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Notices The following information is not intended to be “written advice concerning one or more
Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury
Department Circular 230.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
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Handicapping the Legislative Process
Tax Bills Introduced In
114th Congress
(1062) Became Law
0.8%
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Economic Recovery Tax Act of 1981
Omnibus Budget Reconciliation Act of 1989
Omnibus Budget Reconciliation Act of 1993
American Recovery & Reinvestment Tax Act of 2009
Economic Growth & Tax Relief Reconciliation Act of 2001
Historical Perspective – First Year Tax Legislation
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Making tax law
Policy
Politics
Personalities
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Senate 2017
Democrats 48
Republicans 52
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House 2017
Democrats 194
Republicans 241
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Elections: United States Senate election map, 2018
Democratic
incumbent*
Republican
incumbent
Independent
incumbent
*Includes 10 of 12 Democratic Finance Committee members
*
* *
*
* *
*
*
*
*
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Process and politics: The Pledge
Significance
• All but 26 Republican Members of House have signed
• All but 6 Republican Senators have signed
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Speaker of the House “[Tax Reform] is going to have to be one
of the Crown Jewels of our agenda….
I have a deep interest in this…” -Speaker Paul Ryan
Politico Playbook Breakfast 12/15/15
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The “Big Four”
Chair: Orrin Hatch (R-UT)
Senate Finance Committee:
Chair: Kevin Brady (R-TX)
Ranking Member:
Ron Wyden (D-OR)
Ranking Member:
Richard Neal (D-MA)
Ways & Means Committee:
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Secretary: Steven Mnuchin
• Finance Chairman of Trump campaign
• CEO Dune Capital Management
• 17 years at Goldman Sachs
Key Treasury Personnel
Key Tax Positions
• Assistant Secretary
• Deputy Assistant Secretary (Tax Policy)
• Deputy Assistant Secretary (Tax Analysis)
• Deputy Assistant Secretary (international)
• Tax Legislative Counsel
• International Tax Counsel
• Benefits Tax Counsel
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Tax Reform: U.S. and other OECD statutory corporate tax rates
Source: Forbes - http://blogs-images.forbes.com/niallmccarthy/files/2016/07/20160713_Corporate_Tax.jpg
(Percent)
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Tax Reform: Statutory tax rates, United States and OECD
Source: Tax Foundation (http://taxfoundation.org/article/countdown-over-were-1)
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Competing Goals of Tax Reform
Distributional Neutrality
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The House: Thinking Outside the Box
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Ways & Means strategy: towards consumption
Infrastructure
Spending
Inversions
Rate
Differentials
Income Tax VAT
Camp
Tax Reform Act
2014
Nunes
ABC Act
2015
Brady
House Blueprint
June 2016
Renacci
SATS
July 2016 Ryan/Brady
International Reform
2015
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Source: Ways and Means Committee
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Tax Reform: Why Consumption Tax?
Pro-Growth • Emphasis on Savings
• ROI on Capital Investments
Border Adjustable
• Territoriality
• Ability to attract Investment
• Manage Base Erosion
Base Broadening
• More Taxpayers
• Better Compliance
Consumption
Tax
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Outside the Box: Senate Approach Corporate Integration
• Corporate integration plan to mitigate double taxation on corporate income
• Dividend paid deduction to reduce corporate level tax to the extent of
distribution of income
• Potentially solves several problems including base erosion, debt-equity issue,
pass-through conversion, etc.
Other considerations:
• Revenue neutrality
• Shifting of tax burden
• Design complexity including tax exempts and interaction with treaty provisions
• Effect on partnerships, MLPs, etc.
• Fate of policy preferences (PTCs, ITCs, R&D, etc.)
• Hatch says “may” be released in April May June soon when advisable
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The Senate: Back Inside the Box
Cartoon: New Yorker magazine, November 30, 1998
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Inside the Box: Senate Approach Camp Rides Again?
• “Quasi-territoriality”
• MinTax on foreign earnings
• Dividend exemption on foreign-sourced dividends
• Mandatory Repatriation
Camp and “let’s not do that again” possibilities
• MACRS remains
• Possibly permanence for bonus depreciation
• Interest deductibility and a thin-cap rule
• Innovation box regime
• Other pay fors
Question remains whether the math works and if the political calculus will
be different this time
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Key Proposals - Individual President Trump
(April 26, 2017)
House blueprint
Camp bill
Ordinary income rate 10%-25%-35% 12%-25%-33% 10%-25%-35%. (Special
calculation for qualified
domestic manufacturing
income) Standard deduction/personal
exemption
Double standard deduction Consolidate personal
exemption/standard deduction
into larger standard deduction
Increase standard deduction
with phase out; eliminate
personal exemptions Itemized deductions Eliminate itemized deductions
other than home mortgage
interest and charitable
deductions
Eliminate itemized deductions
other than home mortgage
interest and charitable
deductions (with possible
changes to home mortgage
interest deduction)
Eliminate many itemized
deductions, including
deduction for interest on home
equity debt. 2% floor on
charitable deductions
Individual AMT Repeal Repeal Repeal
Net investment income tax Repeal Not part of tax reform blueprint
(but contemplated as part of
healthcare)
Does not address
Investment income rate Same as current law (20%) 50% deduction for capital
gains, interest, and dividends
(6%, 12.5%, 16.5% rates)
Deduction of 40% of adjusted
net capital gain
Estate tax Repeal estate tax Repeal. Silent as to basis
consequences
Keep
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Key Proposals – Business President Trump
(April 26, 2017)
House blueprint
Camp bill
Corporate rate 15% 20% Reduce to 25% (over several
years)
Individual owners of
passthroughs and
proprietorships
15% rate, possibly limited to
“small” and “medium”
passthrough businesses (with
unspecified anti-abuse rules)
“Active business income” of
owners of passthrough entities
capped at 25% ordinary income
rate. Backstopped by
“reasonable compensation”
requirement for owner-
operators
Qualified domestic
manufacturing generally taxed
at no higher than 25%. Owners
who materially participate treat
70% of combined
compensation and distributive
share as subject to employment
taxes. Other changes to Sub K.
Carried interest Not mentioned Not clear Special rules
Cost recovery Not mentioned Full and immediate expensing
for investments in tangible
property and intangible assets,
but not land
Replace MACRS with system
that lengthens recovery lives
and indexes depreciable basis
for inflation. Extend
amortization period for acquired
Code section 197 intangibles.
Caps on expensing. Other.
Interest expense Not mentioned Net interest expense not
deductible but carried forward
indefinitely—with unspecified
special rules for financial
services companies
No broad rule, but limits
amount of deductible interest
expense that could apply to a
U.S. corporation shareholder
with one or more foreign
corporations in some cases
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Key Proposals – Business (cont’d) President Trump
(April 26, 2017)
House blueprint
Camp bill
NOLs Not mentioned Carry forward indefinitely and
indexed for inflation, but no
carry back. Carryforwards
limited to 90% of the net
taxable amount for the year
Limit deduction to 90% of
taxable income. Repeal some
special NOL carryback
provisions as well as limitation
on the carryback of excess
interest losses attributable to
CERTs Corporate AMT Not clear Repeal Repeal (with unused AMT
credits refundable over
several years)
Research credit Not mentioned Keep, with unspecified
modifications
Keep, with modifications
Last in, first out (LIFO) Not mentioned Superseded by expensing of
non-imported inventory
Repeal
Selected revenue raisers Eliminate unspecified tax
breaks for “special interests”
Eliminate various unspecified
“special interest” deductions
and credits, including section
199 (but not R&D credit)
Numerous raisers specified
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Key Proposals - International President Trump
(April 26, 2017)
House blueprint
Camp bill
Destination based cash
flow system, with border
adjustments
Not mentioned in one-page
summary document
Move towards a destination-
based tax system, with
border adjustments
Not included
Territorial system Move to territorial system.
No details.
Territorial tax system, with
100% exemption for
dividends received from
foreign subsidiaries. Repeal
most of current subpart F
regime, but retain foreign
personal holding company
rules for passive foreign
income.
U.S. corporate shareholder
gets 95% deduction for
foreign sourced portion of
dividends received from
certain foreign subsidiaries.
Complex provisions to
prevent offshore shifting of
profits. Minimum tax of 15%
on CFC’s foreign earnings.
Modify active financing
exception Repatriation of existing
earnings and profits (E&P)
Foreign earnings
accumulated under old
system taxed; rate
determined in consultation
with Congress
Foreign earnings
accumulated under old
system repatriated by paying
tax of 8.75% to the extent
held in cash or cash
equivalents or 3.5%
otherwise (payable in
installments over 8 years)
Foreign earnings
accumulated under old
system repatriated by paying
tax of 8.75% to the extent
held in cash or cash
equivalents or 3.5%
otherwise (payable in
installments over 8 years)
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$1,325
$883
$160
$388
$185
$936
$1,172
$677
GOP House Blueprint – Doing the Math*
▼ Reduce rate to 20%
▼ Full expensing
▼ True territorial system
▼ 25% passthrough rate
▲ Repatriation at 8.75% / 3.5%
▲ Border adjustment
▲ Only “net interest” deductible
▲ Nearly all other credits/deductions eliminated
Corporate Highlights
* Tax Foundation dynamic scoring estimates from “Details and Analysis of the 2016 House Republican Tax
Reform Plan” https://taxfoundation.org/details-and-analysis-2016-house-republican-tax-reform-plan/ (July 5,
2016). Dollar amounts are in billions.
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Tax Reform and Cooperatives: Considering the Options Options 2: Camp Approach - make conforming and
consistent changes only.
Option 3: Repeal Subchapter T and 501(c)(12)
Option 1: Do nothing
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The Universe (?) of Options – What can be done?
Go Big (Major rate reduction, restructuring of tax system)
The Blueprint
Credit Invoice (i.e., traditional) VAT
Revenue Losing Tax Reform (i.e., tax cuts)
Corporate Integration (e.g., DPD)
Political Orphans – Camp 2014, Carbon Tax
Go Small
Modest rate cuts
Repatriation only (mandatory or voluntary)
Small business + individual?
Payroll tax holiday
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The Universe (?) of Options – How to do it? Getting to 60
Can it be done part one
Can it be done part two
Budget Reconciliation -
About that budget . . .
Achieving permanence through revenue neutrality
“Flexibility” in defining neutrality
Revisit the budget window
One last option . . .
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Contact us
John P. Gimigliano
202-533-4022
@johngimigliano