Option 66:
Eliminate the Net Controlled Foreign Corporation Tested Income Foreign Tax Credit Haircut
Topline Estimates
Source: Tax Foundation General Equilibrium Model.
Net CFC-tested income (NCTI) is the system for taxing international earnings of US companies. It is a hybrid between a territorial and worldwide system, requiring a US shareholder of one or more controlled foreign corporations (CFCs) to partially include in current income a pro rata share of each CFC’s tested income, net of tested losses, regardless of whether the earnings are distributed.
This option removes the NCTI foreign tax credit haircut by increasing allowed creditability from 90 percent to 100 percent. It leaves the NCTI inclusion rate and other settings unchanged relative to current law.
As with other international options, the economic implications are complex and not captured in our model. In this case especially, international tax policy effects are heavily dependent on the policy responses that this change evokes in other countries; while foreign tax crediting is a direct tax cut, it indirectly incentivizes, at the margin, increases in the creditable taxes. Tax Foundation modeling does not include assumptions on how or when such a response might happen.
On a conventional basis, this option would increase the primary deficit by $43.1 billion over the budget window. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 176.3 percent by 2056.
Modeled Results
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About the Authors
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 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.
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.
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 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 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
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
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 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.