Options to Help Pay for the Big Six Tax Reform Framework

The unified framework for tax reform released by the White House and GOP Congressional leaders includes several provisions that could result in about $2.2 trillion in net tax cuts over the next decade. Ensuring that the framework does not worsen our fiscal situation would require identifying additional base broadening measures or scaling back the framework's tax cuts.

We have compiled a list of illustrative revenue options that could be used to help offset the net revenue loss from the provisions in the tax framework. The list is not exhaustive, and many more options also exist.

Importantly, these provisions have not been modeled and our estimates are extremely rough—they are intended to convey the magnitude of potential savings rather than precise scores. For most of the options, we provide a current law estimate and a revenue estimate given other provisions of the framework (the proposed rate reductions would reduce the value of most deductions and other preferences). Our estimates are based on our $2.2 trillion estimate of the details included in the framework.

Business Base-Broadening

The framework's net revenue loss is largely driven by its proposed steep tax cuts for businesses, including lowering the corporate tax rate from 35 to 20 percent and repealing the corporate Alternative Minimum Tax (AMT), capping the tax rate on pass-through business income at 25 percent, and allowing full expensing of assets other than structures for five years.

The plan could offset some of the cost of these tax cuts by broadening the tax base, and it does mention that many "special exclusions and deductions" for businesses will be repealed or restricted. But the only business tax break it specifically eliminates is the domestic production activities deduction (section 199), the largest non-structural business tax expenditure unrelated to cost recovery or international taxation. Other major tax breaks that the framework does not otherwise mention preserving include the deferral of gain on like-kind exchanges, the Employee Stock Ownership Plan (ESOP) dividend deduction, the credit for employer-paid payroll taxes on tips, and various energy credits.

Repealing business tax expenditures would not be enough to offset the revenue loss of the framework's business tax cuts, especially if policymakers abide by the framework's promise to preserve the tax credits for Research & Experimentation and Low-Income Housing, two of the largest non-structural business credits in the current code. Policymakers could further broaden the base, however, by eliminating or restricting certain deductions that are considered normal features of the income tax code. These Non-Tax Expenditure Base Provisions (NTEBPs) include the deductions for state and local taxes for businesses, meals and entertainment expenses, net operating losses, and interest expenses. The framework already proposes limiting the deduction of net interest expenses for corporations, though it does not specify by how much. Our analysis assumed the framework's limits on interest deductibility would be large enough to offset half of the ten-year cost of temporary expensing, but further limiting the deduction would raise roughly $6 billion for every 1 percent increase in the size of the haircut.

Options to Reduce Revenue Loss From Business Tax Cuts

Option Current Law Framework
Repeal Business Tax Expenditures
Modify or repeal the R&E tax credit* $70 to $135 billion $60 to $110 billion
Repeal various energy related tax credits $60 billion $50 billion
Reform taxation of insurance companies $80 billion $45 billion
Repeal low-income housing tax credit* $35 billion $30 billion
Limit like-kind exchanges $40 billion $25 billion
Repeal deduction for ESOP dividends $35 billion $20 billion
Eliminate credit for employer-paid payroll taxes on tips $20 billion $15 billion
Repeal rehabilitation tax credits $15 billion $10 billion
Repeal other business tax breaks unrelated to cost-recovery or international taxation $330 billion $195 billion
Eliminate Non-Tax Expenditure Base Provisions (NTEBPs)
Further reduce the net interest deduction for corporations $10 billion/ percent $6 billion/ percent
Eliminate the corporate state and local tax deduction $290 billion $165 billion
Repeal deduction for meals and entertainment $140 billion $80 billion
Limit net operating loss deduction to 90% of income $100 billion $60 billion
Limit deductibility of CEO compensation $12 to $50 billion $5 to $30 billion
Modify Cost Recovery Provisions
Amortize 25% of advertising costs $230 billion $135 billion
Repeal expensing for R&E costs $185 billion $105 billion
Repeal "LIFO" and "Lower Cost of Market" accounting methods $100 billion $60 billion
Repeal expensing of exploration & development and use of percentage depletion allowance $25 billion $15 billion

Note: Estimates are rounded and rely on CRFB calculations and multiple sources, including CBO, JCT, Treasury, Tax Policy Center, and Tax Foundation.

* = Inconsistent with certain Framework details.

One last option for business base-broadening would be to modify certain cost recovery rules that generally give businesses faster write-offs. While the framework proposes temporary expensing and is unlikely to repeal accelerated depreciation, it could eliminate smaller provisions such as "last-in, first-out" (LIFO) accounting or the ability to fully expense advertising costs.

Individual Base Broadening

The framework makes several changes to the individual tax code that would raise revenues on net. It proposes consolidating individual income tax rates to 12, 25 and 35 percent, expanding the standard deduction, replacing personal exemptions with an expanded child credit and a new credit for non-child dependents, repealing the AMT and estate tax, indexing tax brackets using a more accurate measure of inflation (likely the chained CPI), and eliminating most itemized deductions other than those for mortgage interest and charitable giving.

Much more could be done to broaden the base and raise additional revenues to offset other parts of the plan. Some of the largest remaining tax preferences that could be limited include exclusions for fringe benefits such as employer-provided health insurance (the largest tax expenditure in the code), cafeteria plans, income-replacement insurance, miscellaneous fringe benefits, or transportation benefits. The framework would preserve current tax preferences for work, higher education, and retirement savings, but it does not necessarily rule out modifying them in ways that could lower their cost.

Options to Raise Revenue From Individual Income Taxes

Option Current Law Framework
Replace the Cadillac tax with a cap on the exclusion of employer-provided health insurance^ $100 to $300 billion $90 to $265 billion
Reform or eliminate the exclusion of interest for public-purpose municipal bonds $30 to $400 billion $25 to $350 billion
Repeal deduction for "cafeteria plans" $380 billion $330 billion
Include employer-paid premiums for income-replacement insurance in taxable income $335 billion $300 billion
Cap remaining tax breaks for higher earners* Varies ~$300 billion
Include investment income from life insurance and annuities in taxable income $240 billion $200 billion
Reform higher education tax preferences* $105 to $195 billion $95 to $170 billion
Repeal foreign earned income and housing exclusions $105 billion $90 billion
Include VA disability benefits in taxable income $90 billion $80 billion
Reduce IRA and 401(k) contribution limits* $90 billion $80 billion
Repeal exclusion for miscellaneous fringe benefits $85 billion $75 billion
Tax capital gains at death OR $150 billion $150 billion
  Replace step-up basis of inherited assets with carryover basis $70 billion $70 billion
Repeal exclusion for employer-provided transportation benefits $60 billion $50 billion
Eliminate child and dependent care and elderly tax credits $40 billion $40 billion
Eliminate "carried interest" loophole $20 billion $20 billion
Require derivatives to be marked to market $15 billion $15 billion
Repeal the exclusion of allowances for federal employees abroad $15 billion $15 billion

Note: Estimates are rounded and rely on CRFB calculations and multiple sources, including CBO, JCT, Treasury, Tax Policy Center, Tax Foundation, and American Enterprise Institute.

^ = Effect on income tax revenues only.

* = Inconsistent with certain Framework details.

Another option might be to impose a broad cap on any remaining tax preferences for higher earners. Such a cap could take the form of a Feldstein-MacGuineas-Feinberg style limit on the value of tax expenditures as a percent of income, or limiting the value of tax deductions to the 25 percent bracket, similar to what President Obama proposed. It could also apply to a broader group of tax preferences than just itemized deductions – most of which would already be eliminated under the framework – such as the exclusion of employer-sponsored health insurance premiums or interest earned on state and local bonds.

Scaling Back Framework Tax Cuts

Finally, if offsetting the plan's revenue loss through base broadening alone proves too difficult or insufficient, some of the tax cuts promised in the framework could be scaled back. The framework's proposed 15 percentage point reduction in the corporate tax rate, for example, would cost about $1.9 trillion over ten years. Reducing the corporate tax rate to the current OECD average of 24 percent instead would reduce the plan's cost by over $500 billion while still improving the tax code's competitiveness.

Options to Scale Back Framework Rate Reductions

Option Framework
Increase corporate rate by 1 percentage point $130 billion/ point
Maintain current top rate of 39.6% on non-business income $265 billion
Impose a 3% surtax on AGI over $1 million $115 billion

Note: Estimates are rounded and rely on CRFB calculations and multiple sources, including Tax Policy Center and American Enterprise Institute.


The framework leaves open the possibility of an additional tax rate on the highest-earners, which could also generate substantial revenues. Retaining the current top individual rate of 39.6 percent on non-business income would reduce the plan's total revenue loss by about $265 billion. Alternatively, a 3 percent surtax on all taxpayers with incomes over $1 million could raise roughly $115 billion.

Policymakers could also cover some of the framework's revenue loss by raising or introducing other taxes, such as excise or transaction taxes. We discuss several options for doing so here.


Policymakers can still craft fiscally responsible tax reform consistent with many of the principles laid out in the framework, but to do so they will need to identify many more base broadening measures or scale back some of the proposed tax rate reductions. Economic growth alone will not be enough to offset the cost of the tax cuts being proposed.