U.S. industrial-policy efforts frequently undermine themselves through counterproductive tax regulations, creating a paradox that hinders genuine investment and economic growth. Policymakers have committed substantial resources and political capital toward reshoring domestic manufacturing, upgrading national infrastructure, and enhancing American economic competitiveness. Indeed, these goals have been central to the Trump administration’s stated economic priorities. Yet despite these intentions, poorly structured tax policies simultaneously create substantial barriers to investment, growth, and global competitiveness.
Nowhere is this contradiction more evident than in the recent shift in business-interest-deduction rules under Section 163(j) of the Internal Revenue Code contained in the Tax Cuts and Jobs Act of 2017 (TCJA). The move from an EBITDA-based standard—which allowed companies to deduct interest payments calculated from earnings before interest, taxes, depreciation, and amortization—to an EBIT-based standard has severely restricted allowable deductions, dramatically raising the cost of debt-financed investments.
While this shift, implemented in 2022, provided an immediate benefit for budget projections, helping the TCJA comply with budget-reconciliation rules by raising future revenue estimates, it has introduced significant long-term economic harm by discouraging domestic investment in capital-intensive industries critical to industrial revitalization and technological advancement.
Genuine pro-growth policy must focus on creating a fertile ground for investment, rather than relying on reactive government subsidies or interventions. As such, the Trump administration’s policy agenda would be better served by Congress restoring the 30% of EBITDA deduction standard under Section 163(j) originally put in place in 2017. This structural reform would align tax incentives appropriately, organically encouraging private-sector investment, innovation, wage growth, and job creation—essential conditions for durable American economic strength and competitiveness. Congress should make restoring the 30% of EBITDA standard in Section 163j a key priority in its upcoming tax legislation.
Interest Deductibility as Foundational Growth Policy
Interest deductibility is a fundamental component of the U.S. corporate tax structure, reflecting the basic principle that businesses should only pay taxes on their net income—revenues minus legitimate business expenses. Interest payments resulting from debt incurred to finance investments and operations have traditionally been treated as ordinary and necessary business expenses. Allowing firms to deduct these costs from their taxable income appropriately recognizes interest payments as essential operational expenditures, rather than taxable profits.
Economically, the rationale for interest deductibility is straightforward: it significantly lowers the cost of capital for companies. When firms know they can deduct the full expense of their interest payments, borrowing becomes more affordable. This affordability directly influences investment decisions, making it economically feasible for companies to expand operations; revitalize and rebuild aging infrastructure; build new infrastructure, factories, and facilities; and purchase advanced machinery and technologies.
Proper interest deductibility thus plays a pivotal role in fostering domestic economic growth. By reducing the after-tax cost of capital, businesses have incentive to undertake more investments, leading to expanded productive capacity. These expansions have broader economic benefits, including job creation, higher productivity, and greater innovation.
The positive relationship between affordable borrowing, investment, and economic growth is well-documented; industry analyses consistently show that, when the cost of capital is lower, businesses are more likely to pursue investments that enhance competitiveness, productivity, and ultimately, the American economy
Conversely, policies that restrict interest deductibility, such as the recent shift from EBITDA to EBIT under Section 163(j), can significantly increase the cost of investment capital. By removing the ability to deduct depreciation and amortization in calculating allowable interest deductions, the EBIT standard effectively penalizes capital-intensive industries, discouraging investment. At a time when Congress and the administration are making every effort to bring manufacturing and investment back to the United States, creating disincentives for U.S. companies to invest must be avoided.
The Harmful Shift from EBITDA to EBIT
Before the TCJA, Section 163(j) targeted only corporations with substantial interest payments to related parties, primarily to prevent earnings stripping. At the time, deductions were capped at 50% of adjusted taxable income (ATI)—a calculation similar to EBITDA—and triggered only if a company’s debt-to-equity ratio exceeded 1.5-to-1. For most U.S. companies who borrowed from banks or unrelated parties, there was no restrictive cap.
The TCJA introduced a significant change to the way business-interest expenses are deducted for tax purposes. For its initial period, the law capped interest deductions at 30% of a company’s EBITDA. This provision was intentionally structured to accommodate capital-intensive industries such as manufacturing, telecommunications, and energy that rely heavily on debt-financed investments in infrastructure and equipment. By including depreciation and amortization expenses in the calculation base, the EBITDA approach effectively recognized these substantial capital expenditures as legitimate costs of doing business, thus enabling more extensive deduction of interest expenses.
But a critical aspect of the TCJA was its built-in sunset clause, automatically shifting the deduction standard from EBITDA to EBIT beginning in 2022. Under this stricter standard, companies could no longer include depreciation and amortization in the calculation, severely narrowing their allowable interest deductions. As a result, many businesses faced significantly higher effective tax rates on the same level of interest expense, due simply to this accounting shift.
The consequences can be particularly severe for capital-intensive industries, precisely those sectors vital to U.S. industrial policy goals like reshoring manufacturing and strengthening American infrastructure. Under an EBIT standard, companies find their costs of capital dramatically increased, depressing their incentive to invest domestically in equipment, technology, and expanded operations. Higher borrowing costs reduce the net returns on investment projects, forcing businesses either to defer crucial growth activities and investment, or seek more favorable environments overseas. In short, the EBIT-based approach negatively affects domestic investments, job creation, and innovation.
Moreover, the United States has become an outlier with the 2022 shift to an EBIT-based deduction standard. Among the 35 OECD countries, the United States is alone in disallowing use of depreciation and amortization as legitimate business expenses in interest-deduction calculations. At a time when the administration is looking to improve the country’s attractiveness for capital-intensive production, this is an unusual policy.
Conclusion
Effective tax policy should establish baseline incentives that naturally guide market participants toward economically and socially beneficial outcomes. When policymakers neglect structural issues in favor of short-term measures, they risk perpetuating inefficiencies and creating dependencies that require constant intervention.
Rather than relying on heavy-handed industrial policies to encourage domestic investment, simply reinstating EBITDA would organically improve the business climate. By properly allowing firms to increase the range of their legitimate expenses, the tax system would naturally encourage investment in capital-intensive industries without the need for continual, costly federal intervention.
