Business Taxes

Before the Tax Cuts and Jobs Act of 2017, the federal corporate income tax rate of 35 percent was one of the highest in the world. Today, the US federal corporate tax rate is 21 percent. When taking into account state- and local-level corporate taxes, the US has a weighted average corporate tax rate of 25.57 percent, which is closer to global averages. With the 2017 reforms, the US followed a broader, decades-long trend of reductions in statutory corporate tax rates around the world.

The high pre-TCJA tax rate posed multiple problems: it discouraged real business investment in the US, and it encouraged companies to shift their profits to other jurisdictions. Economists generally find that corporate taxes are more economically harmful than other taxes because they discourage business investment, a central determinant of the long-run size of the economy. Evidence indicates the TCJA’s reforms helped drive investment and reduce profit shifting.

This subchapter includes proposals to change the tax rates that apply to corporate income. The corporate income tax largely falls on investment, so changes in the corporate tax rate have significant impacts on the size of the capital stock, worker productivity, and thus total economic output.

This subchapter also considers changes to the stock buyback tax rate. Introduced in 2022, the stock buyback tax is a one percent tax on the corporate repurchasing of shares. Stock buybacks are another way firms can return value to shareholders, so the stock buyback tax represents yet another layer of tax on capital.

Lastly, this subchapter includes the option of introducing a value-added tax at a rate of 10 percent. Value-added taxes are legally paid by businesses, but economically, they fall on consumption. The US is one of the only countries without a value-added tax.

When a business makes an investment—in assets such as equipment, machinery, buildings, or intellectual property via research and development (R&D)—the US tax code does not always allow it to deduct the full cost of the investment immediately. Instead, businesses may be required to spread the deduction over multiple years, according to a set of more than a dozen depreciation schedules.

Requiring businesses to take deductions over time penalizes investment. A deduction today is worth more than a deduction 5 or 15 years from now. Accordingly, taking deductions over time means companies cannot fully recover the real value of their investments after factoring in inflation and opportunity cost, creating a tax penalty.

Because investment is one of the main drivers of economic growth and relatively sensitive to tax policy, even small changes to the tax treatment of investment create large economic effects. Lengthening depreciation schedules decreases overall investment and leads to a smaller economy. On the other hand, expensing—simply allowing businesses to deduct the full cost of investment immediately—is one of the most cost-effective policy tools for encouraging investment and economic growth.

Recent years have seen significant improvements in cost recovery policy. The One Big Beautiful Bill Act of 2025 permanently reintroduced 100 percent bonus depreciation for investments in assets with 20-year schedules or shorter, and full expensing for domestic R&D, eliminating tax penalties on large swaths of investment. The law also created a temporary, narrow provision allowing full expensing for certain manufacturing buildings through 2028, but most buildings are still subject to long depreciation schedules. Investment in foreign R&D by US companies must be deducted over 15 years.

This subchapter considers several options for changing how the US allows companies to deduct investment costs. Some options add to recent improvements; others are reversions to less favorable cost recovery rules.

International corporate tax policy is a wide-ranging subject, as it interacts with both US domestic corporate income tax policy and the corporate tax policies of many other countries.

In a globalized economy, determining the “right” taxable income for a multinational company in a particular country is complicated. How do you apportion the profits of a US company’s activities in a foreign country? How about a foreign company’s profits in the US?

The primary revenue-raising goal of US international tax policy is to protect the US tax base by reducing profit shifting to low-tax countries. But the need to stop profit shifting should not be used as a justification to unduly tax legitimate cross-border investment. Policymakers must minimize damaging impacts on valuable cross-border investments, both inbound and outbound, and avoid overly complex provisions that can lead to unintended behavior and create high compliance costs.

International corporate income tax rules can often be divided into three types. Source-based or territorial taxes count profits where goods and services are produced. Residence-based or worldwide taxes count profits according to a multinational enterprise’s home country. Destination-based taxes count profits where goods and services are sold. In practice, international tax systems, including the US’s, usually end up having a mix of characteristics from the different types.

Due to considerable uncertainty, all Tax Foundation’s international options are modeled without dynamic effects; reduced taxation on investment is generally efficient, but preferential regimes are generally not. Even the conventional estimates are subject to considerable uncertainty. International corporate income data is generally less available and less reliable than domestic corporate or individual income data. Furthermore, international businesses have many more potential behavioral responses—the activities can vary across time, legal structure, and place—than domestic firms or individuals.

This subchapter considers some possible reforms to the US’s international business tax code.

Business tax reform comes in many forms. One of the most common mantras of tax reform is to “lower the rates and broaden the base.” While generally a good framing, the phrase has sometimes been misapplied, particularly in relation to reforms that would prevent firms from fully deducting capital investments. The corporate tax base is corporate profits, and corporate profits are revenues minus costs.

Sound corporate tax base-broadening involves removing preferences that tax certain corporate profits at lower rates than the ordinary one. Unsound corporate tax base-broadening involves changing the definition of profits by preventing companies from deducting costs.

This subchapter includes major structural reforms, including replacing the corporate income tax (which mostly falls on investment) with either a value-added tax (which does not fall on investment) or with a destination-based cash flow tax (DBCFT) and changing other major aspects of the corporate tax base, such as the treatment of interest expense. It also considers eliminating the Inflation Reduction Act’s corporate alternative minimum tax (CAMT) on book income.

Finally, it includes several incremental base-broadeners, ranging from eliminating non-neutral preferences for narrow types of economic activity—like credit unions, the production of certain biofuels, and low-income housing—to less-sound incremental expansions of the tax base, such as further limiting the deductibility of high-level employee compensation.