Update on the Revenue Effects of GILTI and FDII, 2026 Rate Changes, and Proposed Policy Reforms

Update on the Revenue Effects of GILTI and FDII, 2026 Rate Changes, and Proposed Policy Reforms

Tax Policy Trade

Update on the Revenue Effects of GILTI and FDII, 2026 Rate Changes, and Proposed Policy Reforms

Lysle Boller, Wanling Luo and Xiaoyue Sun · · 8 min read
Update on the Revenue Effects of GILTI and FDII, 2026 Rate Changes, and Proposed Policy Reforms

We analyze new data from the US Treasury to examine historical revenue effects of TCJA’s international corporate tax provisions. We also provide updated conventional estimates to assess the revenue impact of scheduled 2026 rate increases on foreign income of US corporations and assess several proposals that aim to further increase tax revenue.


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.

Introduction

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

Historical Comparison of GILTI and FDII

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 2018 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.

Figure 1: GILTI and FDII Tax Liability

Figure 2: GILTI Liability Net of FDII Tax Incentive

Figure 2
Fiscal Effect of TCJA 2026 Rate Changes

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.

Figure 3: Fiscal Effect of TCJA 2026 Rate Changes

Examining Proposals to Modify GILTI and FDII

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.

Revenue Raisers

Figure 4: Fiscal Effect of Possible Revenue Raisers



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.

  1. 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.  ↩

  2. One would expect firms to shift income from the FDII category to GILTI if the FDII tax incentive were eliminated.  ↩