How Huntsman Would Reform Corporate Taxes
Policy + Politics

How Huntsman Would Reform Corporate Taxes

iStockphoto/Getty Images/The Fiscal Times

In an effort to boost his sagging poll numbers, Republican hopeful Jon Huntsman on Wednesday offered a tax reform proposal that would eliminate a wide range of breaks for individuals and corporations in exchange for lower overall rates.

The former Utah governor’s proposal, part of a comprehensive jobs program that also called for regulatory relief and supported new free trade agreements, would neither cut taxes nor raise revenue. To use the parlance of tax wonks, it would be revenue-neutral. That aspect is likely to draw objections from sections of the business community and some upper-middle-class individuals who might see higher taxes under the plan.

"The President believes that we can tax and spend and regulate our way to prosperity,” he said during a campaign stop at a New Hampshire factory. “We cannot. We must compete our way to prosperity.”

The plan would eliminate all loopholes, deductions, and tax expenditures, according to preliminary reports, while lowering individual tax brackets to 8, 14, and 23 percent. The corporate tax rate would drop 10 percentage points to 25 percent, while capital gains and dividends would no longer be taxed.

Corporate tax reform has emerged this year as a major goal of corporate leaders due to widespread concerns that the U.S.’s top rate of 35 percent puts it at a disadvantage when competing with other advanced industrial countries, which have lower overall rates.

The Obama Administration, most leaders from political parties and various think tanks, lobbying groups, and deficit-reduction groups have embraced reform, even as they quarrel over specifics.  Should reform be revenue-neutral or used as a way to raise revenue by broadening the tax base?

Tea Party-backed legislators on the Right back reform that would lower rates without eliminating wasteful tax deductions and loopholes, which they see as tax increases. However, even Grover Norquist, the head of anti-tax and anti-government Americans for Tax Reform, has backtracked somewhat on prior statements that closing loopholes is always the equivalent of a tax hike.  

According to published reports, Huntsman’s plan contains key tax reform proposals included in the Bowles-Simpson deficit commission report, including moving the U.S. to a territorial tax system that would allow repatriation of overseas earnings of multinational to the U.S. tax-free.

A tax holiday for overseas corporate profits drew strong support from top business lobbyist Tom Donohue of the U.S. Chamber of Commerce on Wednesday. He told Fox News, “You ought to let the companies bring the money home,  maybe even get rid of the corporate tax on profits, capital gains tax for a year or so. We’d generate millions and millions of jobs in a very short period of time,” he said.

However, the results of the last effort to exempt overseas earnings from taxation do not support that contention. Economists who have studied the Bush Administration’s 2004 tax holiday say the program created very few jobs and nearly every dollar brought back wound up being paid out as increased dividends to shareholders.

Companies with largely domestic operations – hospital chains, retailers, for instance – are likely to embrace the Huntsman approach since they do not benefit from many of the major exclusions and loopholes in the tax code nor do not they have opportunities to shift income to overseas tax havens in Switzerland or the Cayman Islands. “Retail doesn’t get many of the breaks that other industries get: the foreign tax benefits, the research and development break,” says Craig Shearman, a spokesperson for the National Retail Federation. “We’d benefit from lower rates.

“Plus, we’re in a very competitive industry, so those lower taxes are more likely to be passed along to consumers, which increases demand and gives you a ripple benefit . . . through the supply chain,” he says. “Our contention is that by broadening the base and lowering rates, you get a fairer tax system and you make businesses make decisions based on business and not tax considerations.”

On the other hand, many major multinationals may see their tax bills rise under a revenue-neutral tax-reform plan since they can take many of the exclusions or can easily park money abroad. The federal tax that companies like General Electric, eBay and Chesapeake Energy, actually pay, for instance, is well under ten percent and in some years close to zero.

That has led leaders on Capitol Hill to offer vague and sometimes shifting support for tax reform over the past year. During the heat of the debt ceiling negotiations, House Speaker John Boehner, R-Ohio, said he believed “comprehensive reform – both on the corporate side and the personal side – would make America more competitive, help create jobs in our country.”

But when pressed by reporters about eliminating loopholes to make any tax reforms revenue-neutral, he said the GOP would not support anything that could be attacked as a tax increase. “We are not interested in raising taxes on the American people,” he said.

Yet last April, House Majority Leader Eric Cantor, R-Va., said “we’re for tax reform” even though “tax reform may result in certain entities, industries ending up paying more under a much-reformed system where there are lower rates.”