Daily Tax Update - July 19, 2011: House To Vote On "Cut, Cap & Balance"

HOUSE TO VOTE ON "CUT, CAP AND BALANCE" PLAN TONIGHT – COBURN REJOINS "GANG OF SIX": Later today, the House is expected to pass a deficit reduction plan aimed at cutting spending and balancing the budget. The legislation is said to have "little chance in the Senate" and the White House has threatened to veto the bill.

  • The "Cut, Cap and Balance" plan would:
    • Cut US spending for the next fiscal year by $111 billion.
    • Cap annual federal spending at less than 20 percent of the gross domestic product.
    • Balance the budget each year via a proposed constitutional amendment, the Balanced Budget Amendment (which if passed by Congress, would require state ratification).
  • Today, House Speaker John Boehner acknowledged that the bill faces an uphill climb in the Senate and that he would continue to explore other options. Boehner said, "I'm not going to give up hope on Cut, Cap and Balance. But I do think it’s responsible to look at what [a] Plan B would look like. The leadership had a long conversation yesterday about Plan B. There are a lot of options available to us."
  • Sen. Tom Coburn (R-OK) has rejoined the bipartisan "Gang of Six" senators working on a deficit reduction agreement. Coburn said, "The [Gang’s] plan has moved significantly, and it’s where we need to be." The plan, which would cut the deficit by $3.7 trillion over 10 years, includes $1 trillion in new revenue, an end to annual fixes to the Alternative Minimum Tax and an immediate $500 billion in spending cuts. Coburn said he expected a "significant portion of the Senate" to support the plan, "maybe sixty members."
  • According to a summary of the "Gang of Six" plan, it would:
    • Fundamentally reform our tax code, by:
    • Reducing marginal income tax rates and abolishing the $1.7 trillion Alternative Minimum Tax.
    • Encouraging greater economic growth.
    • Enhancing the competitiveness of American businesses and workers against global competition.
    • Reforming spending through the tax code to eliminate investment distortions and tax gaming.
    • Changing the debate about taxes in America from rate levels and carve outs to competitiveness, fairness and growth.
    • If scored by the CBO, reflect net tax relief of approximately $1.5 trillion.
    • Require the Finance Committee to report tax reform within six months that would deliver real deficit savings by broadening the tax base, lowering tax rates, and generating economic growth as follows:
    • Simplify the tax code by reducing the number of tax expenditures and reducing individual tax rates, by establishing three tax brackets with rates of 8–12 percent, 14–22 percent, and 23–29 percent.
    • Permanently repeal the $1.7 trillion Alternative Minimum Tax.
    • Tax reform must be projected to stimulate economic growth, leading to increased revenue.
    • Tax reform must be estimated to provide $1 trillion in additional revenue to meet plan targets and generate an additional $133 billion by 2021, without raising the federal gas tax, to ensure improved solvency for the Highway Trust Fund.
    • If CBO scored this plan, it would find net tax relief of approximately $1.5 trillion.
    • To the extent future Congresses find that the dynamic effects of tax reform result in additional revenue beyond these targets, this revenue must go to additional rate reductions and deficit reduction, not to new spending.
    • Reform, not eliminate, tax expenditures for health, charitable giving, homeownership, and retirement, and retain support for low-income workers and families.
    • Retain the Earned Income Tax Credit and the Child Tax Credit, or provide at least the same level of support for qualified beneficiaries.
    • Maintain or improve the progressivity of the tax code.
    • Establish a single corporate tax rate between 23 percent and 29 percent, raise as much revenue as the current corporate tax system, and move to a competitive territorial tax system.
    • Additional information can be accessed via: http://www.steptoe.com/publications/2011-15712-1.pdf

WAYS AND MEANS ANNOUNCES HEARING ON TAX REFORM AND CONSUMPTION-BASED TAX SYSTEMS:  On July 26, the House Ways and Means Committee will hold a hearing on alternative tax systems, with a focus on tax systems that are based on taxing consumption rather than income.  Specifically, the Committee will consider the FairTax – a proposal to replace existing federal taxes with a national retail sales tax – and the Value-Added Tax (VAT), a type of consumption tax used by many other countries as a supplement to other taxes, such as taxes on individual and corporate income.

  • In announcing this hearing, Committee Chairman Dave Camp said, "While the Committee thus far has focused on reforming the income tax, tax proposals that would move us away from an income base and instead adopt consumption as the tax base have continued to generate interest as well.  Supporters of such approaches believe that taxing consumption rather than income could have important economic benefits, and so as part of our efforts to reform the tax code, the Committee needs to examine those proposals.  This hearing will allow the Committee to learn more about two of the most-discussed consumption tax proposals, the FairTax and the VAT."
  • The witnesses at next Tuesday’s hearing will be:
    • Mr. Robert Greenstein, President, Center on Budget and Policy Priorities
    • Dr. Lawrence B. Lindsey, President and Chief Executive Officer, The Lindsey Group, former Director of the National Economic Council
    • Mr. Michael Ettlinger, Vice President for Economic Policy, Center for American Progress
    • Mr. Chris Edwards, Director, Tax Policy Studies, Cato Institute

IRS UPDATES SCHEDULE UTP FREQUENTLY ASKED QUESTIONS:  The IRS has updated the Schedule UTP web page frequently asked questions.  According the IRS, question 4 and its answer have been revised, and questions 5 - 12 are new.

MISCELLANEOUS GUIDANCE RELEASED TODAY:

  • Notice 2011-62 provides a proposed revenue procedure that will update Rev. Proc. 2000-43, 2000-2 C.B. 404, which provides guidance regarding ex parte communications between Appeals and other Internal Revenue Service functions.
  • Announcement 2011-42 advises taxpayers that the IRS intends to discontinue authorizing the high-low per diem method for substantiating lodging, meal, and incidental expenses incurred in traveling away from home.  Beginning in 2011, the IRS plans to publish a revenue procedure providing the general rules and procedures for substantiating these expenses (omitting the high-low substantiation method) and a notice providing the special transportation rate.  The IRS plans to discontinue publishing the per diem revenue procedure annually but will publish modifications as required.

TAX BILL INTRODUCED JULY 18TH:

H.R.2576: To amend the Internal Revenue Code of 1986 to modify the calculation of modified adjusted gross income for purposes of determining eligibility for certain healthcare-related programs.
Sponsor: Rep Black, Diane [TN-6] (introduced 7/18/2011) Cosponsors (None)
Latest Major Action: 7/18/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

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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