return adjustments. Administratively, neutral cost recovery requires policymakers to accurately set a discount rate to ensure its equivalence to expensing, which can be a point of debate.
Despite their timing differences, both options prove revenue-positive on a dynamic basis. Full expensing for structures is estimated to cut the primary deficit by $433.5 billion, while neutral cost recovery for structures is projected to reduce it by a more substantial $964.6 billion over the budget window. The variance in revenue impact is largely attributed to the different timing of deductions within the 10-year budget window. These options demonstrate that targeted reforms to capital cost recovery can yield significant economic benefits and improve fiscal health over the long run.
4. Replacing the Corporate Income Tax with a Destination-Based Cash Flow Tax (Option 71): A Structural Overhaul
A more radical but highly effective reform, Option 71 proposes replacing the existing corporate income tax (CIT) with a destination-based cash flow tax (DBCFT). The current CIT is primarily source-based, taxing profits where they are produced. This system is riddled with inefficiencies: it biases financing toward debt (as interest paid is partially deductible while returns to equity are not), and its reliance on corporate location necessitates complex anti-profit shifting rules, leading to significant administrative burdens and tax planning efforts by multinational corporations.
The DBCFT, as outlined in the Tax Foundation’s model, would be a flat 21 percent tax that encompasses several key components: immediate expensing for all investment, repeal of the deduction for interest, repeal of general business credits and Section 199A, and a critical "border adjustment." This border adjustment is a feature common in value-added taxes, which converts the tax base from a source to a destination basis. In essence, it taxes imports and exempts exports, ensuring the tax applies where goods and services are consumed rather than produced. Crucially, the Tax Foundation clarifies that a border adjustment is distinct from a tariff. A tariff is a standalone tax on imports, whereas a border adjustment, when implemented, leads to an appreciation of the dollar, which in the long run neutralizes its impact on the trade balance. This mechanism effectively eliminates the problem of profit shifting, as the tax would ignore internal corporate transactions designed to move profits to low-tax jurisdictions.
This comprehensive reform is projected to increase the capital stock by 2.6 percent, GDP and GNP by 1.4 percent, wages by 1.3 percent, and hours worked by 463,000 full-time equivalent jobs. While immediate expensing drives most of the growth effect, the repeal of the interest deduction can raise the cost of capital for some firms. Notably, this is the only option among the top five that generates revenue on a conventional basis before accounting for economic growth. This is because it significantly broadens the tax base, offsetting its initial costs. Conventionally, it is projected to cut the primary deficit by $2.3 trillion, and dynamically, by an even larger $3.3 trillion. The DBCFT represents a bold structural change that promises to enhance U.S. competitiveness, simplify the tax code, and foster substantial economic growth while significantly improving the nation’s fiscal outlook.
5. Lowering Individual Income Tax Rates by 10 Percent Across the Board (Option 2): A Focus on Labor Supply
Rounding out the top five growth-enhancing options is a more traditional approach: cutting all seven marginal individual income tax rates by 10 percent. This would, for example, reduce the top rate from 37 percent to 33.3 percent and the bottom rate from 10 percent to 9 percent. This policy is primarily aimed at boosting incentives for labor supply and investment in pass-through businesses. By lowering marginal rates on labor income, it increases the reward for working, and by reducing rates on pass-through business income, it encourages investment in these entities.
The economic modeling for this option indicates a 1.3 percent rise in GDP, a 1.6 percent increase in the capital stock, and a significant gain of 1.3 million full-time equivalent jobs—the largest increase in hours worked among the top five options. This substantial job growth underscores the policy’s effectiveness in incentivizing labor supply. However, the impact on wages is more modest, rising by only 0.2 percent. This is because the growth largely stems from an increase in hours worked rather than a deepening of the capital stock, which typically drives higher worker productivity and, consequently, higher wages. This contrasts with the capital investment-focused options, where wage growth is more directly tied to increased capital per worker.
Unlike the other top options, lowering individual income tax rates across the board significantly increases the deficit, even on a dynamic basis. Conventionally, it is projected to increase the primary deficit by $3.6 trillion, and dynamically, by $2.5 trillion. The higher deficit leads to increased interest payments, including those made to foreign investors, which can create a "wedge" between GDP (total output within the U.S.) and GNP (income accruing to U.S. residents), ultimately reducing American incomes. This option highlights the trade-off between broad-based rate cuts and their fiscal implications, especially when compared to more targeted, base-broadening reforms. The growth generated by Option 2 offsets only about 31 percent of its revenue cost, making it the only option on this list that is not revenue positive dynamically.
The Big Picture: Strategic Reform Over Broad Cuts
The Tax Foundation’s research underscores a crucial distinction: tax reform debates often gravitate towards headline-grabbing rate reductions, but the most potent growth effects are found in reforms that fundamentally change how the tax code measures business income and capital investment. Full expensing for all capital investments (Option 53), for example, is projected to deliver twice the GDP effect of a 10 percent individual income tax rate cut (Option 2) while simultaneously reducing the primary deficit. In contrast, the growth spurred by the individual rate cut offsets only a fraction of its substantial revenue cost.
Another critical insight is the differential impact on wages and labor supply. Business tax reforms, particularly those related to capital expensing, tend to deepen the capital stock. This means workers have more and better tools, leading to higher productivity and, consequently, wages that rise almost in step with GDP. Conversely, broad individual income tax rate cuts primarily incentivize an increase in hours worked, with a more modest effect on per-hour wages. This suggests that removing existing biases against capital investment embedded in the tax code represents some of the most accessible and effective avenues for pro-growth tax reform.
Beyond economic impact, the Tax Foundation emphasizes that policymakers should adhere to the foundational principles of sound tax policy: neutrality, simplicity, stability, and transparency. Neutrality ensures that the tax code does not unduly distort economic decisions. Simplicity reduces compliance costs and administrative burdens. Stability provides certainty for businesses and individuals, encouraging long-term planning. Transparency ensures that taxpayers understand how and why they are taxed. Integrating these principles with a focus on growth-enhancing mechanisms will be paramount for any successful tax reform effort.
As the nation continues to navigate complex economic challenges, the insights from Options for Reforming America’s Tax Code 3.0 provide an invaluable resource. The guide serves as a powerful reminder that strategic, evidence-based adjustments to the tax code, particularly those focused on capital investment, offer a clear path to fostering robust economic growth, increasing wages, creating jobs, and ensuring fiscal sustainability for the future. The interactive tool accompanying the book allows policymakers and the public to delve deeper into these options and understand the detailed trade-offs involved in shaping America’s economic future.
