GOP Corporate Tax Overhaul Would Place 25 Percent Levy on Companies’ Cash Flow

Senior House tax writer Devin Nunes is making an opening bid in the GOP’s hunt for a viable tax overhaul with a proposal to replace the 35 percent corporate rate with a 25 percent levy on cash flow, a measure of funds typically available after expenses, financing and investment.

The California Republican said in an interview that his American Business Competitiveness plan could move on a separate track from an envisioned international tax overhaul that is a top priority of Ways and Means Chairman Kevin Brady, R-Texas. Nunes’ proposal, introduced earlier this month, will be one of the items weighed as Speaker Paul D. Ryan of Wisconsin and his leadership team try to frame tax priorities for a campaign agenda they plan to unveil by spring.

“It’s going to be revolutionary. ... You are getting rid of the income tax. And you are putting in a consumption-type system,” Nunes said. He referred to longstanding efforts by the GOP to refocus the income tax on consumed income, or spending on goods and services.

Nunes said the 26 co-sponsors of his bill represent a number of important constituencies within in the GOP conference. They include other GOP tax writers such as Reps. Pat Tiberi of Ohio and Charles Boustany Jr. of Louisiana, and several conservative rebels such as Dave Brat of Virginia and Ted Yoho of Florida.

He said his vision for a domestic business tax overhaul is probably not attainable in 2016 because of the deep partisan rift on the issue of individual taxes. But Nunes said he remained hopeful that there could be a pathway to a markup.

“I’m not going to rule that out, but it depends on how the vetting goes,” Nunes said.

Nunes isn’t the only Republican lawmaker advancing priorities for a corporate tax overhaul. Sen. John Thune, R-S.D., chairman of the Senate GOP conference, said that he and Finance Chairman Orrin G. Hatch, R-Utah, and other Republicans have discussed the idea of giving corporations a deduction for the dividends they pay out. The chamber’s third-ranking Republican said the proposal would be “a more efficient way and better tax policy” than current law.

Partisan Split

President Barack Obama and senior Democrats have also called for reducing the corporate tax rate. But while Obama has focused on traditional corporations, Republicans are seeking parallel cuts for owners of pass-through operations, who pay individual rates on business income. Democrats have opposed changes to higher rates for the wealthy laid out in the fiscal cliff deal.

Nunes said he believed there still was a chance centrist Democrats could be persuaded to support a plan that spurs growth and simplifies paperwork. The proposal would transform the corporate tax into a 25 percent tax on business’ cash flow and would also cover income reported by owners of pass-through businesses such as S corporations.

A study of the proposal by the Tax Foundation, a conservative think tank, concluded the plan would result in the loss of $1.6 trillion in revenue based on a traditional analysis of its effect on tax collections. But the study also found economic growth unleashed by the plan’s lower taxes would mean it would end up raising $631 billion over 10 years. Based on that dynamic score, Nunes said he would make the case that his bill should move without full offsets.

Brady said he likes Nunes’ ideas but added was too early to determine whether the Nunes’ bill or other measures would be marked up to measure support or develop a component for a broad tax overhaul in the next Congress. Brady has been focused on trying to lay groundwork for a possible international tax overhaul as a follow-up to the permanent extensions of incentives for businesses and individuals in the new omnibus spending and tax law. 

Favoring The Wealthy? 

Democrats and liberal analysts predict the proposal would gain little traction in an election year. Chuck Marr, director of federal tax policy for the Center on Budget and Policy Priorities, a liberal think tank, said the measure would favor wealthy owners of small businesses by allowing them to keep more of their income. “It continues the great income shift up the income ladder,” Marr said.

Grover Norquist, president for the Americans for Tax Reform, endorsed the proposal as a blend of long-standing conservative ideas. “I want to transform our dysfunctional tax code into something totally different — a system that encourages economic growth instead of suppressing it. The ABC Act will do that, without raising any taxes on American companies or businesses,” Norquist said.

Kyle Pomerleau, director of federal projects for the Tax Foundation, said features of Nunes’ plan such as full business expensing would help to drive new investment and produce more revenue based on a macroeconomic analysis than plans that focus primarily on cutting tax rates.

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