Full expensing of all capital investment, neutral cost‑recovery for structures, a destination‑based cash‑flow tax, and a 10‑percent across‑the‑board cut in individual marginal rates are the five tax reforms that generate the largest long‑run gains in U.S. GDP according to the Tax Foundation’s Options for Reforming America’s Tax Code 3.0.
1. Full expensing of all capital investment (Option 53)
- Allows firms to deduct the entire cost of new equipment, technology, or buildings in the year of purchase.
- Estimated effects:
- Capital stock ↑ 5.0 %
- Real GDP ↑ 2.7 %
- Wages ↑ 2.2 %
- Full‑time‑equivalent jobs ↑ 706 000
- Over a ten‑year budget window the conventional revenue loss is about $1.4 trillion, largely a timing effect; dynamically, higher wages and payroll taxes offset most of the loss and the primary deficit falls by $321.1 billion.
2‑3. Full expensing for structures (Option 54) and neutral cost‑recovery for structures (Option 55) – tied in impact
- Both restore the present‑value of deductions for non‑residential and residential buildings, which currently have the longest depreciation schedules (39 years and 27.5 years).
- Economic outcomes (nearly identical):
- Capital stock ↑ 2.8 %
- Real GDP ↑ 1.5 %
- Wages ↑ 1.2 %
- Full‑time‑equivalent jobs ↑ 400 000
- Revenue implications:
- Full expensing – conventional loss $536.8 billion (front‑loaded).
- Neutral cost‑recovery – conventional loss $2.2 billion (back‑loaded, adjusted for inflation).
- On a dynamic basis both are revenue‑positive, cutting the primary deficit by $433.5 billion (expensing) and $964.6 billion (neutral cost‑recovery).
4. Destination‑based cash‑flow tax (DBCFT) – 21 % flat rate (Option 71)
- Replaces the corporate income tax and the individual tax on non‑corporate business income.
- Features: immediate expensing for all investment, elimination of the interest deduction, repeal of general business credits and Section 199A, and a border adjustment that taxes where goods and services are consumed.
- Projected impacts:
- Capital stock ↑ 2.6 %
- Real GDP and GNP ↑ 1.4 %
- Wages ↑ 1.3 %
- Full‑time‑equivalent jobs ↑ 463 000
- Revenue: the only top‑five option that is revenue‑positive on a conventional basis, cutting the primary deficit by $2.3 trillion (conventionally) and $3.3 trillion (dynamically).
5. 10‑percent across‑the‑board cut in individual marginal rates (Option 2)
- Reduces all seven marginal rates by 10 percentage points (top rate from 37 % to 33.3 %; bottom rate from 10 % to 9 %).
- Effects on the economy:
- Real GDP ↑ 1.3 %
- Capital stock ↑ 1.6 %
- Full‑time‑equivalent jobs ↑ 1.3 million (largest jobs gain among the five options)
- Wages ↑ 0.2 % (growth driven mainly by additional labor hours rather than capital deepening)
- Deficit impact: $3.6 trillion increase in the primary deficit on a conventional basis and $2.5 trillion dynamically, making it the only option that is not revenue‑positive.
Overall takeaways
- The reforms that alter the tax base—particularly those that eliminate depreciation schedules and allow immediate expensing—produce far larger GDP gains per dollar of revenue loss than pure rate cuts.
- Full expensing of all capital (Option 53) delivers the greatest boost to output while still reducing the primary deficit, whereas the 10 % individual rate cut (Option 2) generates modest output growth but substantially widens the deficit.
- Policies that target investment incentives tend to raise both capital stock and wages in tandem; rate cuts focused on labor supply mainly increase hours worked with limited wage impact.
- When evaluating tax reforms, policymakers should weigh the growth potential against revenue effects and adhere to the principles of neutrality, simplicity, stability, and transparency.
Source article: taxfoundation.org
