deficits, politics and policy: a tax legislative outlook leon lewis partner, federal tax competency...

Deficits, Politics and Policy: a Tax Legislative Outlook

Leon Lewis

Partner, Federal Tax Competency Leader

Deloitte Tax LLP

September 21, 2011

http://www.emc.com/index.htm



Copyright © 2010 Deloitte Development LLC. All rights reserved.2 Footnote

Debt, Deficits and Demographics

The “supercommittee” Cure?

Tax Reform Debate

What’s Next?

Agenda

Debt, Deficits and Demographics


2011 2015 2020 2025 2030 20350

20

40

60

80

100

120

140

160

180

Extended Baseline 40-Year Average (37%)Alternative Fiscal Scenario

Greece (2010 est.)144%

Japan (2010 est.)196%

Source: Congressional Budget Office, CBO’s 2011 Long-Term Budget Outlook (June, 2011)

Federal Debt Held by the Public(as a percentage of GDP)


2011 2021 2031 2041 2051 2061 2071 20810

10

20

30

40

50

60

70

Interest on Publicly Held Debt Social Security Medicare, Medicaid, Exchange Subsidies, CHIPAll Other Outlays

The Revenue/Spending Squeeze

Projected Revenues

Source: Congressional Budget Office, CBO’s 2011 Long-Term Budget Outlook (June, 2011)

Projected US Total OutlaysCurrent Policy

The “supercommittee” Cure?


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


Current Tax Rate Landscape – post 2012

Top Tax Rates Current Law through 2012

Beginning 2013

Ordinary Income 35 % 39.6%

Dividends 15% 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

Gone Restored


9

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


Yes No

They are close to leadership They are too close to leadership

The President & Speaker will cut a deal

Leaders cannot deliver their partisans

Failure is not an option Compromise on principle is not an option

It only takes a 7-5 vote No one is walking the plank alone

Members need agreement for 2012 Members need to stand pat for 2012

A good deal will be harder in 2013 A good deal will be easier in 2013

The triggers will force an agreement Triggers 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


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


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


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.15

Expenditure Percent Rate Cut

Depreciation of equipment in excess of alternative deprecation system 2.0%

Inclusion of income arising from business indebtedness 1.8%

Deferral of active income of CFCs 1.0%

Inventory property sales source rule exception 0.6%

Deduction for income attributable to domestic production activities 0.6%

Credit for low income housing 0.4%

Expensing of research and experimentation expenditures 0.4%

Credit for increasing research activities 0.3%

Reduced rates on first $10 million in corporate taxable income 0.3%

Inventory methods and valuation: LIFO 0.3%

Special treatment of life insurance reserves 0.2%

Exclusion of investment income on life insurance/annuity contracts 0.2%

Total 8.1%

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.16

Proposal Expenditures repealed

Corporate rate Individual rate

Rangel (2007) Selected corporate 30.5% High-income surtax

Bowles-Simpson “Zero Plan”

All corporate and individual

26% 23%

Bowles-Simpson “Modified Zero Plan”

All corporate and many individual

28% 28%

Wyden-Coats Selected individual and corporate

24% 35%

Domenici-Rivlin Targeted corporate and individual; also adds a 6.5% consumption tax

27% 27%

Tax Rates and Reform


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?


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


Average Campaign CostsSenate House

• 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

2000 2002 2004 2006 2008 2010$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Election Cycle

Ave

rag

e S

pen

t b

y W

inn

ers

(th

ou

san

ds)

Source: Opensecrets.org

2000 2002 2004 2006 2008 2010$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

Election cycle

Ave

rag

e S

pen

t b

y W

inn

er (

tho

usa

nd

s)Election 2012 in Full Swing


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


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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deficits, politics and policy: a tax legislative outlook leon lewis partner, federal tax competency...

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