Is There a Future for Tax Reform in Washington?

1. Is There a Future for Tax Reform in Washington? Presentation by Scott Hodge 202-464-6200 www.TaxFoundation.org 1

2. Tax Foundation’s Mission Since 1937: 2 • Advocate Economically Sound Tax Policy • Promote Principles: Neutrality, Simplicity, Stability, Transparency, Promote Growth. • Raise the Tax IQ of the Public, Media, and Lawmakers • Provide Tax Facts and Sound Analysis

3. Growing Recognition for the Need for Tax Reform Individual tax system is broken – too complicated, too many “loopholes”, overused for social & economic policy, harming entrepreneurs. Corporate tax system is uncompetitive – tax rate is too high and our worldwide tax system is out of step with our major trading partners.

4. Tax Code Now on Year-to-Year Lease Expired 12/31/2011: • Payroll tax holiday • 65 “extenders” – e.g. R&D tax credit, AMT “patch”, active financing, 100% expensing Expires 12/31/2012 • Payroll tax holiday • “Bush” Tax Rates: top rate jumps 35% to 39.6% • Marriage Penalty Relief • Child tax credit drops from $1,000 to $500 • Capital Gains: 15% to 20%, Dividends: 15% to 39.6% • Estate Tax: 35% to 55%

5. New Health Care Taxes Start 2013 • 0.9% Medicare HI tax on incomes above $200,000 (singles)/$250,000 (married) • 3.8% “Unearned Income” Medicare Contribution tax on investment income for taxpayers with AGI in excess of $200,000 (single)/$250,000 (married)

6. Today’s Plan Overview of corporate tax system – how does the U.S. compare? Overview of individual tax system – facts from fiction, who pays what?, how changing demographics affect tax debate. Tax expenditures & “loopholes” What could tax reform look like?

8. U.S. Fell Behind by Standing Still

9. “But Nobody Pays That”- New York Times“GE’s 9-Foot Tax Dodge”-Fox News“Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes”-Bloomberg

10. 1,900 Largest Companies pay 68% of All Corporate Income Taxes Source: IRS; Doesn’t add up to 100% due to losses

11. Effective Corporate Tax Rate Has Averaged 26% Since 1994

12. Contribution of Various Credits in Reducing Effective Tax Rate, 2008

13. By Most Measures U.S. Effective Tax Rate Among Highest Internationally • New Tax Foundation Study surveys 13 recent academic studies on effective tax rates, finds that: • U.S. consistently ranks among the top five highest effective tax rates on multiple measures. • Only nation with a higher effective tax rate in each study is Japan.

14. Individual Tax Issues • Uncertainty – tax code on annual renewal: • (Mis)perceptions: • “Rich” not paying fair share (Buffett). Widening income inequality. • Tax policy as social policy • Complexity: National Taxpayer Advocate says Complexity is the #1 issue facing taxpayers.

15. Who Earns What? Who Pays What?

18. Does Buffett Really Pay Less Than His Secretary?

31. Inequality Tends to Follow the Business Cycle

32. Issues Driving Tax Reform Debate Deficit – revenue neutrality Distributional issues – how to broaden base without hurting nonpayers? How to cut rates without giving “tax cuts for the rich?” Which tax “loopholes” do you cut? All or some? Must individual and corporate reform go hand-in-hand?

33. Tax “Loopholes” Favor Individuals • Individual Tax Expenditures = $900 Billion • Corporate Tax Expenditures = $100 Billion

35. Recent Proposals All Point to Flatter Bases and Lower Rates “Volker” Commission “Bowles/Simpson” Commission Wyden/Coats Plan Paul Ryan Plan Cain 9-9-9 Perry Flat Tax Camp “discussion” plan

37. Prez Candidates AWOL on Tax Reform? Obama • Corporate: Cut rate to 28% by eliminating “loopholes”, lower rate for manufacturers • Individual: Allow “Bush” rates to expire for high income taxpayer. Add a Buffett Rule. Romney • Corporate: Cut rate to 25% while eliminating preferences. Move to territorial. • Individual: Cut all rates by 20% (i.e. top rate to 28%)

38. For More Information Contact: Scott Hodge 202-464-6200 www.TaxFoundation.org 38