Key Points
Since TCJA’s implementation, multinationals have significantly increased their use of the FDII tax incentive. PWBM estimates that, between 2018 and 2021, Section 250 deductions for FDII have more than doubled, growing from $69 billion in 2018 to $139 billion in 2021. Section 250 deductions for GILTI have also grown over this period, but at a slower rate, from $171 billion in 2018 to $304 billion in 2021.
On a conventional basis, we estimate that scheduled rate increases to FDII and GILTI in 2026 will generate $410 billion in additional revenue by 2035 relative to a scenario in which the pre-2026 rates are extended indefinitely.
We analyze several proposals to modify the taxation of GILTI and FDII and find that eliminating the deemed tangible income return exclusion from the GILTI computation would generate $58 billion in revenue by 2035. Eliminating the Section 250 deduction for FDII would generate an additional $363 billion, and cutting the Section 250 deduction rate for GILTI in half would generate an additional $785 billion on a conventional basis.
Update on the Revenue Effects of GILTI and FDII, 2026 Rate Changes, and Proposed Policy Reforms
At the end of September, the Treasury Department released a trove of corporate tax data, including its biannual study of the international corporate tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA). This data provides new facts about the taxation of two categories of foreign income created by TCJA, known as Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII). PWBM has been working to incorporate this new data into its tax module. This brief uses the new Treasury data in conjunction with our updated tax module to provide insight into the historical revenue effects of these provisions and to analyze how upcoming changes to the tax code, scheduled to take effect in 2026, will impact the federal government’s tax receipts. In addition to analyzing these changes, we also provide conventional revenue estimates for a set of proposed policy reforms that aim to increase US tax revenue collected on GILTI and FDII.1
Although TCJA took effect in 2018, the US Treasury typically releases data with a lag of several years. The most recent data released by the Treasury in September 2024 provides information covering tax filings for the 2021 tax year.
GILTI includes foreign income of US corporations earned by their foreign affiliates, whereas FDII captures foreign-source income earned directly by a US-domiciled corporation. Both categories of income attempt to proxy for highly mobile income generated by firms’ intangible assets by excluding a “normal” return on investment that depends on the tangible assets of the firm. Since 2018, there has been significant growth in foreign income under the FDII category compared to GILTI, with a surge in FDII deductions between 2020 and 2021. Overall, we estimate that the FDII deduction has more than doubled between 2020 and 2021, growing from $69 billion to $139 billion. Although corporations report relatively more income categorized under GILTI compared to FDII, much of this is offset by a foreign tax credit allowed for a portion of the foreign taxes paid on GILTI. As a result, tax liability on GILTI has been considerably lower than FDII since TCJA’s implementation, as shown in Figure 1. This figure also shows the revenue that would have been collected on FDII if this income were taxed at the full US statutory rate of 21%, without taking into account potential behavioral responses.2
Figure 2 provides another perspective. Although TCJA has collected considerable revenue on income from US-owned foreign affiliates under GILTI, this has largely been offset by the tax incentive on foreign-source income earned by US-domiciled corporations under FDII.
Many provisions of TCJA that affect taxation of individuals are scheduled to expire at the end of 2025. In contrast, TCJA’s corporate tax provisions are largely permanent. However, starting in 2026, there are significant changes to the deduction rates for GILTI and FDII that will increase the effective US tax rate on foreign corporate income. For income categorized under FDII, the effective rate will increase from 13.1% to 16.4%. GILTI, in conjunction with the foreign tax credit, functions as a minimum tax that affects companies facing a foreign effective tax rate that falls below a certain threshold. This minimum tax rate will also increase from 13.1% to 16.4% in 2026.
By 2026, we project that aggregate foreign income will reach about $800 billion in GILTI and $550 billion in FDII. Figure 3 shows the fiscal effect of the 2026 rate changes on a conventional basis. From 2026 to 2035, we estimate these rate increases will generate $410 billion in additional revenue relative to a scenario where the pre-2026 rates are extended indefinitely.
There have been numerous proposals aiming to reform the tax code to increase tax revenue on GILTI and FDII. In Figure 4, we analyze three such proposals: (1) eliminating the deemed tangible income return exclusion from the GILTI computation, (2) eliminating the Section 250 deduction for FDII, and (3) reducing the Section 250 deduction for GILTI by half. We conduct a “stacked” estimate, such that these policy reforms are implemented on top of each other, and present the results in terms of the change in revenue generated by each successive reform. We emphasize that conventional estimates will not capture all behavioral responses to these reforms, and that dynamic estimates would likely result in smaller revenue changes. Between 2026 and 2035, we estimate that eliminating the deemed tangible income return exclusion would generate $58 billion in additional revenue, eliminating the Section 250 deduction for FDII would generate $363 billion, and cutting the Section 250 deduction rate for GILTI in half would generate $785 billion.
This analysis was produced by Lysle Boller, Lorraine Luo, and Xiaoyue Sun under the direction of Alex Arnon and the faculty director, Kent Smetters. Mariko Paulson prepared the brief for the website.
-
We caution readers that the foreign corporate tax base can be highly responsive to changes in the tax code. PWBM has been overhauling its tax module to better capture this responsiveness with plans to release dynamic estimates of international tax policy reforms in the future. ↩
-
One would expect firms to shift income from the FDII category to GILTI if the FDII tax incentive were eliminated. ↩
Year name value 2018 GILTI Liability 11.75272332 2018 FDII Liability 24.13831963 2019 GILTI Liability 18.18817621 2019 FDII Liability 29.61980648 2020 GILTI Liability 13.24656472 2020 FDII Liability 31.40722778 2021 GILTI Liability 19.51197629 2021 FDII Liability 48.78917663 2018 FDII Liability Excluding S250 Deduction (height) 14.48299178 2018 FDII Liability Excluding S250 Deduction (tooltip) 38.6213114 2019 FDII Liability Excluding S250 Deduction (height) 17.77188389 2019 FDII Liability Excluding S250 Deduction (tooltip) 47.39169036 2020 FDII Liability Excluding S250 Deduction (height) 18.84433667 2020 FDII Liability Excluding S250 Deduction (tooltip) 50.25156444 2021 FDII Liability Excluding S250 Deduction (height) 29.27350598 2021 FDII Liability Excluding S250 Deduction (tooltip) 78.0626826
Year name value 2018 GILTI Liability 11.75272332 2018 GILTI Liability Net of FDII Tax Incentive -2.73026846 2019 GILTI Liability 18.18817621 2019 GILTI Liability Net of FDII Tax Incentive 0.41629232 2020 GILTI Liability 13.24656472 2020 GILTI Liability Net of FDII Tax Incentive -5.597771942 2021 GILTI Liability 19.51197629 2021 GILTI Liability Net of FDII Tax Incentive -9.76152969
year Change in Liability 2025 0 2026 35.82506585 2027 38.09058737 2028 38.3076885 2029 38.43507769 2030 39.59807714 2031 41.97328485 2032 41.8890144 2033 43.98727257 2034 44.96390601 2035 46.83842515
scenario year change_in_Liability Eliminate Exclusion for Deemed Tangible Income Return 2025 2.463359847 Eliminate FDII Deduction 2025 41.71812767 Halve S250 GILTI Deduction Rate 2025 82.50792117 Eliminate Exclusion for Deemed Tangible Income Return 2026 4.700324778 Eliminate FDII Deduction 2026 28.67021756 Halve S250 GILTI Deduction Rate 2026 60.77149511 Eliminate Exclusion for Deemed Tangible Income Return 2027 4.995022521 Eliminate FDII Deduction 2027 30.16939443 Halve S250 GILTI Deduction Rate 2027 64.63276222 Eliminate Exclusion for Deemed Tangible Income Return 2028 5.120131469 Eliminate FDII Deduction 2028 30.24581697 Halve S250 GILTI Deduction Rate 2028 65.38022749 Eliminate Exclusion for Deemed Tangible Income Return 2029 5.217804275 Eliminate FDII Deduction 2029 30.31606369 Halve S250 GILTI Deduction Rate 2029 65.91977547 Eliminate Exclusion for Deemed Tangible Income Return 2030 5.393132975 Eliminate FDII Deduction 2030 31.09163236 Halve S250 GILTI Deduction Rate 2030 68.02562804 Eliminate Exclusion for Deemed Tangible Income Return 2031 5.722878038 Eliminate FDII Deduction 2031 32.78065027 Halve S250 GILTI Deduction Rate 2031 72.13558139 Eliminate Exclusion for Deemed Tangible Income Return 2032 5.666095675 Eliminate FDII Deduction 2032 32.63590732 Halve S250 GILTI Deduction Rate 2032 71.92859331 Eliminate Exclusion for Deemed Tangible Income Return 2033 5.976045254 Eliminate FDII Deduction 2033 34.19489229 Halve S250 GILTI Deduction Rate 2033 75.61169805 Eliminate Exclusion for Deemed Tangible Income Return 2034 6.116662555 Eliminate FDII Deduction 2034 34.8399118 Halve S250 GILTI Deduction Rate 2034 77.26178532 Eliminate Exclusion for Deemed Tangible Income Return 2035 6.386854806 Eliminate FDII Deduction 2035 36.22839602 Halve S250 GILTI Deduction Rate 2035 80.52650209