Deficits, Politics and Policy: a Tax Legislative Outlook Leon Lewis Partner, Federal Tax Competency Leader Deloitte Tax LLP September 21, 2011

Copyright © 2010 Deloitte Development LLC. All rights reserved. 1Footnote  Debt, Deficits and Demographics  The “supercommittee” Cure?  Tax Reform Debate  What’s Next? Agenda

Debt, Deficits and Demographics

Copyright © 2010 Deloitte Development LLC. All rights reserved. 3Footnote Source: Congressional Budget Office, CBO’s 2011 Long-Term Budget Outlook (June, 2011) Federal Debt Held by the Public (as a percentage of GDP)

Copyright © 2010 Deloitte Development LLC. All rights reserved. 4Footnote The Revenue/Spending Squeeze Projected Revenues Source: Congressional Budget Office, CBO’s 2011 Long-Term Budget Outlook (June, 2011) Projected US Total Outlays Current Policy

The “supercommittee” Cure?

Copyright © 2010 Deloitte Development LLC. All rights reserved. 6Footnote  Created the bipartisan, bicameral Joint Select Committee on Deficit Reduction (i.e., the “supercommittee”)  12-member supercommittee tasked with recommending an additional deficit reduction package of at least $1.5 trillion over 10 years  Enforced by “trigger” which cuts spending $1.2 trillion if supercommittee deadlocks or Congress fails to enact supercommittee’s recommendations  Budget Control Act may trade a debt limit crisis today for a debt limit and tax crisis later –The Act ensures the debt limit is sufficiently raised to carry the government until the end of 2012 –Expiring after 2012: Current tax rates on individual income, capital gains, and dividends; current estate tax exemption and top rate; AMT patch –Effective in 2013: Taxes on upper-income taxpayers enacted as part of healthcare reform, including the 3.8% Medicare surtax on investment income and.9% increase in the employee portion of the Medicare HI tax Budget Control Act of 2011

Copyright © 2010 Deloitte Development LLC. All rights reserved. 7Footnote Current Tax Rate Landscape – post 2012 Top Tax RatesCurrent Law through 2012 Beginning 2013 Ordinary Income35 %39.6% Dividends15%39.6% Long-term capital gains 15%20% Health care reform increases None.9 percent – ordinary income 3.8 percent – investment income PEP & Pease limitations GoneRestored

Copyright © 2010 Deloitte Development LLC. All rights reserved. 8Footnote President’s Tax Reform and Deficit Reduction Plan Principles for tax reform  Lower tax rates  Cut “inefficient and unfair tax breaks”  Cut the deficit  Increase job creation and growth in the U.S.  Observe the “Buffett rule” Recommendations to the “supercommittee” for deficit reduction taken largely from previous budgets  Allow 2001/2003 tax cuts to expire for upper income taxpayers  Limitation on itemized deductions as well as certain exclusions  International changes  Repeal of LIFO/LCM  Fossil fuel tax provisions  Corporate aircraft 8

Copyright © 2010 Deloitte Development LLC. All rights reserved. 9Footnote YesNo They are close to leadershipThey are too close to leadership The President & Speaker will cut a deal Leaders cannot deliver their partisans Failure is not an optionCompromise on principle is not an option It only takes a 7-5 voteNo one is walking the plank alone Members need agreement for 2012Members need to stand pat for 2012 A good deal will be harder in 2013A good deal will be easier in 2013 The triggers will force an agreementTriggers have no real affect until 2013 Committee & deadline will force a deal Committees and deadlines routinely fail Can the Super Committee Agree?

Tax Reform Debate

Copyright © 2010 Deloitte Development LLC. All rights reserved. 11Footnote  Should tax reform be revenue neutral or raise revenue?  Corporate and individual tax reform together?  What should our tax system look like after tax reform?  Is there sufficient White House leadership? Tax Reform on the Agenda – Plenty of Questions

Copyright © 2010 Deloitte Development LLC. All rights reserved. 12Footnote  Broad consensus for lowering the rate  Pressure to “pay for” reduced rates  Impact on corporate tax expenditures  Treasury white paper on corporate tax reform Corporate Tax Reform

Copyright © 2010 Deloitte Development LLC. All rights reserved. 13Footnote  What is a tax expenditure? “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability” Or, more simply, Almost anything on your tax return that you like  Tax expenditure cost differs from revenue estimate Tax Expenditures

Copyright © 2011 Deloitte Development LLC. All rights reserved. 14 ExpenditurePercent Rate Cut Depreciation of equipment in excess of alternative deprecation system2.0% Inclusion of income arising from business indebtedness1.8% Deferral of active income of CFCs1.0% Inventory property sales source rule exception0.6% Deduction for income attributable to domestic production activities0.6% Credit for low income housing0.4% Expensing of research and experimentation expenditures0.4% Credit for increasing research activities0.3% Reduced rates on first $10 million in corporate taxable income0.3% Inventory methods and valuation: LIFO0.3% Special treatment of life insurance reserves0.2% Exclusion of investment income on life insurance/annuity contracts0.2% Total8.1% How Much Rate Cut Does it Buy? The President’s Economic Recovery Advisory Board (PERAB) concluded that each percentage point decrease in the corporate tax rate would be associated with a reduction in corporate tax revenues of approximately $120 billion over ten years. The Report on Tax Reform Options, August 2010

Copyright © 2011 Deloitte Development LLC. All rights reserved. 15 Proposal Expenditures repealed Corporate rateIndividual rate Rangel (2007) Selected corporate30.5%High-income surtax Bowles-Simpson “Zero Plan” All corporate and individual 26%23% Bowles-Simpson “Modified Zero Plan” All corporate and many individual 28% Wyden-Coats Selected individual and corporate 24%35% Domenici-Rivlin Targeted corporate and individual; also adds a 6.5% consumption tax 27% Tax Rates and Reform

Copyright © 2010 Deloitte Development LLC. All rights reserved. 16Footnote  Tax reform debate will continue this fall with numerous hearings, meetings and reports, but likely little progress  A top corporate rate in the 25 percent range  Beware the territorial regime that you ask for  Focus on upper income individuals continues  Post 2012 action likely Tax Reform Observations

What’s Next?

Copyright © 2010 Deloitte Development LLC. All rights reserved. 18Footnote  Pending tax agenda items -Employer and worker incentives in the President’s jobs plan -Status of expiring tax provisions -Repatriation  Key dates -November 6, November 7- December 31, 2012 Near-Term Tax Agenda

Copyright © 2010 Deloitte Development LLC. All rights reserved. 19Footnote Average Campaign Costs SenateHouse Avg. Cost, 2010 Election: $9.02 million $14,469 a day excluding Sundays Avg. Cost, 2010 Election: $1.4 mil $2,304 a day excluding Sundays Source: Opensecrets.org Election 2012 in Full Swing

Copyright © 2010 Deloitte Development LLC. All rights reserved. 20Footnote  Members have two full time jobs  Members at home, not in Washington  The “next” campaign starts on day one of term  24hr news cycles and social media platforms brings members closer to their constituencies Outcome: Polarized Political Parties

Copyright © 2010 Deloitte Development LLC. All rights reserved. 21Footnote  Stay connected to Washington – Discussion of tax and spending policies will likely create “winners” and “losers”  View tax reform efforts as three phases – Current environment – Transition phase – Post-reform What Can Taxpayers Do?

About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Copyright © 2010 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsuwww.deloitte.com/aboutwww.deloitte.com/us/about