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Taxes and Tax Reform in an Era of Hyper-Deficits and Gridlock

Taxes and Tax Reform in an Era of Hyper-Deficits and Gridlock. by Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma http://www.law.ou.edu/faculty/forman.shtml Oklahoma City Economic Roundtable March 2, 2011. Overview. The Budget Outlook Short-term Long-term Taxes

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Taxes and Tax Reform in an Era of Hyper-Deficits and Gridlock

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  1. Taxes and Tax Reform in an Era of Hyper-Deficits and Gridlock by Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma http://www.law.ou.edu/faculty/forman.shtml Oklahoma City Economic Roundtable March 2, 2011

  2. Overview • The Budget Outlook • Short-term • Long-term • Taxes • The Current Tax System • Recent Tax Reform Proposals

  3. Short-Term:Projected Budget Totals Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011 to 2021 (January 2011), http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf.

  4. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011 to 2021 (January 2011), http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf.

  5. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011 to 2021 (January 2011), http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf.

  6. U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2009).

  7. Congressional Budget Office, The Long-Term Budgt Outlook (Revised August 2010), at 5, http://www.cbo.gov/ftpdocs/115xx/doc11579/06-30-LTBO.pdf.

  8. Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security (percentage of GDP) • Congressional Budget Office, The Long-Term Budget Outlook (June 2009), at 12 (Box 1-2).

  9. Taxes • Overview of the federal tax system • Recent tax reform proposals

  10. Joint Committee on Taxation, Present Law and Historical Overview of the Federal Tax System (JCX-1-11), January 18, 2011, at 71, www.jct.gov.

  11. Proposed Budget Receipts Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011 to 2021 (January 2011), http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf.

  12. Joint Committee on Taxation, Present Law and Historical Overview of the Federal Tax System (JCX-1-11), January 18, 2011, www.jct.gov. Joint Committee on Taxation, Present Law and Historical Overview of the Federal Tax System (JCX-1-11), January 18, 2011, at 70,www.jct.gov.

  13. U.S. Payroll Tax Rates: Selected Years 20 18 16 14 12 Percent paid jointly by employee and employer Medicare 10 Social Security 8 6 4 2 0 1940 1960 1980 2010 Year

  14. Tax-to-GDP ratio, 2008 OECD Tax Database, http://www.oecd.org.

  15. Edward D. Kleinbard, Muddling Through the Budget Crisis (January 6, 2011); OECD Tax Database, http://www.oecd.org.

  16. Joint Committee on Taxation, Present Law and Historical Overview of the Federal Tax System (JCX-1-11), January 18, 2011, at 72,www.jct.gov.

  17. Congressional Budget Office, Trends in Federal Tax Revenues and Rates (December 2, 2010), at 10, http://finance.senate.gov/imo/media/doc/120210DEtest.pdf.

  18. Joint Committee on Taxation, Present Law and Historical Overview of the Federal Tax System (JCX-1-11), January 18, 2011, at 66, www.jct.gov.

  19. Top 10 Income Tax Expenditures, 2012 (Billions) 23 2012 Federal Budget, Analytical Perspectives, Chapter 17, Tax Expenditures, Table 17-3, http://www.whitehouse.gov/omb/budget/Analytical_Perspectives.

  20. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011 to 2021 (January 2011), http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf.

  21. 25 • Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009).

  22. Rising Poverty U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2009, (Current Population Report No. P60-238, September 2010), http://www.census.gov.

  23. Congressional Budget Office, Trends in Federal Tax Revenues and Rates (December 2, 2010), at 24, http://finance.senate.gov/imo/media/doc/120210DEtest.pdf.

  24. Rising Inequality

  25. Congressional Budget Office, Trends in Federal Tax Revenues and Rates (December 2, 2010), at 15, http://finance.senate.gov/imo/media/doc/120210DEtest.pdf.

  26. Shares of Total Business Returns and Net Income, 1980-2007 Internal Revenue Service, Statistics of Income, www.irs.gov/taxstats.

  27. Expired Tax Provisions 2010 • First-time homebuyer credit • Making work pay credit • Build America Bonds • Estate and gift tax regime for 2010 Joint Committee on Taxation, List of Expiring Federal Tax Provisions, 2010-2020 (JCX-2-11), January 21, 2011, www.jct.gov.

  28. Expiring Tax Provisions 2011 • Tax credit for research and experimentation expenses • Increased AMT exemption amount • Increase in expensing to $500,000/$2,000,000 • Above-the-line deduction for qualified tuition and related expenses • Temporary 2% payroll tax cut Joint Committee on Taxation, List of Expiring Federal Tax Provisions, 2010-2020 (JCX-2-11), January 21, 2011, www.jct.gov.

  29. Expiring Tax Provisions 2012 • Most 2001 and 2003 tax cuts • 35% maximum rate • 10% minimum rate • $1,000 child tax credit • 15% capital gain and dividend rates • Expanded earned income tax credit • American opportunity tax credit • Reduced estate and gift taxes Joint Committee on Taxation, List of Expiring Federal Tax Provisions, 2010-2020 (JCX-2-11), January 21, 2011, www.jct.gov.

  30. Recent Tax Reform Proposals • President’s Economic Recovery Advisory Board, The Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation (August 2010). • National Commission on Fiscal Responsibility and Reform, The Moment of Truth (December 2010). • Bipartisan Policy Center, Restoring America’s Future (November 2010). • Co-Chairs: Pete Domenici & Alice Rivlin

  31. Recent Tax Reform Proposals • Bipartisan Tax Fairness and Simplification Act of 2010 (2010). • Senators Ron Wyden and Judd Gregg • Rep. Paul Ryan, The Roadmap Plan (2010). • National Taxpayer Advocate, 2010 Annual Report to Congress (December 31, 2010). • President Obama’s FY2012 Budget

  32. Principles of Sound Tax Policy • Simplicity • Transparency • Neutrality • Stability • No Retroactivity • Broad Bases and Low Rates Tax Foundation, The Principles of Sound Tax Policy , http://www.taxfoundation.org/publications/show/25982.html.

  33. More Principles of Sound Tax Policy Distribution matters A just distribution of economic resources Intergenerational justice/ Deficits Behavioral consequences matter Encourage work and savings Marriage penalties and bonuses Keep effective rates as low as possible Growth and a stronger dollar 38

  34. Tax Base Income Consumption Earnings Wealth

  35. President Obama: Reform Corporate & Individual Tax • “I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years –- without adding to our deficit. It can be done.” • “In fact, the best thing we could do for all Americans is to simplify the individual tax code. This will be a tough job, but members of both parties have expressed interest in doing this, and I am prepared to join them.” Text of President Barack Obama’s State of the Union Address , http://www.politico.com/news/stories/0111/48181.html.

  36. PERAB: Simplification Options • Simplification for Families • Consolidate Family Credits and Simplify Eligibility Rules • Simplify and Consolidate Tax Incentives for Education

  37. PERAB, The Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation, at 6, http://www.whitehouse.gov/sites/default/files/microsites/PERAB_Tax_Reform_Report.pdf.

  38. PERAB: Simplification Options • Simplify Savings and Retirement Incentives • Consolidate Retirement Accounts • Integrate IRA and 401(k)-type Contribution Limits and Disallow Nondeductible Contributions • Consolidate Non-Retirement Savings • Reduce Retirement Account Leakage • Simplify Taxation of Social Security

  39. PERAB: Simplification Options • Simplify Taxation of Capital Gains • Harmonize Rules and Tax Rates for Long-Term Capital Gains • Simplify Capital Gains Tax Rate Structure • Limit or Repeal Section 1031 Like-Kind Exchanges • Capital Gains on Principal Residences

  40. PERAB: Simplification Options • Simplify Tax Filing • The Simple Return • Data Retrieval • Raise the Standard Deduction and Reduce the Benefit of Itemized Deductions • Simplification for Small Business • The Alternative Minimum Tax

  41. PERAB: Compliance Options • Dedicate More Resources to Enforcement and Enhance Enforcement Tools • Increase Information Reporting and Source Withholding • Clarify the Definition of a Contractor

  42. PERAB: Corporate Tax Reform • Reduce Marginal Corporate Rates • Broaden the Corporate Tax Base • Eliminate or Reduce Tax Expenditures • Eliminate the Domestic Production Deduction • Eliminate or Reduce Accelerated Depreciation • Eliminate Other Tax Expenditures

  43. PERAB: International Corporate Tax Issues • Option 1: Move to a Territorial System • Option 2: Move to a Worldwide System with a Lower Corporate Tax Rate • Option 3: Limit or End Deferral with the Current Corporate Tax Rate • Option 4: Retain the Current System but Lower the Corporate Tax Rate

  44. President’s Fiscal Commission • Co-chairs: Alan Simpson & Erskine Bowles • Designed to raise 21% of GDP • Individual tax rates of 12, 22, and 28% • Eliminate the AMT • Eliminate the phase-out of personal exemptions & limits on itemized deductions • Eliminate itemized deductions but retain standard deduction & personal exemptions • Tax capital gains & dividends as ordinary income The National Commission on Fiscal Responsibility and Reform, The Moment of Truth (December 2010), http://www.fiscalcommission.gov; Tax Policy Center, http://www.taxpolicycenter.org.

  45. President’s Fiscal Commission • Eliminate tax expenditures except: • child credit and earned income tax credit • mortgage interest deduction—replace with 12% credit; $500,000 mortgage cap • cap and phase out the exclusion for employer-sponsored health care • charitable giving deduction—replace with 12% credit for contributions over 2% AGI The National Commission on Fiscal Responsibility and Reform, The Moment of Truth (December 2010), http://www.fiscalcommission.gov.

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