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Deficits, Politics and Policy: a Tax Legislative Outlook Leon Lewis Partner, Federal Tax Competency Leader Deloitte Tax LLP September 21, 2011
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Copyright © 2010 Deloitte Development LLC. All rights reserved. 1Footnote Debt, Deficits and Demographics The “supercommittee” Cure? Tax Reform Debate What’s Next? Agenda
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Debt, Deficits and Demographics
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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)
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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
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The “supercommittee” Cure?
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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
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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
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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
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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?
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Tax Reform Debate
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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
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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
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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
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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
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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
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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
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What’s Next?
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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, 2012 -November 7- December 31, 2012 Near-Term Tax Agenda
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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
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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
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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?
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