Daily Tax Update - April 13, 2011: Obama Outlines Comprehensive Deficit Reduction Framework

OBAMA OUTLINES COMPREHENSIVE DEFICIT REDUCTION FRAMEWORK:  Today, President Obama announced his framework for reducing the deficit by $4 trillion over the next 12 years through a combination of spending cuts and tax increases.  As expected, Obama’s plan calls for a repeal of the Bush tax cuts for families making more than $250,000 annually.  His deficit reduction plan also calls for the creation of a "debt failsafe" trigger that would impose automatic across-the-board spending cuts and tax changes starting in 2014 if annual deficits are on track to exceed 2.8% of the nation's gross domestic product.

  • The President said, "We have to live within our means, reduce our deficit, and get back on a path that will allow us to pay down our debt.  And we have to do it in a way that protects the recovery."
  • On the issue of taxes, the White House fact sheet states, "The President is calling on Congress to undertake comprehensive tax reform that produces a system which is fairer, has fewer loopholes, less complexity, and is not rigged in favor of those who can afford lawyers and accountants to game it.  He believes we cannot afford to make our deficit problem worse by extending the Bush tax cuts for the wealthiest Americans.  He also supports efforts to build on the Fiscal Commission’s goal of reducing tax expenditures so that there is enough savings to both lower rates and lower the deficit.  Reform should be designed to ask more of those who can afford it while protecting the middle class and promoting economic growth.  In addition, as he explained in the State of the Union, the President is continuing his effort to reform our outdated corporate tax code to enhance our economic competitiveness and encourage investment in the United States.  By eliminating loopholes, reducing distortions and leveling the playing field in our corporate tax code, we can use the savings to lower the corporate tax rate for the first time in 25 years without adding to the deficit."
  • House Republican leaders strongly reiterated their stance in opposition to any tax increases as part of a deficit-cutting plan.  House Speaker John Boehner said that he made it clear to the President that if the government is going to do something credible and meaningful on deficit reduction, "raising taxes will not be part of that."  Boehner added, "The one area that we know we're not going to get very far on is that we're going to raise taxes on the very people we're counting on to...create jobs."  House Majority Leader Eric Cantor said, "I hope we don't have a re-do and a do-over of the tax agreement.  This was an issue that was litigated in the election last fall."
  • House Ways and Means Committee Chairman Dave Camp responded to Obama's speech. Camp said, "While I’m pleased the President has answered our call for individual tax reform, I’m disappointed the speech was so partisan.  That said, the President deserves credit for acknowledging his budget didn’t go nearly far enough in getting Washington spending under control.  However, his proposal to raise taxes on the American people by more than $1 trillion would be devastating for our economy and job creation. Higher taxes aren’t the solution; they’re just a greater burden Washington would put on families and job creators.  Despite the President’s claim that tax hikes will only hit those families defined as ‘fortunate,’ the reality is that the tax hike would hit half of all small business income. We need those small businesses paying more employees, not paying more in taxes."  Camp added, "Going forward, I am hopeful we can set the politics aside and focus on pro-growth policies.  What I have called for, and what is included in Chairman Ryan’s budget, is revenue neutral tax reform that lowers rates and broadens the base.  Our approach is pro-jobs and independent economists have estimated that, when coupled with spending restraint, it can spur the creation of up to 1 million jobs next year alone."
  • Additional information can be accessed here.  

WAYS AND MEANS TAX REFORM HEARING – BURDEN OF TAX CODE ON INDIVIDUALS, FAMILIES:  Today, the House Ways and Means Committee held a hearing "to examine some of the difficulties that individuals and families face in navigating the current tax code, including both compliance burdens and challenges faced in making long-term financial decisions when confronted with confusing, overlapping, and frequently temporary tax preferences."

  • Witnesses were:
    • Alan Viard, Resident Scholar, American Enterprise Institute;
    • Annette Nellen, CPA, Director, Masters of Science in Taxation Program, San Jose State University;
      Mark E. Johannessen, CFP, Managing Director, Harris – SBSB; and
    • Neil H. Buchanan, Associate Professor of Law, The George Washington University.
  • Committee Chairman Dave Camp said, "We meet today to continue our dialogue about what I hope will result in a bipartisan path forward to reform our federal income tax system.  While there has been a lot of valuable discussion about the impediments the tax code creates for America’s job creators – and we will certainly continue that discussion over the time ahead – today’s hearing will focus on the burdens imposed by the current Federal income tax system on individual taxpayers and families. Today’s hearing is especially timely since each one of us likely knows a family that is racing to file their taxes before this year’s April 18th deadline.  Because of the thousands of amendments to the tax code enacted over the past quarter-century, this race to the finish has become increasingly challenging over the years.   Since the Tax Reform Act of 1986 – the last comprehensive tax reform enacted by Congress – the code has become a maze of increasingly complex credits, deductions, exclusions and exemptions." Camp added, "Although it will require a lot of hard work on our part to achieve consensus on a solution, I think it is safe to say we all agree that the current tax code is broken.  We can do better...The American people deserve a tax code that is responsible and responsive to their needs.  We can do our part by working together to make it one that is fairer and simpler for all families."
  • Viard said, "There is a strong public interest in having a tax system that permits relatively easy taxpayer compliance. Of course, efforts to properly measure ability to pay or to promote social objectives often require some degree of complexity. But, today’s tax system features a large amount of avoidable complexity, forcing many taxpayers to choose among an array of complicated provisions that are intended to advance similar objectives, to apply income-based phase-outs, and to confront a parallel tax system. Although many tax issues give rise to strong ideological and philosophical disagreement, the issues discussed here are less affected by such controversies. The simplification of needlessly complex tax incentives and the elimination of income-based phase-outs and the AMT can be addressed separately from the issue of how much tax revenue the government should collect or how progressive the tax system should be, because the tax rate schedule can be adjusted to meet any desired revenue and distributional targets."
  • Nellen said, "We appreciate your efforts in examining some of the difficulties that individuals and families face in navigating the code, including both compliance burdens and challenges faced in making long-term financial decisions when confronted with confusing, overlapping and frequently temporary tax provisions. We suggest in drafting new tax legislation that you review the AICPA’s Tax Policy Concept Statement #2: Guiding Principles for Tax Simplification. In brief, our principles are (1) make simplification a priority; (2) seek simplest approaches; (3) minimize compliance burdens; (4) reduce frequency of tax law change; (5) use consistent concepts and definitions; (6) consider administrative burdens; and (7) avoid limited applicability. We also suggest that you review the AICPA’s Tax Policy Concept Statement #1: Guiding Principles for Good Tax Policy to assist you in identifying problems in the Code as well as to test any new proposals against the principles of good tax policy."
  • Johannessen stated, "As a result of the complexity and lack of predictability in our tax code, I am increasingly seeing the tail wagging the dog when it comes to taxes and the financial decisions being made by my clients. Rather than plan ahead, the vast majority of taxpayers choose to deal with their taxes through the rearview mirror, sometime shortly before the April 15 deadline. In its effort to appeal to constituent concerns, Congress has killed the code with its kindness, loading it up with thousands of special breaks and exemptions. While the goal to encourage certain behaviors is laudable, the sheer magnitude of these special breaks and exemptions has made the income tax system unmanageably complex. This complexity has created a cruel burden on those who can least afford it. Those who are unable to afford the cost of a competent, professional tax preparer or tax preparation software are the most likely to miss out on the multitude of tax benefits that could be a lifesaver for them in these challenging economic times. Americans would be better served by a tax code that is fair and simple."
  • Buchanan testified, "My message today, Mr. Chairman, therefore amounts to taking three items off of the list of possible approaches to tax simplification. First, taking policies out of the tax code – and out of the IRS’s jurisdiction – can make citizens’ lives more complicated, rather than less so, as it would simply relocate the complexity that our citizens face, rather than actually reducing it. Second, the number of tax rates is a non-issue, as far as complexity and compliance burdens are concerned. And third, the existence of phase-outs is nearly a non-issue, and the complexity of phase-outs can be all but eliminated by harmonizing phase-outs across all provisions that Congress chooses to means-test. The Committee’s work is daunting, involving important work in eliminating and combining duplicative and sometimes ineffective tax benefits. That work will be difficult enough without becoming distracted by false promises of reduced complexity."
  • Testimony can be accessed here.
  • For additional information, contact Philip R. West at pwest@steptoe.com.

MISCELLANEOUS GUIDANCE RELEASED:
Notice 2011-37 provides interim guidance on the treatment under section 67 of the Code of investment advisory costs and other costs subject to the 2-percent floor under section 67(a). Specifically, this notice provides that, for taxable years beginning before the date that final regulations under § 1.67-4 of the Income Tax Regulations are published in the Federal Register, nongrantor trusts and estates will not be required to “unbundle” a fiduciary fee into portions consisting of costs that are fully deductible and costs that are subject to the 2-percent floor.

TAX BILLS INTRODUCED APRIL 12TH:
1. [112nd] H.R.1478: To amend the Internal Revenue Code of 1986 to provide for S corporation reform, and for other purposes.
Sponsor: Rep Reichert, David G. [WA-8] (introduced 4/12/2011)    Cosponsors (1)
Committees: House Ways and Means
Latest Major Action: 4/12/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

2. [112nd] H.R.1479: To amend the Internal Revenue Code of 1986 to allow a credit against income tax for the purchase of hearing aids.
Sponsor: Rep Latham, Tom [IA-4] (introduced 4/12/2011)    Cosponsors (35)
Committees: House Ways and Means
Latest Major Action: 4/12/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

3. [112nd] H.R.1481: To amend the Internal Revenue Code of 1986 to encourage the purchase of residential property by providing an exclusion from tax on certain gains.
Sponsor: Rep Polis, Jared [CO-2] (introduced 4/12/2011)    Cosponsors (1)
Committees: House Ways and Means
Latest Major Action: 4/12/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

4. [112nd] S.794: A bill to amend the Internal Revenue Code of 1986 to disallow any deduction for punitive damages, and for other purposes.
Sponsor: Sen Leahy, Patrick J. [VT] (introduced 4/12/2011)    Cosponsors (1)
Committees: Senate Finance
Latest Major Action: 4/12/2011 Referred to Senate committee. Status: Read twice and referred to the Committee on Finance.

5. [112nd] S.796: A bill to amend the Internal Revenue Code to extend qualified school construction bonds and qualified zone academy bonds, to treat qualified zone academy bonds as specified tax credit bonds, and to modify the private business contribution requirement for qualified zone academy bonds.
Sponsor: Sen Rockefeller, John D., IV [WV] (introduced 4/12/2011)    Cosponsors (4)
Committees: Senate Finance
Latest Major Action: 4/12/2011 Referred to Senate committee. Status: Read twice and referred to the Committee on Finance.

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.

STEPTOE & JOHNSON LLP - TAX PRACTICE
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