Daily Tax Update - December 1, 2010: Debt Commission Releases Final Report

DEBT COMMISSION RELEASES FINAL REPORT – RECOMMENDS CUTTING CORPORATE TAXES: Today, President Obama's debt commission (The National Commission on Fiscal Responsibility and Reform) released its final report titled "The Moment of Truth."  The Commission’s report states that the "current individual income tax system is hopelessly confusing and complicated…The corporate income tax, meanwhile, hurts America’s ability to compete. On the one hand, statutory rates in the US are significantly higher than the average for industrialized countries (even as revenue collection is low), and our method of taxing foreign income is outside the norm. The US is one of the only industrialized countries with a hybrid system of taxing active foreign-source income. The current system puts US corporations at a competitive disadvantage against their foreign competitors. A territorial tax system should be adopted to help put the US system in line with other countries, leveling the playing field." The report adds, "Tax reform should lower tax rates, reduce the deficit, simplify the tax code, reduce the tax gap, and make America the best place to start a business and create jobs. Rather than tinker around the edges of the existing tax code, the Commission proposes fundamental and comprehensive tax reform that achieves these basic goals: lower rates, broaden the base, and cut spending in the tax code; reduce the deficit; maintain or increase progressivity of the tax code; and make America the best place to start a business and create jobs."

  • The Commission is expected to vote on the report Friday and must have 14 of the 18 panel members supporting its recommendations in order to issue formal recommendations to Congress and the White House. The Commission is not expected to have a majority of votes supporting the report’s recommendations.
  • The recommendations include:

RECOMMENDATION 1: ENACT FUNDAMENTAL TAX REFORM BY 2012 TO LOWER RATES, REDUCE DEFICITS, AND SIMPLIFY THE CODE. Eliminate all income tax expenditures, dedicate a portion of the additional revenue to deficit reduction, and use the remaining revenue to lower rates and add back necessary expenditures and credits.

    • "The Commission proposes tax reform that relies on "zero-base budgeting" by eliminating all income tax expenditures (but maintaining the current payroll tax base, which should be modified only in the context of Social Security reform), and then using the revenue to lower rates and reduce deficits. The revenue from eliminating tax expenditures should be dedicated to three clear purposes: 1) substantially lowering marginal tax rates; 2) reducing the [deficit]; and 3) supporting a small number of simpler, more targeted provisions that promote work, home ownership, health care, charity, and savings. As a matter of principle, tax reform must increase or maintain progressivity."
    • The report observes that a "zero plan" [i.e., one that eliminated all tax expenditures] could reduce income tax rates to as low as 8%, 14%, and 23%. The report notes that "[e]ven after adding back a number of larger tax expenditures, rates would still remain significantly lower than under current law."
    • The Commission recommends requiring the Ways and Means and Finance Committees to report out comprehensive tax reform legislation "through a fast track process by 2012."

In order to achieve a "fast-tracked status," the commission recommends that Congress abide by the following parameters:

Cut rates across the board, and reduce the top rate to between 23 and 29 percent. Real tax reform must dedicate a portion of the savings from cutting tax expenditures to lowering individual rates. The top rate must not exceed 29%.

Dedicate $80 billion to deficit reduction in 2015 and $180 billion in 2020. In additional to reducing rates, reform must be projected to raise $80 billion of additional revenue (relative to the alternative fiscal scenario) in 2015 and $180 billion in 2020. To the extent that the dynamic effects of tax reform result in additional revenue beyond these targets, excess funds must go to rate reductions and deficit reduction, not to new spending.

Simplify key provisions to promote work, homes, health, charity, and savings while increasing or maintaining progressivity.

    • The report recommends that the AMT be permanently repealed and all capital gains and dividends taxed at ordinary income rates.

RECOMMENDATION 2: ENACT CORPORATE REFORM TO LOWER RATES, CLOSE LOOPHOLES, AND MOVE TO A TERRITORIAL SYSTEM.

The report states, "The US corporate tax is a patchwork of overly complex and inefficient provisions that creates perverse incentives for investment. Corporations engage in self-help to decrease their tax liability and improve their bottom line. Moreover, corporations are able to minimize tax through various tax expenditures inserted into the tax code as a result of successful lobbying. Without reform, it is likely that US competitiveness will continue to suffer. The results of inaction are undesirable: the loss of American jobs, the movement of business operations overseas, reduced investment by foreign businesses in the US, reduced innovation and creation of intellectual property in the US, the sale of US companies to foreign multinationals, and a general erosion of the corporate tax base."

The Commission states that reform of the corporate tax structure should include the following:

    • Establish single corporate tax rate between 23 percent and 29 percent. Corporate tax reform should replace the multiple brackets (the top being 35 percent), with a single bracket as low as 23 percent and no higher than 29 percent.
    • Eliminate all tax expenditures for businesses. The report recommends that "[c]orporate tax reform should eliminate special subsidies for different industries. By eliminating business tax expenditures – currently more than 75 – the corporate tax rate can be significantly reduced while contributing to deficit reduction. A lower overall tax rate will improve American business competitiveness. Abolishing special subsidies will also create an even playing field for all businesses instead of artificially picking winners and losers."
    • Move to a competitive territorial tax system. The Commission states that "[t]o bring the US system more in line with our international trading partners’, we recommend changing the way we tax foreign-source income by moving to a territorial system. Under such a system, income earned by foreign subsidiaries and branch operations (e.g., a foreign-owned company with a subsidiary operating in the United States) is exempt from their country’s domestic corporate income tax. Therefore, under a territorial system, most or all of the foreign profits are not subject to domestic tax. The taxation of passive foreign-source income would not change. (It would continue to be taxed currently.)"

RECOMMENDATION 3: CONGRESS SHOULD PUT "FAILSAFE" TO ENSURE SWIFT PASSAGE OF TAX REFORM:

The report states, "To ensure Congress moves quickly to enact comprehensive tax reform, the Commission recommends enacting a "failsafe" that will automatically trigger should Congress and the Administration not succeed in enacting legislation by 2013 that meets specified revenue targets. If Congress and the Administration do not act, the failsafe would impose either: 1) an across-the-board reduction of itemized deductions, above-the-line deductions, non-refundable credits for individuals, the income tax exclusion for employer-provided health care, general business credits, the domestic production activities deduction beginning in 2013 and increasing over time to raise $80 billion in FY 2015 and $180 billion in FY 2020; or 2) a trigger which reduced tax expenditures further and moved rates and expenditures down toward the levels specified in Recommendation 2.1, assuming such a trigger met the same revenue and progressivity targets."

JOINT TAX RELEASES TAX REFORM REPORT: In advance of tomorrow's Senate Finance hearing on tax reform, the Joint Committee on Taxation released a report (JCX-51-10) on the present law and historical overview of the federal tax system.

  • The document can be accessed here.
SENATE REPUBLICANS VOW TO FILIBUSTER ALL BILLS UNTIL BUSH TAX CUTS AND GOVERNMENT FUNDING RESOLUTION ARE PASSED – HOUSE VOTE THURSDAY ON MIDDLE CLASS TAX CUTS: Today, all 42 members of the Republican Caucus sent a letter to Senate Majority Leader Harry Reid stating, "[W]e write to inform you that we will not agree to invoke cloture on the motion to proceed to any legislative item until the Senate has acted to fund the government and we have prevented the tax increase that is currently awaiting all American taxpayers. With little time left in this Congressional session, legislative scheduling should be focused on these critical priorities." Their letter continues, "While there are other items that might ultimately be worthy of the Senate's attention, we cannot agree to prioritize any matters above the critical issues of funding the government and preventing a job-killing tax hike." The letter adds, "Given our struggling economy, preventing the tax increase and providing economic certainty should be our top priority. Without Congressional action by December 31, all American taxpayers will be hit by an increase in their individual income-tax rates and investment income through the capital gains and dividend rates. If Congress were to adopt the President’s tax proposal to prevent the tax increase for only some Americans, small businesses would be targeted with a job-killing tax increase at the worst possible time…Finally, Congress still needs to act on the ‘tax extenders’ and the alternative minimum tax ‘patch,’ all of which expired on December 31, 2009."
  • The letter can be accessed here.
  • Congress is expected to pass a short-term government funding resolution today or tomorrow.
  • House Majority Leader Steny Hoyer said that the House would vote on a permanent extension of the middle class tax cuts tomorrow. Hoyer said, "I am very hopeful that we will pass this. Nobody wants working Americans to get an increase on January 1."  Hoyer also said today that the House would likely be in session until December 17. Hoyer stated, "I think we’ll be in next week. I was hopeful that that would not be the case…I was hopeful that we would be able to have our Members off."
  • The members of the tax cut negotiating team completed their meeting today without an agreement. Finance Chairman Max Baucus said, "We’ll have a deal when we have a deal. If we have a deal."
  • In reaction to Hoyer's announcement that a House vote would be held tomorrow on extending the middle income tax cuts, incoming Ways and Means Committee Chairman Dave Camp (and a member of the tax cut negotiating team) said, "Now is the time for serious negotiations, not political stunts. This is disappointing and a sign of bad faith after the President agreed to bipartisan, bi-cameral talks. There will be bipartisan opposition to the Democrats' push to raise taxes on small business."

SHULMAN: "EXTREMELY DETRIMENTAL" IF AMT PATCH NOT ENACTED THIS YEAR: Today, the IRS released a letter sent to the House Ways and Means and Senate Finance Committees expressing concern about the challenges the agency would face if an AMT patch is not passed this year. The letter stated, "While I know you and your colleagues have a difficult challenge to enact legislation this year, I want to stress that it would be extremely detrimental to the entire tax filing season and to tens of millions of taxpayers if tax law changes affecting 2010 are deferred and then retroactively enacted in 2011. Specifically, it would be an unprecedented and daunting operational challenge to open the tax filing season under one set of tax laws with respect to AMT and extenders, begin accepting tax returns, and then have the law change. Re-programming systems and publishing new forms and instructions in the middle of filing season would introduce significant operation and compliance risks."

  • The letter can be accessed here

TREASURY PUBLISHES LIST OF COUNTRIES REQUIRING COOPERATION WITH AN INTERNATIONAL BOYCOTT: In accordance with section 999(a)(3) of the Internal Revenue Code of 1986, the Department of the Treasury is publishing a current list of countries which require or may require participation in, or cooperation with, an international boycott (within the meaning of section 999(b)(3) of the Internal Revenue Code of 1986).

TAX BILL INTRODUCED NOVEMBER 30TH:
S. 3989 A bill to amend the Internal Revenue Code of 1986 to allow an offset against income tax refunds to pay for restitution and other State judicial debts that are past-due.
Sponsor: Sen Wyden, Ron [OR] (introduced 11/30/2010)      Cosponsors (3)

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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