The Five Most Pro-Growth Options in the Options Guide

TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Foundation’s new book, Options for Reforming America’s Tax Code 3.0, models the economic, distributional, and revenue effects of 86 different changes to the tax code. One theme that emerges from the variety of options is that not every tax cut buys the same amount of growth, and not every revenue raiser has the same cost. Some taxes have more powerful economic effects than others, and that’s a lesson policymakers should absorb as they work to craft a tax code that encourages growth and raises sustainable revenue.

Ranked by their effect on long-run GDP, five options in the guide stand out. Among the top five, three options move from increasing the deficit to reducing it after accounting for economic growth. The takeaway is not that tax cuts tend to pay for themselves (they rarely do), but that careful, deliberate design of the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. can deliver an outsized growth impact with minimal revenue loss.

1. Full ExpensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. for All Capital Investment (Option 53)

Before paying the corporate tax, businesses deduct most expenses, such as wages, in the year they pay them. Capital investment is treated differently. Many assets must follow depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco schedules that allow only a fraction of the cost to be deducted each year, and the code does not adjust those later deductions for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin or the time value of money. For example, deducting a $10 million residential building over 27.5 years is worth about $5.5 million in present value, so depreciation acts like an implicit tax on long-lived investments.

Full expensing eliminates this bias by letting businesses deduct the full cost of investments immediately, leaving only real profit taxed. The 2017 Tax Cuts and Jobs Act and the 2025 One Big Beautiful Bill Act both expanded expensing. The OBBBA made expensing permanent for equipment and domestic research and development and temporary for manufacturing structures, but foreign research and development remains on a 15-year schedule, and inventories as well as other long-lived assets were left out.

Extending expensing to all capital investment raises the long-run capital stock by 5.0 percent, GDP by 2.7 percent, wages by 2.2 percent, and hours worked by 706,000 full-time equivalent jobs.

Over the budget window, the $1.4 trillion conventional cost is largely a timing effect; deductions are shifted forward, reducing taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. Taxable income differs from—and is less than—gross income.   in earlier years but increasing it in later years. On a conventional basis, the revenue loss declines over the budget window. On a dynamic basis, the increase in business investment boosts wages and employment, leading to higher income and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. collections that offset the loss in business tax revenue, and the primary deficit falls by $321.1 billion.

Expensing all capital investment delivers the largest GDP boost of all 86 options in the book.

2 and 3 (Tie). Full Expensing and Neutral Cost RecoveryCost recovery refers to how the tax system permits businesses to recover the cost of investments through depreciation or amortization. Depreciation and amortization deductions affect taxable income, effective tax rates, and investment decisions. for Structures (Options 54 and 55)

Nonresidential buildings are depreciated over 39 years and residential buildings over 27.5 years, the longest schedules in the code (though qualified production property, such as manufacturing structures, qualify for temporary full expensing). Structures like factories, warehouses, and apartments have historically borne the highest tax burdens because of these long recovery schedules.

Option 54 extends full expensing to structures, whereas Option 55 adopts neutral cost recovery, which keeps the existing depreciation schedules but adjusts each year’s deduction upward for inflation and the time value of money. Because both restore the deduction’s full present value, their economic effects are nearly identical. Both increase capital stock by 2.8 percent, GDP by 1.5 percent, wages by 1.2 percent, and hours worked by 400,000 full-time equivalent jobs.

The two options differ in timing and administrability. Expensing front-loads the deduction, reducing federal tax revenue by $536.8 billion from 2027 through 2036 conventionally. If a firm’s deductions exceed its taxable income, expensing may not fully address the problem of delayed deductions, because excess deductions wind up as net operating loss carryforwards.

Neutral cost recovery, in contrast, is backloaded: it reduces revenue by $2.2 billion within the 10-year window, and the nominal revenue loss grows over time with the inflation and real rate of return adjustments. Administratively, neutral cost recovery requires lawmakers to set an accurate discount rate in order to be equivalent to expensing.

Both options end up revenue positive on a dynamic basis. Expensing cuts the primary deficit by $433.5 billion and neutral cost recovery by $964.6 billion over the budget window; the revenue gap is driven by the timing difference within the budget window. Both have about half the GDP effect of Option 53, since they extend neutral treatment to a limited portion of capital investment.

4. Replace the Corporate Income TaxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. with a Destination-Based Cash Flow Tax (Option 71)

The corporate income tax is primarily source-based, meaning it taxes profits where they are produced. Interest paid is partially deductible while returns to equity are not, which biases financing toward debt. And because the base depends primarily on where corporations are located, the code requires a large body of anti-profit shifting rules.

This option replaces the corporate income tax and the individual tax on non-corporate business income with a flat 21 percent destination-based cash flow tax (DBCFT). This option combines immediate expensing for all investment, repeal of the deduction for interest, repeal of general business credits and Section 199A, and a border adjustment.

The border adjustment, a component in value-added taxes, converts the base from source to destination, so the tax applies where goods and services are consumed rather than produced. A DBCFT would ignore the transactions firms use to shift profits, effectively eliminating the problem of profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens.. It’s worth clarifying that a border adjustment does not function like a tariff. A tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. is a standalone tax on imports, whereas a border adjustment taxes imports and exempts exports, resulting in dollar appreciation which leaves the trade balance unchanged in the long run.

The option increases 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. Expensing drives most of the growth effect, whereas the interest change raises the cost of capital. This is the only option among the top five that raises revenue on a conventional basis, before accounting for the impact on growth, because it widens the tax base to offset its costs. It cuts the primary deficit by $2.3 trillion conventionally and by a larger $3.3 trillion dynamically.

5. Lower Individual Income TaxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source Rates by 10 Percent Across the Board (Option 2)

Cutting all seven marginal rates by 10 percent moves the top rate from 37 percent to 33.3 percent and the bottom from 10 percent to 9 percent. The tax cut increases the incentive to work by lowering marginal rates on labor income and increases the incentive to invest by lowering marginal tax rates on pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. income.

GDP rises by 1.3 percent, the capital stock by 1.6 percent, and hours worked by 1.3 million full-time equivalent jobs—the largest gain in hours worked of the five options listed, as this option is targeted primarily at labor supply incentives rather than investment incentives. Accordingly, wages rise only 0.2 percent because growth comes mostly from additional hours rather than a deeper capital stock, as with the options targeted at lowering the tax burden on investment.  

The option significantly increases the deficit, even on a dynamic basis, which places a wedge between the GDP effect of 1.3 percent and the GNP effect of 0.9 percent; the higher deficit increases interest payments, including those made to foreigners, which reduces American incomes.

It is also the only option outlined in this list that is not revenue positive. Option 2 increases the primary deficit by $3.6 trillion conventionally and $2.5 trillion dynamically.

Big Picture

Tax reform debates usually center on rate reductions, but the options with the strongest growth effects are the ones that change how the code measures business income. Full expensing for all capital investments (Option 53) buys twice the GDP effect of the 10 percent income tax rate cut (Option 2) and still reduces the primary deficit, while the growth from Option 2 offsets only about 31 percent of its revenue cost.

Another difference is that the business tax reforms deepen the capital stock, so wages rise nearly in step with GDP, whereas the rate cut mostly affects hours worked. Removing the remaining biases against capital investment embedded in the tax code is some of the lowest-hanging fruit for pro-growth tax reform efforts.

Additionally, while economic impact is an important factor to weigh when designing tax policy reforms, lawmakers should also adhere to the principles of sound tax policy: neutrality, simplicity, stability, and transparency.

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