US tax reform: The potential for action The Dbriefs Tax Reform series

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1 The Dbriefs Tax Reform series Jon Traub, Principal, Deloitte Tax LLP Matt Iandoli, Managing Director, Deloitte LLP Terri LaRae, Partner, Deloitte Tax LLP July 18, 2017

4 Corporate income tax rates around the world 55% 50% 45% 40% 35% 30% 25% 20% Marginal Tax Rates: US vs. OECD Average 38.9% 31.4% OECD (weighted avg.) US 15 Highest Corporate Tax Rates 2016 Rate (%) United Arab Emirates 55 United States 38.9 Argentina 35 Chad 35 Democratic Republic of the Congo 35 Equatorial Guinea 35 Guinea 35 Malta 35 US Virgin Islands 35 Zambia 35 India 34.6 Sint Maarten 34.5 France 34.4 Belgium 34 Brazil 34 Source: OECD historical data Source: Tax Foundation, Aug. 18, 2016, Copyright 2017 Deloitte Development LLC. All rights reserved. 4

5 But some industries fare better than others (And that s part of the problem) 60% Average Effective Tax Rate, by Industry 50% 40% 30% 20% 21% 24% 26% 26% 28% 31% 33% 34% 37% 10% 12% 0% Utilities IT Industrials Telecom Pharma Consumer Products Materials Financials Retailers Energy Note: Average Effective Tax Rates by Industry; Range of Effective Tax Rates of companies with Market Capitalization over $25B as of March 11, Source: Across U.S. Companies, Tax Rates Vary Greatly. New York Times, available at Copyright 2017 Deloitte Development LLC. All rights reserved. 5

Congressional action on health care potential impact on tax

8 President Trump s tax announcement Key features Individual Reform Tax relief for American families, especially middle-income families: Reducing the 7 tax brackets to 3 tax brackets of 10%, 25% and 35% Doubling the standard deduction Providing tax relief for families with child and dependent care expenses Simplification: Eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers Protect the home ownership and charitable gift tax deductions Repeal the Alternative Minimum Tax Repeal the death tax Repeal the 3.8% Obamacare tax that hits small businesses and investment income Source: White House fact sheet, April 26, 2017 Copyright 2017 Deloitte Development LLC. All rights reserved. 8

9 President Trump s tax announcement (2 of 2) Key features Business Reform 15% business tax rate Territorial tax system to level the playing field for American companies One-time tax on trillions of dollars held overseas Eliminate tax breaks for special interests Source: White House fact sheet, April 26, 2017 Copyright 2017 Deloitte Development LLC. All rights reserved. 9

10 Polling question #1 Is there a feature of corporate tax reform most likely to boost economic growth in the U.S.? A border-adjusted tax Lowering the corporate tax rate Expensing of manufacturing equipment A simplified code International tax reforms None of the above/don t know/not applicable Copyright 2017 Deloitte Development LLC. All rights reserved. 10

13 House Republicans Blueprint summary Business Tax 20% corporate tax rate; 25% rate on pass-through business income 100% expensing (rather than depreciation); repeal deductibility of business interest Repeal corporate AMT Disallow NOL carrybacks; NOLs may be carried forward indefinitely R&D credit and LIFO retained; most other business tax credits and deductions assumed to be repealed International Tax Full territorial system (no tax on repatriation of future foreign profits) Transition rule that has a deemed repatriation of past foreign profits (8.75% rate on cash and cash equivalents; 3.5% rate on everything else; payable over eight years) Moves to a destination-based border adjustable cash flow tax, which the blueprint says will obviate the need for most base erosion safeguards Copyright 2017 Deloitte Development LLC. All rights reserved. 13

14 House Republicans Blueprint summary Individual Tax Reduce seven tax brackets down to three 33%, 25%, 12% 50% exclusion for investment income (capital gains, dividends, interest) Combine and expand the standard deduction and personal exemption, allowing fewer taxpayers to go through the complexity of itemizing Retain, though possibly in a modified form, the deductions for mortgage interest and charitable contributions as well as incentives for savings and education Repeal most other individual income tax preferences, including for state and local taxes Repeal AMT Repeal estate and gift tax Copyright 2017 Deloitte Development LLC. All rights reserved. 14

15 Polling question #2 Taking into account political and budgetary considerations, which top corporate rate do you feel is most likely in a tax reform bill? 28% (Obama) 25% (Camp) 20% (House GOP Blueprint) 15% (Trump) Don't know/not applicable Copyright 2017 Deloitte Development LLC. All rights reserved. 15

16 Congressional Democrats Focused more on flaws in the tax code Some Ways & Means Democrats seem interested in tax reform and have led the way on discrete parts (e.g., Rep. Richie Neal pairing with GOP Rep. Charles Boustany in 2015 to unveil an innovation box) However, the general approach of House Democrats has been to continue to push for action to address what they say are flaws in the tax code, and they are unlikely to be supportive of the sort of tax reform that Trump and House Republicans will pursue Senate Finance Committee Ranking Member Ron Wyden has urged Congress to act in the short term on the issue of inversions Unlike his House counterparts, he has worked on a broader vision of tax reform and last year released discussion drafts on three pieces of tax reform Incentives for Senate Democrats to push for tax reform are unclear under a Trump presidency, but there may be areas of agreement on which legislation can be built Copyright 2017 Deloitte Development LLC. All rights reserved. 16

17 2016: A good map (on paper) for Democrats; 2018: A very different story Senate Seats Contested In 2016 Senate Seats To Be Contested in 2018 Copyright 2017 Deloitte Development LLC. All rights reserved. 17

18 Senate Republicans Senate Finance Committee Chairman Hatch had been working on proposal for corporate integration Generally it was expected to give corporations a deduction for dividends paid while requiring all dividend recipients to pay tax on them at ordinary income rates Chairman Hatch delayed releasing it in 2016 and recently indicated he would suspend work on it to focus on broader tax reform Copyright 2017 Deloitte Development LLC. All rights reserved. 18

19 Polling question #3 How confident are you that a comprehensive tax reform bill will be enacted this year? Very confident Somewhat confident Doubtful Not at all confident Don t know/not applicable Copyright 2017 Deloitte Development LLC. All rights reserved. 19

Bottom line question: Is tax reform more likely than not in 2017?

21 There are at least eight reasons to keep expectations in check Reasons Parties have real and deep differences over whether tax reform should raise more revenue 2. Parties remain badly divided over whether to reduce the top marginal rate for individuals; relatedly, they have very different views as to whether the tax code should be made more progressive or not 3. Tax reform entails very difficult choices Members of Congress are rarely excited about taking away specific tax benefits for specific groups/industries Copyright 2017 Deloitte Development LLC. All rights reserved. 21

22 Broadening the base More than just closing loopholes Largest Business Tax Expenditures 2015 $ Billion Largest Individual Tax Expenditures 2015 $ Billion Deferral of active CFC income deduction 11.7 Deferral on like-kind exchanges 11.0 Exclusion for muni bond interest 9.7 Low-income housing tax credit 7.3 Deferral of gain on installment sales expensing 4.8 Expensing of R&D expenditures 4.7 Reduced tax on corporate income below $10M 4.0 Special treatment of life insurance co. reserves 2.9 Accelerated depreciation -20.0* Tax-preferred retirement plans Exclusion of employer-provided health benefits Reduced rates on LT cap gains/dividends Earned Income Tax Credit 72.7 Mortgage interest deduction 71.0 State and local tax deduction 62.2 Child tax credit 57.1 Charitable contribution deduction 45.6 Exclusion of Social Security benefits 37.6 Property taxes deduction 32.4 Exclusion of cap gains at death 32.4 *Accelerated depreciation is a negative expenditure (brings in revenue) in the short term but a revenue loss in the longer term. Source: Joint Committee on Taxation publication JCX-141R-15, Estimates Of Federal Tax Expenditures For Fiscal Years , Dec. 7, Copyright 2017 Deloitte Development LLC. All rights reserved. 22

23 There are at least eight reasons to keep expectations in check Reasons Parties have real and deep differences over whether tax reform should raise more revenue 2. Parties remain badly divided over whether to reduce the top marginal rate for individuals; relatedly, they have very different views as to whether the tax code should be made more progressive or not 3. Tax reform entails very difficult choices Members of Congress are rarely excited about taking away specific tax benefits for specific groups/industries 4. Politics as a whole seems to be broken Copyright 2017 Deloitte Development LLC. All rights reserved. 23

25 Special Elections in 2017 Kansas: Mike Pompeo (CIA Director) April 11: General election held Traditionally safe Republican seat Georgia: Tom Price (Department of Health and Human Services) June 20: Runoff held Traditionally Republican leaning seat South Carolina: Mick Mulvaney (Office of Management and Budget) May 16: Primary runoff was too close to call; June 20: General Election held Traditionally Republican leaning seat Montana: Ryan Zinke (Department of Interior) May 25: General Election held Traditionally competitive seat California 34: Xavier Becerra (California Attorney General) Runoff: June 6 held Traditionally safe Democratic seat Copyright 2017 Deloitte Development LLC. All rights reserved. 25

Special Elections in 2017 Kansas: Mike Pompeo (CIA Director) April 11: General election held Georgia 6: Traditionally Republican leaning seat Traditionally safe Republican seat Georgia: Tom Price

26 Special Elections in 2017 Kansas: Mike Pompeo (CIA Director) April 11: General election held Georgia 6: Traditionally Republican leaning seat Traditionally safe Republican seat Georgia: Tom Price (Department of Health and Human Services) Election held on June 20 June 20: Runoff held Traditionally Republican leaning seat Most expensive Congressional race in history : over $50 million spent South Carolina: Mick Mulvaney (Office of Management and Budget) May 16: Primary runoff was too close to call; June 20: General Election held Traditionally Republican leaning seat The first real referendum on Trump?? Montana: Ryan Zinke (Department of Interior) Trump carried the seat by 1.5 points in 2016 May 25: General Election held Traditionally competitive seat Romney carried the seat by 23 points in 2012 California 34: Xavier Becerra (California Attorney General) Karen Handel (R ) won the race 52% to 48% Runoff: June 6 held Traditionally safe Democratic seat Copyright 2017 Deloitte Development LLC. All rights reserved. 26

28 White House Agenda Health care reform Tax reform Infrastructure Federal judicial appointments Regulatory reforms Renegotiating Trade Agreements Copyright 2017 Deloitte Development LLC. All rights reserved. 28

29 New Trump Administration Nominations Status Approx 4,000 appointments Approx 500 Senate confirmed positions Civilian Nomination Status as of June of First Year of Presidency Trump Confirmed nominees 36 Nominees not yet confirmed 81 Obama W. Bush Clinton H.W. Bush Copyright 2017 Deloitte Development LLC. All rights reserved. 29

31 The House of Representatives A fanatic is always the fellow that is on the opposite side. Legislative paths Will Rogers Majority Rule Bipartisanship Factions Copyright 2017 Deloitte Development LLC. All rights reserved. 31

33 Nuclear Option Sen. Harry Reid 2013 Eliminate filibuster for most confirmations Sen. Mitch McConnell 2017 Supreme Court confirmation Pressure rising for future use on policy Copyright 2017 Deloitte Development LLC. All rights reserved. 33

34 There are at least eight reasons to keep expectations in check 1. Parties have real and deep differences over whether tax reform should raise more revenue 2. Parties remain badly divided over whether to reduce the top marginal rate for individuals; relatedly, they have very different views as to whether the tax code should be made more progressive or not 3. Tax reform entails very difficult choices Members of Congress are rarely excited about taking away specific tax benefits for specific groups/industries 4. Politics as a whole is broken; the system today rewards purists not dealmakers 5. Republicans are using up a fair amount of political capital in early 2017 on ACA repeal and the process of confirming President Trump s cabinet and court nominees 6. You can never rule out the possibility of a Black Swan event (natural disaster, financial market turmoil, terrorism, etc.) that could stymie or re-direct the legislative process; and the 2018 midterm elections are less than 500 days away 7. Chaos coming out of the White House is not conducive to legislating 8. The clock is ticking Copyright 2017 Deloitte Development LLC. All rights reserved. 34

35 The 2017 legislative calendar For the remainder of CY 2017, the House and Senate are scheduled to be in session on 51 overlapping days and an additional 32 days when either the House or Senate is in session JUN JUL AUG SEPT OCT NOV DEC 1 week District work period BY SEPT 30 1 week District work period 5 week summer recess 1 week District work period 1 week District work period 1 week District work period Target Adjournment 12/15 Must dos Pass FY18 spending bills or shut down part of the gov t Reauthorize FAA Raise or suspend federal debt ceiling? Extend Children s Health Insurance Program Senate continues processing Trump s nominees ACA repeal and replace Repeal through FY17 budget reconciliation process Copyright 2017 Deloitte Development LLC. All rights reserved. 35

36 The 2017 legislative calendar A potential and increasingly ambitious tax reform timeline For the remainder of CY 2017, the House and Senate are scheduled to be in session on 51 overlapping days and an additional 32 days when either the House or Senate is in session JUN JUL AUG SEPT OCT NOV DEC 1 week District work period 1 week District work period 5 week summer recess 1 week District work period 1 week District work period 1 week District work period Target Adjournment 12/15 House Pass FY18 budget resolution including reconciliation instructions; start tax reform hearings; negotiations with Senate and White House continue House Ways & Means vote Full House vote Senate Pass FY18 budget resolution including reconciliation instructions; negotiations with House and White House continue Senate Finance vote? Full Senate vote Copyright 2017 Deloitte Development LLC. All rights reserved. 36

37 Seven reasons to think it could really happen this time 1. There is substantial agreement that the current system with high corporate tax rates, a narrow tax base riddled with credits and deductions, and an antiquated worldwide tax system is not sustainable 2. External factors (including inversions, foreign acquisitions of U.S. firms, BEPS, and the state aid cases in the EU) are imposing real political and policy costs 3. Lots of groundwork has been laid 4. Reform is a high priority for key House and Senate leaders, so this likely won t fall off the radar 5. Republicans are generally united on the idea of tax reform, and with the executive and legislative branches under the control this year, they may try to enact tax reform under reconciliation 6. If not now, when? 7. Republicans will need something to take to the voters in November of 2018 Copyright 2017 Deloitte Development LLC. All rights reserved. 37

38 Polling question #4 What is most needed to ensure passage of tax reform? A sense of economic crisis Presidential leadership Compromise in Congress Public support Unified support from business groups Other/don t know Copyright 2017 Deloitte Development LLC. All rights reserved. 38

41 Join us September 13 at 2 p.m. ET as our Tax Reform series presents: US tax reform: What is in store for businesses and individual taxpayers? Copyright 2017 Deloitte Development LLC. All rights reserved. 41

43 Contact information Matthew Iandoli Managing Director Deloitte LLP Jon Traub Principal Deloitte Tax LLP Terri LaRae Partner Deloitte Tax LLP Copyright 2017 Deloitte Development LLC. All rights reserved. 43

44 This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation. Copyright 2017 Deloitte Development LLC. All rights reserved. 44

About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities.

45 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a detailed description of DTTL and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2017 Deloitte Development LLC. All rights reserved. 36 USC

Tax reform: Ways and Means Republicans fill in the blanks

Tax reform: Ways and Means Republicans fill in the blanks The Dbriefs Tax Reform series Terri LaRae, Partner, Deloitte Tax LLP Patrice Mano, Partner, Deloitte Tax LLP Jon Traub, Principal, Deloitte Tax