Politics, Elections, and Tax Policy in the 114 Congressteidetroitchapter.camp7.org/resources/Documents... · Note*: CBO’s projected baseline deficit as of August 2010 increased

Politics, Elections, and Tax Policy in the 114th Congress

Alex BrosseauDeloitte Tax LLP

Setting the stage

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Since 2010, we have seen:

“Super-committee”

Senate Gang of

Six Biden Group

Bowles-Simpson

Obama-Boehner

talks

Failed Budget Talks‏ Governing by Deadline‏

S&P downgrade

Debt ceiling crises in

2011 & 2013Fiscal Cliff

in 2012

Government shutdown

In 2013

Twenty-six continuing resolutions

Sevenshort-term highway patches

Soon to be fourretroactive

extensions of the tax

extenders


“Do you approve of the way Congress is handling its job?”

56.1%

14.7%

0

10

20

30

40

50

60

70

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

% Approving

Source: Deloitte analysis of Gallup historical polling data, simple average of approval rate each year, through 9/13/2015 (http://www.gallup.com/poll/1600/congress-public.aspx)‏

16.7%‏

http://www.gallup.com/poll/1600/congress-public.aspx


Still, we’ve made some progress on the deficit

1,227

435

0

200

400

600

800

1000

1200

1400

2010 Projected* Actual

FY 2015 Budget Deficit

Billions of $

Note*: CBO’s projected baseline deficit as of August 2010 increased by CBO’s estimated cost in 2014 of extending all of the 2001 and 2003 tax cuts, patching the Alternative Minimum Tax, and extending other expiring tax provisions. Sources: Congressional Budget Office, The Budget and Economic Outlook: An Update (Aug. 2010), and An Update to the Budget and Economic Outlook: 2015-2025 (Aug. 2015)

11th Hour Deals

• Budget Control Act of 2011

• American Taxpayer Relief Act of 2012

Other

• Persistently low interest rates

• Slower than expected healthcare cost growth


17%

18%

19%

20%

21%

22%

23%

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Current Law Revenues Current Law Spending

But the deficit reprieve is temporary

Note*: Assumes current law remains unchanged (e.g., tax extenders remain expired, sequester cuts are allowed to transpire as scheduled, etc.). Source: Congressional Budget Office (CBO), An Update to the Budget and Economic Outlook, 2015 to 2025 (Aug. 2015)

% of GDP $7.0 trillion deficit*


Bipartisan Budget Act of 2015 helps to break the fiscal fever (for now)

900

950

1,000

1,050

1,100

1,150

FY2014 FY2015 FY2016 FY2017

Discretionary Spending

Sequester Ryan-Murray

Billions of $

BBA of 2015‏

What the BBA does

• Lifts sequester spending caps for FY16/17

• Suspends the debt limit through 3/15/2017

• Keeps Disability Insurance solvent until 2022

What it didn’t do

• Fill-in program-by-program spending details

• Extend the tax extenders

Recent political developments


Paul Ryan now holds the Speaker’s gavel

• Two main reasons Speaker Boehner left:− Exhausting job− Frustration of being a leader without followers

• Will Speaker Ryan be in a stronger position than Boehner?

• Does Ryan’s ascent bolster the odds of tax reform?


Meet your new Ways and Means Committee Chairman

Kevin Brady, R-Texas

11 Copyright © 2015 Deloitte Development LLC. All rights reserved.Strategic Tax Conference

New leaders, same challenges?

Under Speaker Boehner

247 Size of House GOP Conference218 Votes to pass bills in the House~40 Approximate size of House Freedom Caucus54 Size of Senate GOP Conference60 Votes to overcome a Senate filibuster

290/67 Votes to override a President’s vetoin the House/Senate

Under Speaker Ryan246218~405460

290/67


Senate up for grabs – 2016 map unfavorable to Republicans...

Source: University of Virginia Center for Politics, Sabato’s‏ Crystal Ball

…but Senate Democrats back on defense in 2018

A look back and a look ahead


Another year of missed opportunities on tax reform

First idea Second idea Last idea

Comprehensive tax reform How about business only tax reform?

Can we pair international tax reform with more money to help pay for highways?

The parties can’t agree on how much revenue is enough and whether to use tax reform to make the system more (or less) progressive than it is today

Pass-through supporters indicated to Congress that if C Corps get a rate reduction that there is no other benefit, short of a rate cut, that will work for them


• Increasing the gas tax = political nonstarter

• Bipartisan flare – approach supported by Chairman Camp, President Obama, Sens. Portman and Schumer, others

• Budget math – “deemed repatriation” a rare policy with bipartisan support capable of plugging massive hole in Highway Trust Fund

• Global competitiveness at stake – re-domiciling, foreign acquisitions, & BEPS … problems are too urgent to hold out for “comprehensive” reform

• Reps. Boustany (R-La.) and Neal (D-Mass.) unveiled a draft innovation box bill in July that was praised by then-Chairman Ryan

Why international tax reform for highways seemed promising


• Reps. Boustany (R-La.) and Neal (D-Ma.) released a draft “innovation box” bill in July

• 71 percent deduction (ETR of 10.15%) on profits derived from products that are produced using a broad range of IP, after such profits have been multiplied by a ratio of domestic R&D to total operating costs

◦ The higher the profit rate and the larger domestic R&D is as a share of total expenses, the bigger the benefit

• Would facilitate the tax-free repatriation of appreciated IP held abroad

• Applies only to corporate entities / Does not apply to income from services

Draft “Innovation Box” bill raised hopes even more


• Tepid business support: − No rate reduction / domestic-only firms doubt Congress will revisit broader reform− Innovation box less generous than many had hoped− Fear that deemed repat rate / minimum tax rate / other offsets may too onerous

• Tough numbers:− Territorial + innovation box + HTF fix = Hundreds of billions of dollars− Some Republicans view policy combo as higher taxes chasing more spending

• Democrats wanted more highway spending than Republicans could stomach

Why international tax for highways seemed promising ------------------------- stalled


• Raise the federal debt limit (Nov. 3)

• Highway reauthorization (December 4)

• Expiration of government funding (December 11)

• Tax extenders perceiveddeadline (December 31)

Must do items• Export-Import bank

reauthorization • Budget Reconciliation package

– including repeal of the Cadillac tax, medical device tax, employer and individual mandates, and Medicaid expansion

May do items include

Congress’ to-do list for the rest of 2015


Tax extenders – déjà vu all over again?Permanent provisions advanced in HOUSE so far this year 10-year score

Enhanced 50% bonus depreciation (and election to accelerate AMT credits in lieu of bonus)* -280.7

Enhanced R&D credit (20% ASC) -181.6

Active Financing Exception to Subpart F* -78.0

Enhanced §179 expensing thresholds ($500K/$2M, indexed) -77.1

Itemized deduction for state/local sales taxes in lieu of income taxes -42.4

15-year recovery for qualified leasehold improvements, & certain retail and restaurant property* -28.4

Look-through rule for payments between related CFCs* -21.8

Tax-free distributions from IRAs for charitable purposes -8.8

Other extenders related to charitable contributions -4.0

Above-the-line deduction for costs incurred by teachers for supplies* -2.5

Total budget impact of HOUSE legislation -$725 billion

* Indicates provisions reported by the Ways and Means Committee, but not yet considered by the full House** S.1946, as reported by the Senate Finance Committee on July 21, 2015

Temporary provisions advanced in SENATE so far this year 10-year scoreTwo-year (2015-2016) extension of nearly all expired provisions** -96.9

Total budget impact of SENATE legislation -$97 billion


What could unlock a permanent extenders package?

Reforms to refundable tax

credits that reduce the potential for

fraud and limit the eligibility of

non-citizens

Reforms to refundable tax credits that do not undermine their ability to

provide help to low-income

families

The case for tax reform is still strong


Statutory corporate rates among OECD countries (including subnational) – 2015

12.5%17%

19%19%19%

20%20%20%20%20%

21.1%22%22%

22.5%23.5%

24.2%25%25%

26%26.3%26.5%

27%27.5%

28%28%

29.2%29.5%

30%30%30.2%

32.1%34%34.4%

39%

0 5 10 15 20 25 30 35 40

IrelandSlovenia

Czech RepublicHungary

PolandFinlandIcelandTurkey

EstoniaUnited Kingdom

SwitzerlandSlovak Republic

SwedenChile

DenmarkKorea

AustriaNetherlands

GreeceCanada

IsraelNorway

ItalyNew Zealand

SpainLuxembourg

PortugalAustralia

MexicoGermany

JapanBelgium

FranceUnited States

Source: OECD Tax Database, Table II.1‏


“You can observe a lot just by watching” – Yogi Berra

20%

25%

30%

35%

40%

45%

50%Corporate Tax Rates Over Time – Including Subnational

U.S. OECD Weighted Avg. (by GDP) OECD Simple Average

Source: OECD, Tax Foundation‏


Developed nations trending away from worldwide taxation

8

26

28

6

Territorial Worldwide

Source: Tax Foundation‏

Today1972

International Tax Systems Among Current OECD Members‏

How much revenue should we raise, and who should pay it?


The Republican view

Source: Congressional Budget Office, Budget and Economic Outlook: 2015 to 2025 (Jan. 2015), historical data‏

13

14

15

16

17

18

19

20

21

2007 2009 2011 2013 2015 2017 2019 2021 2023 2025

Federal Revenues / GDP

- Yr. Average Revenues (1975-40‏ 2014)Past & Projected Revenues‏


The Democrat view

15

16

17

18

19

20

21

22

23

24

25

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014

Federal Revenue, Spending / GDP

Yr. Average Revenues (17.3%)-40‏

Actual Spending‏

Source: Congressional Budget Office, Budget and Economic Outlook: 2015 to 2025 (Jan. 2015), historical data‏


Parties draw different conclusions from balanced budget years

16

17

18

19

20

21

22

1969 1998 1999 2000 2001

Revenues Spending

% of GDP

Sources: Congressional Budget Office, Budget and Economic Outlook: 2015 to 2025 (Jan. 2015), historical data‏Projected averages from CBO, An Update to the Budget and Economic Outlook: 2015 to 2025)‏ (Aug. 2015))

Projected Avg. Spending over Next Decade (21.3%)‏

Projected Avg. Revenues over Next Decade (18.3%)‏


Is the tax code too progressive, or not progressive enough?

6.2

45.2

5.3

51.9

0

10

20

30

40

50

60

Bottom 20% Top 20%

Share of Pre-Tax Income

1980 2011

% of Total

2.1

55.4

0.6

68.7

0

10

20

30

40

50

60

70

Bottom 20% Top 20%

Share of All Federal Taxes

1980 2011

% of Total

Source: Joint Committee on Taxation, Fairness and Tax Policy, JCX-48-15 (Feb. 2015)‏

Other headwinds


U.S. is unique in not taxing consumption

0%9.2%

12.1%13%

13.7%13.8%

15.5%15.7%

16.6%17.2%

17.9%18.2%18.2%18.6%19%19.4%

20.1%20.6%20.8%20.8%20.9%21.1%21.1%21.2%21.3%21.7%22%22.1%

22.8%23.7%

24.7%26.4%26.6%

30%37.7%

0 5 10 15 20 25 30 35 40United States

JapanAustralia

SwitzerlandCanada

ItalyFrance

BelgiumSpainKorea

NetherlandsLuxembourg

NorwayAustriaMexico

GermanyAverage (Ex-U.S.)

DenmarkTurkey

United KingdomCzech Republic

SwedenFinlandGreece

Slovak RepublicIreland

SloveniaPolandIceland

HungaryIsrael

PortugalEstonia

New ZealandChile

Value Added Taxes as a % of total taxation – OECD countries – 2012

Source: OECD, Consumption Tax Trends 2014 (Table 1.A1.7)‏


Broadening the base is more than just closing “loopholes”

Largest Corporate Tax Expenditures - 2014 Billionsof $

Deferral of active CFC income 83.4

Accelerated depreciation (w/o bonus) 24.0

§199 deduction 12.2

Deferral on like-kind exchanges 11.7

Exclusion for muni bond interest 9.3

Deferral of gain on installment sales 6.9

Low-income housing tax credit 6.8

Expensing of R&E expenditures 4.6

Reduced rates on corporate TI below $10M 3.8

Inventory property sales source rule exception 3.0

Top 10 as a % of total corporate ~80%

Largest Individual Tax Expenditures - 2014 Billionsof $

Exclusion of employer-provided health benefits 143.0

Reduced rates on LT cap gains/dividends 96.5

Tax-preferred retirement plans 88.8

Earned Income Tax Credit 69.2

Mortgage interest deduction 67.8

Child tax credit 57.3

State and local tax deduction 56.5

Exclusion of Social Security benefits 37.4

Charitable contribution deduction 34.8

Exclusion for cafeteria plan benefits 34.5

Top 10 as a % of total individual ~66%

Source: Senate Budget Committee Print 113-32, Tax Expenditures: Compendium of Background Material on Individual Provisions (Dec. 2014)


2016 GOP contenders further muddy the watersGov. Bush Sen. Rubio Trump

Top Individual Rate 28% 35% 25%

Threshold (Joint) $141,000 $150,000 $300,000

Cap Gain / Dividends20% top rate Not taxable 20% top rate

-------------------- Repeal 3.8% NII tax -----------------

Itemized Deductions

Repeal state and local income tax, maintain

charitable, limit value of others to 2% of AGI

Maintain charitable, limit MID to $300K principal

balance, repeal all others

Leave charitable and MID untouched, otherwise

tighten Pease limitation

Top Corporate Rate 20% 25% 15%

Applies to passthroughs? No Yes Yes

Full Expensing Yes Yes No

Limit Interest Yes Yes Yes

International Territorial Territorial Repeal Deferral

Deemed Repatriation Yes (8.75%) Yes (6%) Yes (10%)

Estate Tax ---------------------------- Repeal -------------------------

10-Year Revenue Loss(static / dynamic) $3.7 trillion / $1.6 trillion $6.1 trillion / $2.4 trillion $12 trillion / $10.1 trillion

Carson, Cruz, Huckabee, Paul, Santorum, Fiorina

Ditch entire system in favor of a flat income tax or

national retail sales tax


2016 Democratic contenders – a different definition of “tax reform”Sec. Clinton Sen. Sanders

Individual Taxes Implement Buffett Rule: minimum 30% rate on those earning $1 million+

Buffett Rule + Raise top marginal rate to unspecified level

Cap Gain / DividendsRaise top rate on capital gains to 43.4% (holding

prd ≤ 2 years), gradually reduced to 23.8% (holding prd > 6 years)*

Raise 3.8% NII tax to 10%

Carried Interest --------------- Ordinary income ---------------

Itemized Deductions Limit tax benefit to 28% of deduction No campaign position

Financial Transactions Tax New tax on certain high-frequency transactions 50bp tax on stock trades, 10bp tax on bond trades, 0.5bp tax on derivatives

International No campaign position Repeal deferral; per-country foreign tax credit; tighten anti-inversion law

Estate Tax No campaign position$3.5 million exclusion (maintains portability); 55% top rate; 10% surtax on estates over $1

billion

Misc.• 15% credit for employee profit-sharing

• 20% credit for family caregivers• Credit for out-of-pocket healthcare costs

• Apply Soc. Sec. tax to wages over $250K• 0.2% payroll tax to fund paid family leave

* Would apply only to top-bracket taxpayers

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Most important economic issue according to early state political insidersThe partisan divide

Source: POLITICO Caucus November 2015 survey of a bipartisan group of influential political strategists, operatives and activists in Iowa, New Hampshire, South Carolina and Nevada

Democrats

Economic inequality

81%

Economic growth 17%

Unemployment 2%

Republicans

Taxes 10%

Economic growth

65%

Deficit reduction

23%

Unemployment 2%

http://www.politico.com/story/2015/11/insiders-economy-caucus-215931%23ixzz3rxagrJ28

It’s a broader problem, isn’t it?


Presidential leadership could help. But…

Source: Gallup Politics “Obama’s Fourth Year in Office Ties as Most Polarized Ever,” Jan. 24, 2013, available at http://www.gallup.com/poll/160097/obama-fourth-year-office-ties-polarized-ever.aspx. For up-to-date Obama ratings, see http://www.gallup.com/poll/124922/Presidential-Approval-Center.aspx (last visited Sept. 17, 2015); others are averages for entire term.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Nixon Ford Carter Reagan Bush 41 Clinton Bush 43 Obama

President's party Other party

41% 31%

27%

52%

38%

55% 61% 71%

Average Presidential Approval Ratings, by Party Affiliation


More Americans dislike the thought of their children marrying someone from the other political party

5

4

49

33

Republicans Democrats

.Source: New York Times, How Did Politics Get So Personal?, Thomas B. Edsall, January 15, 2015‏

2010: Percentage of parents who would be “upset”

1960: Percentage of parents who would be “displeased”

http://mobile.nytimes.com/2015/01/28/opinion/how-did-politics-get-so-personal.html?referrer=&_r=0

Copyright © 2015 Deloitte Development LLC. All rights reserved.Copyright © 2015 Deloitte Development LLC. All rights reserved.

Electorate increasingly motivated by negative emotions

“Negative Partisans”Dislike the opposing party more than they like their own party

“Positive Partisans”Like their own party more than they dislike the opposing party

38%

42%

61%

20%

2012

2000

Source: American National Election Studies


Turnout among primary voters has fallen to record lows…

27.1

24.525.6

23.4

19.6 19.918.9

30.6

17.3

23.8

21.5 22.0

19.4 18.6 19.1

16.118.3

14.8

Primary Voters as a Percentage of Eligible Population

Presidential Elections‏

Midterm Elections‏

Sources: Deloitte analyses of data from the Center for the Study of the American Electorate and the Bipartisan Policy Center‏


…and primary voters are more partisan than the general electorate

Source: Pew Research Center, Political Polarization in Action: Insights into the 2014 Election from the American Trends Panel‏

2010 Mid-Term: Primary Voters Compared to Democrat & Republican Parties Generally

29%43%

32%

33%

35%20%

0

10

20

30

40

50

60

70

80

90

100

All Democrats Primary Voters

Democrats

Consistent Liberal Mostly Liberal Moderate

23%37%

38%

40%

31%

17%

0

10

20

30

40

50

60

70

80

90

100

All Republicans Primary Voters

Republicans

Consistent Conservative Mostly Conservative Moderate

% of Total


Few members concerned about a challenge from the other party

148

186

123

159164

90

80

100

120

140

160

180

200

1998 2000 2002 2004 2006 2008 2010 2012 2014

House Seats

Safe Democrat‏

Competitive‏

.Source: Cook Political Report, 2014 Partisan Voter Index‏

Safe Republican‏

Final thoughts and takeaways


• Parties recognize long-term budget challenge – but fundamental disagreements over proper size and role of government continue to block solutions

• Leadership change in House, fiscal deadlines, and encroaching elections narrowed this fall’s tax ambitions:

o International reform for highways• Current talks (Ryan-Schumer-Portman) pushed to back burner• Recently enacted five-year highway bill casts doubt on whether approach will resurface

o Tax extenders• Talks ongoing to marry permanent business provisions with permanent low-income worker/family provisions• If those talks fail, path of least resistance = 1-2 year, clean extension

• 2016 elections won’t settle tax reform debate – parties will still have checks on each other’s power


Questions?

Alex Brosseau‏

[email protected]‏

202.661.4532‏

mailto:[email protected]


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