Funding our Future Together

Affordability pressures, geopolitical competition, aging demographics, and technological advances are creating new demands on an outdated tax system. Recent tax reforms have boosted much-needed investment but have fallen short of the structural changes needed to close distortionary loopholes, rein in unsustainable deficits, or provide relief to working Americans.

Growing affordability pressures and unfair treatment for wage-earners. Eighty percent of households rely primarily on labor income¹ yet wages are taxed at a significantly higher rate than investment income.² Affordability pressures have grown across income levels: one-third of middle-class families struggle to afford food, housing, childcare, and education.³ Adjusted for inflation, median rent has increased 21% since 2000, while median renter household income has increased by just 2%.⁴ High earners paid primarily in wages carry a disproportionate tax burden. The current tax code fails to reward work or ease affordability concerns for working Americans at any income level.

Mixed signals on investment, innovation, and industrial policy. Geopolitical risks, supply chain disruptions, and rapid technological change have increased the need for domestic investment.⁵ Recent tax code changes have appropriately incentivized such investment but have not addressed unproductive loopholes that allow significant income to avoid taxation.⁶ Policy instability has further undermined long-term investment incentives—tariff policy in particular has been unpredictable, raising costs and disproportionately burdening small businesses.⁷

Mounting fiscal pressure. Federal debt held by the public now stands at roughly 100% of GDP, near historic highs outside of wartime. Federal revenues have held relatively stable at about 17–18% of GDP, while spending has risen to roughly 23% of GDP and is projected to climb further as the population ages. The result is a persistent structural deficit—currently around 6% of GDP—and rising interest costs approaching 3% of GDP.⁸ Revenues are structurally misaligned with long-term commitments to Social Security, Medicare, and debt service, meaning difficult policy tradeoffs lie ahead.⁹

The U.S. therefore faces a dual challenge: restoring fiscal sustainability while modernizing the tax system to support and encourage work, investment, and innovation.

Leadership Now supports a set of mutually reinforcing reforms organized around four priorities: strengthening affordability and incentives to work; encouraging productive investment and U.S. competitiveness; broadening the tax base by limiting loopholes and deferrals that allow income to escape taxation; and ensuring enforcement and system adaptability.

A modern tax system should reward work, entrepreneurship, and productive investment. It should subject taxpayers with similar levels of income to broadly comparable tax burdens regardless of how that income is structured and limit the ability to avoid taxation through deferral, preferential structures, or intergenerational transfer. It should also support a dynamic economy in which businesses can invest with confidence and workers can experience security and upward mobility. The landmark, bipartisan Tax Reform Act of 1986 was grounded in similar principles; we are updating them for today’s economy.

We favor reforms that improve incentives within the existing framework rather than introducing entirely new tax regimes that could discourage long-term investment, create substantial administrative complexity, or open new avenues for avoidance. For this reason, we do not support sweeping wealth taxes or similar proposals.

Any discussion of tax policy is incomplete without a discussion of spending—and the balancing of tradeoffs among near-term affordability, long-term entitlements, and fiscal sustainability. That includes addressing Social Security, which we will take up in a separate paper. While tax policy alone cannot provide a comprehensive solution, it can establish clear priorities and a framework for growth and innovation.

The recommendations below are illustrative. A tax plan to fuel growth, reward work, and restore fiscal stability will ultimately require practical and political tradeoffs. Any final policy should embody a serious commitment to a system that works for Americans.

I. Strengthen Affordability and Incentives to Work

Increase the standard deduction and expand the Child and Earned Income Tax Credits. The One Big Beautiful Bill Act (OBBBA) increased the standard deduction (currently approximately $16,100 for individuals and $32,200 for married couples). A further increase of roughly 12.5%—approximately $2,000 per filer ($4,000 for married couples), indexed for inflation—would provide additional relief to working households and simplify tax filing for millions of Americans.¹⁰ Allowing full refundability of the Child Tax Credit up to the $2,200 cap and increasing the phase-in rate to 30% above the $10,000 income threshold would preserve strong work incentives while letting working families benefit more fully from the credit.¹¹ Increasing the maximum Earned Income Tax Credit for workers without children from $664 to $1,500 and expanding eligibility to adults under 25 and over 64 would support workers at the lowest end of the income distribution and better offset the payroll tax.¹² Together, these changes would reduce federal revenue by approximately $80–140 billion per year, or $1 trillion over 10 years.¹³

Modify the Net Investment Income Tax to support Medicare. The Net Investment Income Tax (NIIT) currently imposes a 3.8% tax on passive investment income for taxpayers with adjusted gross income (AGI) above $200,000 (single) or $250,000 (married filing jointly).¹⁴ The NIIT was designed to create parity between the Medicare tax burden on wage income and investment returns. Adding a new tier increasing the NIIT to 5% on passive income for taxpayers with AGI above $400,000 (single) or $500,000 (married filing jointly) would generate approximately $270–300 billion over 10 years.¹⁵ That incremental revenue could be dedicated to the Hospital Insurance Trust Fund, strengthening Medicare Part A’s long-term solvency.¹⁶

Improve retirement savings incentives. An estimated 57 million people—48% of the workforce—lack access to a pension or a 401(k)-type plan,¹⁷ and current incentives disproportionately benefit higher-income taxpayers.¹⁸ Converting some deductions into a flat, uniform tax credit would provide more equitable savings incentives while preserving the employer-based retirement system.¹⁹ Bipartisan proposals for automatic IRA enrollment, paired with the federal matching contributions contemplated in the Secure 2.0 Saver’s Match, would help more workers build retirement security.²⁰

II. Encourage Productive Investment and U.S. Competitiveness

Maintain competitive capital gains taxation. The current top federal rate on long-term capital gains is 20% (approximately 23.8% including the NIIT). Our NIIT recommendation above would increase the effective capital gains rate from 23.8% to 25% for some high earners. But otherwise maintaining current rates preserves incentives for long-term investment and entrepreneurship while avoiding policies that would increase the “lock-in” effect and reduce capital mobility. This position is contingent on effective application of corporate and other entity-level taxation, discussed below.

Maintain full expensing for business investment. The OBBBA made permanent full expensing for many business investments, allowing companies to immediately deduct the cost of equipment, technology, and certain other capital expenditures. Expensing is one of the most effective pro-growth features of the tax code because it encourages companies to deploy capital more quickly and invest in productivity-enhancing technologies. It should be maintained.

Marginally increase the corporate tax rate, increase corporate alternative minimum tax (CAMT) effectiveness, and tighten pass-through taxation. The Tax Cuts and Jobs Act (TCJA) and OBBBA reduced the U.S. corporate tax rate from 35% to 21%. A significant headline rate reduction was appropriate from a global perspective, but the effective U.S. corporate tax on large, profitable corporations is now between 9% and 12.8%, versus the OECD average of 20%, with several U.S. companies paying zero corporate tax.²¹ At a time of record profits and record deficits, a modest adjustment to 23% would contribute to deficit reduction without undermining America’s global competitiveness. To address the effective rate gap, a revised CAMT that preserves full expensing but acts as a catch-all for other avoidance mechanisms, like profit shifting, indefinite loss carryforwards, and large stock option deductions, would broaden the corporate tax base without further headline rate increases. Pass-through rules were not intended to shelter investment activities or allow high earners to recharacterize income; capping Section 199A deductions—and eliminating them for Real Estate Investment Trusts and publicly traded partnerships—would protect bona fide small businesses while narrowing a poorly targeted tax preference. Together, these changes would reduce the federal deficit by $750 billion to $1 trillion over 10 years.

Increase the excise tax on corporate buybacks. The current 1% excise tax on stock buybacks creates a tax preference relative to qualified dividends. Increasing the rate to 4.5% would roughly equalize the effective tax burden on dividends and buybacks for U.S. domestic taxable investors and support effective application of the CAMT. This measure would reduce the 10-year deficit by $310 billion.²²

Reduce international tax arbitrage. Many multinationals use tax strategies to shift profits to lower-tax jurisdictions and minimize U.S. taxes, despite relying on the U.S. as a key market and source of innovation.²³ The OBBBA had mixed results addressing this: increased tax credits shielding foreign income allowed these practices to continue.²⁴ Raising the Net CFC-Tested Income minimum rate, reducing credits that shield income in low-tax jurisdictions, and applying undertaxed profit rules to target tax-driven intra-company payments would better align profits with real U.S. economic activity. Without these reforms, OBBBA’s treatment of foreign income is estimated to cost the U.S. roughly $170 billion over 10 years.²⁵

Targeted industrial policy within stable, transparent frameworks. Broad investment policies such as full expensing should remain the primary tool for encouraging capital formation. Targeted industrial policies can play a complementary role where specific national-security or supply chain concerns arise—the CHIPS and Science Act is a strong model. Similar approaches should be considered for urgent strategic priorities such as pharmaceutical ingredients, critical minerals, and energy technologies. Tariffs should play only a limited role; broad-based, unpredictable tariff regimes function as an import tax paid by American consumers and businesses and undermine the policy stability required for long-term investment. Broad subsidy regimes and ad hoc ownership stakes are unstable and subject to political distortions. Industrial policy initiatives should be targeted, transparent, durable, and the product of bipartisan consensus.

III. Broaden the tax base by limiting loopholes and deferrals that allow income to escape taxation

Reform step-up in basis and ensure taxation at time of transfer. Under current law, assets held until death have their basis “stepped up” to market value, meaning the capital gain is never taxed. Replacing step-up with carryover basis and taxing most gains at the time of transfer would reduce lock-in inefficiencies and improve parity between capital gains and wage income taxation. Deferral provisions for operating family farms and closely held businesses could prevent forced asset sales while maintaining the principle that capital gains should eventually be taxed. Households with more than $100 million in wealth collectively hold over $13 trillion in unrealized gains, highlighting the scale of the issue. Implementing carryover basis would reduce the deficit by $230 billion over 10 years; taxing gains upon transfer would reduce it by an additional $340 billion.

Address “buy–borrow–die” strategies. High-net-worth investors often borrow against appreciated assets rather than selling them, allowing them to access liquidity without realizing taxable gains. Policymakers could address this distortion by taxing appreciated assets used as loan collateral as if the assets were sold, or by applying a modest excise tax on such borrowing. Reforms of this type could generate roughly $10 to 20 billion annually.

Eliminate estate tax avoidance strategies. Over the past two decades, the estate tax has been significantly narrowed even as wealth has become more concentrated. As of 2025, the wealthiest 1% of households held roughly 32% of net wealth, while fewer than 0.5% paid any net estate tax.²⁶ Many of the largest estates avoid the estate tax by transferring assets out of the taxable estate into dynasty trusts, family limited partnerships, family LLCs, intentionally defective grantor trusts, and similar structures. As much as $13 trillion is held in structures that transfer assets out of the estate at discounted valuations and then compound them across multiple generations—or in perpetuity—with no additional transfer tax.²⁷ Policies to close these loopholes include:

• Eliminating transfer techniques that move assets out of the taxable estate at artificially low values—for example, zeroed-out Grantor Retained Annuity Trusts (GRATs), sales of appreciated assets to grantor trusts, and lack-of-control and lack-of-marketability discounts.
• Applying a periodic inclusion rule to irrevocable investment vehicles, assessed at the entity level rather than at the discounted interest level, that imposes a transfer tax on underlying assets at regular intervals.

In addition, an alternative minimum effective tax rate of 30% on estates above $100 million and a reduction in the estate tax exemption from approximately $30 million per couple to $10 million would broaden the tax base further. Together, these reforms are estimated to reduce the federal deficit by between $250 to 420 billion over 10 years.²⁸²⁹³⁰

Strengthen rules governing charitable deductions. Donor-advised funds allow taxpayers to claim an immediate deduction while delaying charitable distributions indefinitely. Reasonable reforms would require DAF distributions within 5 to 10 years and apply size-based payout requirements. More broadly, rules governing trusts, family foundations, museums, and other vehicles for large bequests should be tightened—particularly for structures that generate limited near-term public benefit while keeping wealth within family-controlled entities.

Strengthen accountability for targeted investment incentives and end preferential treatment for carried interest. Programs such as Qualified Small Business Stock and Opportunity Zones were created to encourage investment but often lack strong reporting requirements or clear effectiveness measures.³¹³² Tightening eligibility rules, improving transparency, and strengthening outcome reporting would help ensure these incentives support genuine economic development. Certain investment managers currently pay capital gains rates on carried interest income even though it largely represents compensation for services. Taxing the labor component of carried interest as ordinary income—while preserving capital gains treatment for returns on invested capital—would align fund managers’ tax treatment with that of other workers performing similar services. This reform could raise approximately $10 to 20 billion over 10 years.

IV. Ensure Enforcement and System Adaptability

Fund effective enforcement. Due to automatic withholding, tax compliance for wages and salaries is very high, while investment income and other earnings that disproportionately accrue to the highest earners are more opaque and subject to manipulation. Even before recent reductions in IRS compliance staff, the “tax gap”—taxes owed but not collected—was estimated at roughly $700 billion per year, driven primarily by underreporting.³³ This figure excludes avoidance strategies, such as direct indexing, designed to exploit loopholes that should be closed.³⁴ Cryptocurrencies also present tax avoidance and evasion risks given the challenges in tracking investment gains and identifying beneficial owners. Investment in IRS modernization and enforcement could generate $200 to 500 billion in net federal revenue over 10 years.³⁵

Address harmful externalities and private windfalls. Incremental taxation of social media, online gambling, and legalized marijuana—along with a review of alcohol, prediction markets, and smoking and vaping policies—could more efficiently allocate the cost of mitigating harms with minimal risk to productive economic activity. Direct federal taxation of sports gambling, for example, would discourage little productive economic activity. Atmospheric emissions, including greenhouse gases and local air pollutants, also warrant careful, evidence-based policy consideration given their broad economic and public health impact. We exclude AI and data centers at this stage given uncertain potential harms and the potential for significant economic benefits. Government profit participation may also be appropriate where public investments generate private windfalls. Research grants to universities, for example, could include provisions for government equity—building on models universities have developed to monetize research through royalties. Joint participation in publicly funded successes could form the foundation of a new and productive relationship between government and the beneficiaries of its research investments.

Prepare for AI-driven dislocations. AI has the potential to enhance productivity enormously, but certain sectors may experience significant dislocation. Increased automation of knowledge work and advances in robotics could erode wage income, reducing the tax base and undermining safety net funding. An effective response begins with data collection on AI adoption and its workforce impact. Potential triggers for expanded government support could include persistent unemployment above a specified threshold or labor’s share of GDP falling below historical ranges. Revenue to support the AI transition could come from increased taxes on the corporate profits and capital gains of those who benefit from AI-driven margin expansion. The tax code can also help mitigate dislocation through credits for employers who invest in retraining. Taxes that mitigate harms are preferable to those that directly target AI usage or robotic deployment, which risk slowing innovation.

The following laws address elements of the reforms outlined above and demonstrate bipartisan potential for modernizing the tax code.