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U.S. Tax Reform: If and When? Mel Schwarz Washington National Tax Office mel.schwarz@us.gt

U.S. Tax Reform: If and When? Mel Schwarz Washington National Tax Office mel.schwarz@us.gt.com. The Move Towards Tax Reform. Debate has begun over fundamental tax reform Corporate tax rates, are they anti-competitive? International taxation – trend to territorial

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U.S. Tax Reform: If and When? Mel Schwarz Washington National Tax Office mel.schwarz@us.gt

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  1. U.S. Tax Reform:If and When?Mel SchwarzWashington National Tax Officemel.schwarz@us.gt.com

  2. The Move Towards Tax Reform • Debate has begun over fundamental tax reform • Corporate tax rates, are they anti-competitive? • International taxation – trend to territorial • Individual rates, higher than corporate? • Tax reform as a revenue source: • Magic bullet or Voodoo economics? • Implication for targeted tax provisions • Is repeal a tax increase or a spending cut?

  3. Corporate Tax Reform: The Debate over the Rate Composite Statutory Corporate Tax Rates

  4. Corporate Tax Reform: The Debate over the Rate Composite Statutory Corporate Tax Rates

  5. Corporate Tax Reform U.S. Out of Step? • Most major trading partners either have an essentially territorial system or a statutory rate less than the OECD average of 25.1% • Territoriality may involve zero or low rate on intercompany dividends from abroad • 95% exemption in France, Germany, Japan. • Encourage free flow of capital • Currently - U.S. incentive for indefinite deferral through permanent expatriation of capital

  6. Corporate Tax Reform: The Growth of International Trade U.S. Imports + Exports as % of GDP

  7. Source: Auerbach and Gale; February, 2011

  8. Corporate Tax Reform Can it Happen? • Very expensive – Costs $10 billion per point per year "Get rid of the loopholes. . .and use the savings to lower the corporate tax rate for the first time in 25 years without adding to our deficit" – Obama, State of the Union Address, 2011 Business Roundtable won't support revenue-neutral reform, wants it "off the table" – Robert McDonald (Proctor and Gamble), Ways and Means tax reform hearing, 2011 If that's the formula, we're not going to get it done. I wouldn't sign such a bill – Obama on release of FY 2012 budget

  9. Major business tax expenditures

  10. Corporate Tax Reform Can it Happen? • Mother of all tax reform (Rangel 2007 proposal) was not well received: • Corporate rate reduction to 30.5% in exchange for a package of business revenue raisers including: • Repeal Section 199 DPAD • Repeal LIFO • Defer deductions for foreign expenses until income is repatriated

  11. Corporate Tax Reform Winners and Losers If the revenue lost from cutting the corporate rate is fully offset, who wins and who loses? • Potential Winners • Companies with high effective tax rates • Companies with fewer depreciable assets • Service companies • Financial companies

  12. Corporate Tax Reform Winners and Losers If the revenue lost from cutting the corporate rate is fully offset, who wins and who loses? • Potential Losers • Companies with low effective tax rates • Companies with lots of depreciable assets • Companies with high research demands • Domestic manufacturers, including high tech and software manufacturers

  13. Corporate Tax Reform Can it Happen? More businesses now operate as pass-throughs, will they share in the benefits of rate reduction? Ways and Means Chairman Camp has insisted that individual rates be considered as well

  14. Tax Reform as a part of Budget Reform Major Proposals • Simpson / Bowles • House Republican (Ryan plan) • Obama proposals • Gang of Six Five?

  15. Corporate Tax Reform Simpson / Bowles Debt Commission Report • Corporate rate reduction to 26 to 28% in exchange for a package of business revenue raisers including: • Repeal Section 199 domestic production deduction • Repeal LIFO • Shift to territorial system • Repeal accelerated depreciation • Repeal research and other incentive credits • Assumes approximately 5% of tax savings devoted to deficit reduction

  16. Legislative Concerns for 2011-2012 Projected U.S. Unemployment Rate • Projected unemployment rate Projections from Feb. 2011 Economic Report of the President, prepared by the Council of Economic Advisors

  17. Tax legislation that could be considered • Provide additional employment incentives • What we've already tried: • Hire Act 6.2% employer exemption for some hires • Employee 2% FICA tax holiday for 2011 • What we haven't tried yet: • Employer FICA tax holiday • Make incentives contingent on W-2 wages • Pair with repatriation of foreign earnings • Both parties now in a position to take some blame

  18. Tax legislation that could be considered Potential Revenue Offsets • Limit profits on expatriated intellectual property • Modify pooling rules for foreign tax credits • Defer deductions related to foreign source income until income is repatriated • Oil and gas and other industry specific incentives

  19. Fundamental Tax Reform in the Next Congress Who will be in charge in 2013? • House of Representatives • Republicans start with a 47 votes lead • Republicans are in a position to have greater influence over redistricting • Reapportionment favors Republican leaning states.

  20. Fundamental Tax Reform in the Next Congress Who will be in charge in 2013? • U.S. Senate • Democrats must defend 21 (23) seats while Republicans need defend only 10. • Republicans begin 2012 elections with a majority of 37 to 30. • Democrats must win virtually every race that could lean their way to hold a majority.

  21. 2012 Senate Election Source: Cook Report

  22. Fundamental Tax Reform in the Next Congress Who Will Be in Charge in 2013? Presidential Race Will you vote to re-elect President Obama or vote for someone else? Source: Clarus Poll; Feb. 4-8, 2011

  23. Fundamental Tax Reform in the Next Congress Who Will Be in Charge in 2013? Nationwide Trial Heats • Obama leads Huckabee by 5% • Obama leads Romney by 6% • Obama leads Christie by 9% • Obama leads Rand Paul by 10% • Obama leads Gingrich by 14% • Obama leads Palin 18% Source: Public Policy Polls, April 7-10, 2011.

  24. Fundamental Tax Reform in the Next Congress Who Will Be in Charge in 2013? Nationwide Trial Heats • Obama leads Huckabee by 5% • Obama leads Romney by 7% • Obama leads Gingrich by 14% • Obama leads Daniels by 14% • Obama leads Palin by 17% • Obama leads Trump by 18% Source: Public Policy Polls, May 5 - 7, 2011.

  25. Any final questions?

  26. Tax Professional Standards Statement • This document supports Grant Thornton LLP’s marketing of professional services, and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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