Combination 5:

Reduce Corporate and Individual Taxes and Implement a Value-Added Tax

Topline Estimates

Gross Domestic Product (GDP)
+3.4%
Gross National Product (GNP)
+3.3%
Full-Time Equivalent Jobs
+1.4M
Wage Rate
+2.7%
Capital Stock
+6.6%
Conventional Primary Deficit Change (10‑Yr)
+$404.0B
Dynamic Primary Deficit Change (10‑Yr)
-$1,843.4B
Dynamic Total Deficit Change (10‑Yr)
-$2,085.5B

Source: Tax Foundation General Equilibrium Model.

This option combination imposes a 5 percent value-added tax (VAT) and uses the new tax revenue to reduce other individual and corporate taxes. Tax reductions include reducing employer and employee payroll tax rates by 1 percentage point each, repealing the 3.8 percent net investment income tax (NIIT), reducing ordinary income tax rates by 10 percent, repealing the individual alternative minimum tax (AMT), reducing the corporate income tax rate from 21 percent to 15 percent, and repealing the corporate alternative minimum tax (CAMT).

A VAT would increase marginal tax rates on labor income. The VAT would not increase the cost of capital. The tax reductions would lower the tax burden on labor income, capital income, as well as saving. On net, marginal tax rates would be lower, leading to an expansion in hours worked and in capital investment, significantly increasing long-run economic output.

On a conventional basis, this option would increase the primary deficit by $404 billion over the budget window. Long-run GDP would increase by 3.4 percent and long-run GNP by 3.3 percent. On a dynamic basis, the primary deficit would decrease by $1,843.4 billion from 2027 through 2036, or $2,247.4 billion more than the conventional estimate.

Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be 24.2 percentage points lower than current law baseline, reaching 151.7 percent by 2056.

On average, taxpayers would see a 0.3 percent decrease in their after-tax incomes in 2027, with decreases for the bottom 95 percent and increases for the top 5 percent. All income groups see an increase in after-tax incomes on a long-run dynamic basis, averaging 2.1 percent.

Modeled Results

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About the Authors

Erica York Tax Foundation
Expert

Erica York

Vice President of Federal Tax Policy

Erica York is Vice President of Federal Tax Policy with Tax Foundation’s Center for Federal Tax Policy. Her analysis has been featured in The Wall Street Journal, The Washington Post, Politico, and other national and international media outlets.

Garrett Watson Tax Foundation
Expert

Garrett Watson

Director of Policy Analysis

Garrett Watson is Director of Policy Analysis at the Tax Foundation, where he conducts research on federal and state tax policy. His work has been featured in The Washington Post, The Atlantic, Politico, the Associated Press and other major outlets.

Huaqun Li Tax Foundation
Expert

Huaqun Li

Senior Economist, Director of Modeling Projects

Dr. Huaqun Li is Senior Economist, Director of Modeling Projects at the Tax Foundation. She focuses on developing and maintaining the Foundation’s Taxes and Growth Model, which models the budgetary and economic effects of changes to federal tax policy.

William McBride or Will McBride Tax Foundation
Expert

William McBride

Chief Economist & Stephen J. Entin Fellow in Economics

Dr. William McBride is the Chief Economist & Stephen J. Entin Fellow in Economics at the Tax Foundation, where he oversees major research projects primarily related to reforming the federal tax code, advancing sound tax policy, and improving the federal government’s fiscal outlook.

Alex Durante Tax Foundation
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Alex Durante

Senior Economist

Alex Durante is a Senior Economist at the Tax Foundation, working on federal tax policy and model development. Alex worked as a research assistant at the Federal Reserve Board and served as a staff economist on the Council of Economic Advisers.

Alex Muresianu Tax Foundation
Expert

Alex Muresianu

Senior Policy Analyst

Alex Muresianu is a Senior Policy Analyst at the Tax Foundation, focused on federal tax policy. Previously working on the federal team as an intern in the summer of 2018 and as a research assistant in summer 2020. He attended Tufts University, graduating with a degree in economics and minors in finance and political science.

Peter Van Ness Tax Foundation

Peter Van Ness

Research Software Developer

Peter Van Ness is a Research Software Developer at the Tax Foundation working on federal tax policy and model development. Peter previously worked as a research assistant at another think tank and as a data analyst at a consulting firm.

Aleksei Shilov Tax Foundation Research Software Developer

Aleksei Shilov

Research Software Developer

Aleksei Shilov is a Research Software developer at the Tax Foundation working on economic model development and federal tax policy. Aleksei joined the Tax Foundation as an intern in January 2025. He holds a B.S. in computer science and a minor in economics from Northeastern University and is currently based in Boston, MA.

Daniel Bunn Tax Foundation President & CEO
Expert

Daniel Bunn

President and CEO

Daniel Bunn is President and CEO of the Tax Foundation. Daniel has been with the organization since 2018 and, prior to becoming President, successfully built its Center for Global Tax Policy, expanding the Tax Foundation’s reach and impact around the world. Prior to joining the Tax Foundation, Daniel worked in the United States Senate at the Joint Economic Committee.