Political Developments & The 2017 Tax Cut and Jobs Act

Political Developments & The 2017 Tax Cut and Jobs Act

Moderator Elizabeth Creager, AT&T Assistant Vice President for Tax Panelists Rohit Kumar, PwC Principal & Tax Policy Services Leader Jon Lieber, PwC Principal, National Economics & Statistics Group 2

Sustainability of the TCJA COPYRIGHT NAME OF COMPANY 3

Reconciliation path was taken for tax reform FY 2018 budget resolution allowed up to $1.5 trillion in deficit-financed tax reform Regular legislative process Benefits Legislation can be enacted permanently No artificial restrictions on which measures can be included Limitations 60 votes needed at every step in the Senate (i.e., to begin debate, vote on amendments, vote on passage, to conference, etc.). Budget reconciliation process Benefits Requires only simple majority vote at every step in the Senate (no filibuster allowed) Key Limitations Expedited consideration (time limits for amendments and overall debate) Legislation that increases the deficit outside of the budget window (typically 10 years) is subject to automatic sunset or other measures to avoid long term deficit effect 60-vote Senate super-majority required to waive deficit rule Senate rules also require reconciliation to be used only to enact measures that have a fiscal effect on the federal budget Joint Committee on Taxation macroeconomic analysis projects that 2017 tax reform act will increase federal budget deficits by roughly $1 trillion over 10 years after accounting for economic growth and interest costs 4

Key tax reform provisions that are permanent or temporary & subject to sunset $400b+ annually to extend 5

Share of GDP Large fiscal effects from TCJA in early years 0.0% -0.2% -0.4% -0.6% -0.7% -1.4% -1.2% -1.0% -0.8% -0.6% -0.5% -0.4% -0.8% -1.0% -1.2% -1.4% -1.6% 2018 2019 2020 2021 2022 2023 2024 2025 Source: Joint Committee on Taxation 6

$ billions Annual revenue cost of extending various tax provisions ($ billions) 450 400 350 300 250 200 150 100 50 0 Pass-through provisions of HR1 Individual provisions of HR1 excluding pass-through Business provisions of HR1 Health tax extenders Other non-hr1 expiring tax provisions Business provisions include: 1) Family medical leave credit/craft beer 192 2) CFC look-through 24 3) 163(j) EBITDA definition of adjusted taxable income 4) Section 174 expensing 5) 100% expensing 80 6) GILTI - 50% deduction (in lieu of 37.5%) 7) FDII - 37.5% deduction (in lieu of 21.875%) 96 8) BEAT - 10% rate and GBC offset 76 65 54 53 53 36 15 16 23 30 34 38 43 49 56 11 13 16 18 20 20 20 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 41 44 208 7

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Who will finance the deficit and at what rate? 10.00 9.00 8.00 7.00 Historical rate 10-Year Treasury 6.00 5.00 4.00 3.00 2.00 1.00 0.00 8

Senate Democrats infrastructure plan Proposal to raise $1 trillion to fund infrastructure investment Would repurpose certain tax benefits from 2017 tax law Provision Increase corporate tax rate to 25% Close carried interest loophole Restore top individual tax bracket to 39.6% Restore 2017 individual AMT Restore 2017 estate tax Revenue estimate (10 years) $359 billion $12 billion $139 billion $429 billion $83 billion 9

Key TCJA Provisions COPYRIGHT NAME OF COMPANY 10

Key provisions in the TCJA 21% Corporate Tax Rate Deemed mandatory repatriation o o Business Considerations Political Considerations Provisions aimed at protecting the US tax base intent and reality? o o o o o Global intangible low-taxed income (GILTI) Foreign-derived intangible income (FDII) Base erosion and anti-abuse tax (BEAT) Interest deduction limitation Anti-hybrid rules 11

New US statutory corporate tax rate (federal plus state average) closer to OECD average Hungary Ireland Latvia United Kingdom Slovenia Poland Czech Republic Turkey Iceland Finland Estonia Slovak Republic Switzerland Sweden Denmark Norway Israel Korea Spain Netherlands Chile Austria United States Canada Luxembourg Italy New Zealand Greece Portugal Japan Mexico Australia Germany Belgium France United States 2017 non-us OECD Average Combined Rate = 23.75% New 2018 US Combined Rate = 25.75% Drew Lyon National Economics and Statistics Leader Old 2017 US Combined Rate = 38.9% 0% 5% 10% 15% 20% 25% 30% 35% 40% 12

Other countries have reduced corporate tax rates while increasing VAT rates 13

Political Developments COPYRIGHT NAME OF COMPANY 14

The Trump bump: the good and the bad The upside Fiscal stimulus Competitive corporate tax Repatriation of trapped earnings Domestic investment incentives Productivity and growth The downside Long term deficits 2025 fiscal cliff Higher borrowing costs crowd out other spending Geopolitical uncertainty Inflation and uncertainty 15

Has the Trump bump run its course? 28000 26000 24000 DJIA up 30% since election day Down 9%t since Jan 26 22000 20000 Election day 18000 16000 14000 12000 10000 2013 2014 2015 2016 2017 2018 Source: S&P Dow Jones Indices LLC, retrieved from FRED, Federal Reserve Bank of St. Louis; February 25, 2018 16

How low can unemployment go? 18% 16% 14% Unemployment Underemployment Peak: 17.1% 12% 10% 8% 6% 4% 2% Peak: 10.0% Dec. 17: 8.1% Dec. 17: 4.1% 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 17

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Maybe employment isn t the problem Percentage of the population, age 25-54, that is employed Real median wage growth largely flat 82 January 2001: 81.4% 6.0 81 80 80.3% Jan. 2018: 79% 4.0 2.0 79 0.0 78-2.0 77 76-4.0 75 74 74.8% -6.0-8.0 Source: Bureau of Labor Statistics, US Department of Labor, August 2017. 18

2018 political environment President Trump s job approval rating: 41.0% Presidential job approval Under 50% 50%- 60% Over 60% Avg. Seat Gain / Loss since 1962-40 -12 +3 Generic Congressional vote preference: Democrats +7.6% Sources: US Congress; Cook Political Report; RealClearPolitics.com poll averages as of March 13, 2018 19

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