Transcript Title — Times New Roman 28pt, line spacing .85 Title 2

Deficits, Politics and
Policy: a Tax
Legislative Outlook
Leon Lewis
Partner, Federal Tax Competency Leader
Deloitte Tax LLP
September 21, 2011
Agenda
 Debt, Deficits and Demographics
 The “supercommittee” Cure?
 Tax Reform Debate
 What’s Next?
1
Footnote
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Debt, Deficits and
Demographics
Federal Debt Held by the Public
(as a percentage of GDP)
Japan (2010 est.)
196%
180
160
Greece (2010 est.)
144%
140
120
100
80
60
40
20
0
2011
2015
Extended Baseline
2020
2025
40-Year Average (37%)
2030
2035
Alternative Fiscal Scenario
Source: Congressional Budget Office, CBO’s 2011 Long-Term Budget Outlook (June, 2011)
3
Footnote
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The Revenue/Spending Squeeze
Projected US Total Outlays
Current Policy
70
60
50
Projected Revenues
40
30
20
10
0
2011
2021
2031
2041
Interest on Publicly Held Debt
Medicare, Medicaid, Exchange Subsidies, CHIP
2051
2061
2071
2081
Social Security
All Other Outlays
Source: Congressional Budget Office, CBO’s 2011 Long-Term Budget Outlook (June, 2011)
4
Footnote
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The “supercommittee” Cure?
Budget Control Act of 2011
 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
6
Footnote
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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
7
Footnote
Gone
Restored
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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
8
Footnote
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Can the Super Committee Agree?
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
9
Footnote
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Tax Reform Debate
Tax Reform on the Agenda – Plenty of Questions
 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?
11
Footnote
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Corporate Tax Reform
 Broad consensus for lowering the rate
 Pressure to “pay for” reduced rates
 Impact on corporate tax expenditures
 Treasury white paper on corporate tax reform
12
Footnote
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Tax Expenditures
 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
13
Footnote
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How Much Rate Cut Does it Buy?
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%
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.
14
Tax Rates and Reform
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%
All corporate and
Bowles-Simpson
“Modified Zero Plan” many individual
28%
28%
Proposal
Wyden-Coats
Selected individual
and corporate
24%
35%
Domenici-Rivlin
Targeted corporate
and individual; also
adds a 6.5%
consumption tax
27%
27%
15
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Tax Reform Observations
 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
16
Footnote
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What’s Next?
Near-Term Tax Agenda
 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
18
Footnote
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Election 2012 in Full Swing
Average Campaign Costs
House
$10,000
$1,600
Average Spent by Winners (thousands)
Average Spent by Winner (thousands)
Senate
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
2000
2002
2004
2006
Election cycle
2008
2010
•Avg. Cost, 2010 Election: $9.02 million
•$14,469 a day excluding Sundays
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
2000
2002
2004
2006
Election Cycle
2008
2010
•Avg. Cost, 2010 Election: $1.4 mil
•$2,304 a day excluding Sundays
Source: Opensecrets.org
19
Footnote
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Outcome: Polarized Political Parties
 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
20
Footnote
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What Can Taxpayers Do?
 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
21
Footnote
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About Deloitte
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