The Case for Fundamental Tax Reform: Overview of the Current Tax System

The Case for Fundamental Tax Reform: Overview of the Current Tax System

Sources of Federal Receipts Projected for 2016 Excise Taxes 2.9% Estate & Gift Taxes 0.6% Corporate Income Taxes 9.8% Other Taxes 5.7% Payroll Taxes 32.7% Individual Income Taxes 48.3% Source: Congressional Budget Office, Updated Budget Projections: 2016 to 2026, March 2016 2 Copyright 2016 Deloitte Development LLC. All rights reserved.

Do We Need Additional Revenues or are Current Tax Collections Enough? 24% 23% 22% % of GDP 21% 20% 19% 18% 17% 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Current Law Revenues Current Law Spending Note*: Assumes current law remains unchanged (e.g., remaining tax extenders expire as scheduled, sequester cuts are allowed to transpire as scheduled, etc.). Source: Congressional Budget Office (CBO), The Budget and Economic Outlook, 2016 to 2026 (Jan. 2016) 3 Copyright 2016 Deloitte Development LLC. All rights reserved.

Automatic Spending Will Consume an Increasing Share of the Budget 1965 2015 2026 (projected) 34% 32% 22% 66% 68% 78% Mandatory spending + net interest Discretionary spending Source: Congressional Budget Office 4 Copyright 2016 Deloitte Development LLC. All rights reserved.

Federal Tax Collections: Who Pays the Tab? Share of cash income (%) 45 40 35 30 25 20 15 10 5 0 Corporate tax Labor income 2.2% 1.1% Income Distribution Across Income Brackets, by Source Capital income Transfer income 15.4% 11.2% 8.6% 6.7% 5.1% 2.9% 3.9% 44.5% 18.7% Income percentile Note: Cash Income consists of wages and salaries, net income from a business or farm, taxable and tax-exempt interest, dividends, rental income, realized capital gains, cash and near-cash transfers from the government, retirement benefits, and employer-provided benefits. Employer contributions for payroll taxes and the federal corporate income tax are added to place cash on a pre-tax basis. Families are placed into deciles based on cash income adjusted for family size, by dividing income by the square root of family size. Families with negative incomes are excluded from the lowest income decile; these families have a significant share of negative capital income. Source: US Department of Treasury Office of Tax Analysis, Distribution of Income by Source 2016, July 23, 2015 5 Copyright 2016 Deloitte Development LLC. All rights reserved.

How do We Know if Americans are Paying a fair Amount of Tax? Income and Tax Burden Distribution Across Income Brackets, by Source 65 Corporate tax 61.9% 55 Capital income Share of cash income (%) 45 35 25 15 5 Labor income Transfer income Share of federal taxes 2.9% 1.1% 2.2% 3.9% 5.1% 6.7% 8.6% 11.2% 15.4% 44.5% 31.7% 18.7% -5-0.4% Income percentile Note: Cash Income consists of wages and salaries, net income from a business or farm, taxable and tax-exempt interest, dividends, rental income, realized capital gains, cash and near-cash transfers from the government, retirement benefits, and employer-provided benefits. Employer contributions for payroll taxes and the federal corporate income tax are added to place cash on a pre-tax basis. Families are placed into deciles based on cash income adjusted for family size, by dividing income by the square root of family size. Families with negative incomes are excluded from the lowest income decile; these families have a significant share of negative capital income. Source: US Department of Treasury Office of Tax Analysis, Distribution of Income by Source 2016 and Distribution of Tax Burden 2016 July 23, 2015 6 Copyright 2016 Deloitte Development LLC. All rights reserved.

Broadening the Base More than just closing loopholes Largest Corporate Tax Expenditures 2015 $ Billion Deferral of active CFC income 99.3 199 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 6.9 179 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* Largest Individual Tax Expenditures 2015 $ Billion Tax-preferred retirement plans 157.4 Exclusion of employer-provided health benefits 145.5 Reduced rates on LT cap gains/dividends 131.7 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 2015-2019, Dec. 7, 2015. Note: In 2014, the 10 largest corporate tax expenditures accounted for about 80% of total corporate expenditures, and the 10 largest on the individual side accounted for about 66% 7 Copyright 2016 Deloitte Development LLC. All rights reserved.

Is the U.S. Tax Burden as High as We Think? 50.00 Total Tax Revenue as a percentage of GDP for OECD Countries 1998 2014 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Denmark Sweden Belgium France Finland Austria Norway Italy Hungary Luxembourg Slovenia Netherlands Iceland Germany United Kingdom Czech Republic Spain Poland Israel New Zealand Canada Greece Estonia Portugal Slovak Republic Ireland Australia Japan Switzerland United States Turkey Korea Chile Mexico 8 Copyright 2016 Deloitte Development LLC. All rights reserved.

Should the U.S. Mimic other Countries Distribution of Tax Receipts? 50.00 Makeup of taxes by percentage of GDP for select OECD Countries 1998 2014 40.00 30.00 20.00 10.00 0.00 10.00 Individuals Corporates Social Security Contributions Taxes on Property Goods and Services Taxes Other Taxes 9 Copyright 2016 Deloitte Development LLC. All rights reserved.

Disagreements over Size and Scope Hinder Tax Reform Efforts Comprehensive tax reform White House has dropped reducing top marginal tax rates for individuals off the table Congressional Republicans insist that reducing rates for both corporate and individual taxpayers is necessary for tax reform Business-only tax reform White House calls for business only tax reform that reduces corporate rate, offset with elimination of certain tax expenditures Congressional Republicans insist that tax reform address passthroughs as well (difficult to attain when marginal rate cuts for individuals are off the table) International-only tax reform Global tax landscape is changing (BEPS, inversion transactions, increased foreign acquisitions of U.S. based companies, and EU state-aid actions) and U.S. international tax rules are being left behind 10 Copyright 2014 Deloitte Development LLC. All rights reserved.

Questions Yet to be Answered Should tax reform be revenue neutral, raise revenue or lose revenue over time? Should the current distribution of tax burdens remain the same or should certain taxpayers pay more/less after reform? Does the long-term debt/deficit picture necessitate a new look at the types of tax to be collected? 11 Copyright 2014 Deloitte Development LLC. All rights reserved.