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2012 DC Board Meeting [Speaker] Pat Raffaniello
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"Tax and Budget Update"
October 3, 2012

 

 

 

 

 

 

 

 

 

 

 

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What Will Drive Congressional 

decision making?


-DEBT-

-DEFICIT-

-SPENDING-

 

 

 

 

 

 

 

 

 

 

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Looking to 2013

 

All signs point to consideration of
sweeping tax legislation:

 

– Newly Elected (Re-Elected?) President

– Expiration of Bush tax cuts

– Growing reach of individual AMT

– Budget deficit

 

 

 

 

 


 

Expiration of Bush Tax Cuts (1/1/13)

 

Pre-2001 income tax rates return, maximum 39.6%
Phase-out itemized deductions & personal exemptions
Marriage penalty returns
Higher withholding on January 1, 2013
Millions hit by AMT (starting 1/1/12)
Maximum capital gains rate goes from 15% to 20%*
Maximum rate on dividends goes from 15% to 39.6%*
Estate tax is reinstated with $1 million exemption and
55% maximum rate

 * Jan.1, 2013, Obamacare 3.8% tax on investment income

 

 

 

 

 

 

Cost to Extend the Bush Tax Cuts (1/1/13)

 

Income up to $250,000:           $2.4 Trillion

 

Additional cost to add extend tax cuts for
income up to $1 million:        
$400 Billion

 

Further additional cost to extend tax cuts for
income over $1 million:        
  $400 Billion

 

(Over 10 Years)

 

 

 

 

 

 

 

 

 

 

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Trillions

 

The national debt is now an astounding
$16.0 trillion

$51,000 for every U.S. person

Placing 16 trillion one dollar bills end to end, creates a line extending to Jupiter and back

 

$10,000.00

 

Ten thousand dollars in $100s equals ½ inch thick packet

 

 

$1,000,000.00                $100,000,000.00

 


one million dollars in $100 bills                                one hundred million in $100 bills

 

 


 

$1,000,000,000.00

 

The size of one billion dollars in $100 bills

 

 

 

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The size of 1 trillion dollars laid out in $100 bills


 

 


 

Medicare, Medicaid and private insurance soared 900% between 1980 and 2008

Social Security and the federal health programs consume 10 percent of the country’s gross domestic product, and that share will continue to climb as health costs and an aging population outpace economic growth.
 

The nonpartisan Congressional Budget Office predicts that the three big entitlement programs will consume about 15 percent of GDP within 25 years, almost as big a share as the entire federal government consumed, on average, over the past 40 years.
 

 

President-elect Obama - Jan. 15 2009

President-elect Obama talking about the growing expense of entitlement programs like Medicare and Social Security. Jan. 15, 2009, interview, five days before taking office, he vowed he was ready to make the tough calls:
 

“What we have done is kicked this can down the road. We are now at the end of the road and are not in a position to kick it any further. We have to signal seriousness in this by making sure some of the hard decisions are made“What we have done is kicked this can down the road. We are now at the end of the road and are not in a position to kick it any further. We have to signal seriousness in this by making sure some of the hard decisions are made under my watch, not someone else’s.” under my watch, not someone else’s.”

 

 

 

 

FY 2011 Deficit ($1.3 Trillion)

 

Receipts   2,303

 

 

Outlays     3,603

 

 

  Deficit   -1,300

 

 

(Source:  Congressional Budget Office,  Mar.  2012)

$ billions

 

 

Individual Income                           1,091

Corporate Income                             181

Social Insurance                               819

Other                                                  212

Total                                              $2,303

 

 Defense - Military                                700

Social Security Benefits                       725

Medicare                                              560

Medicaid                                               275

Other Mandatory Spending                  502

Offsetting Receipts                               ( 37)

Non Defense Discretionary                  646

          Subtotal                                   3,371

Net Interest on Public Debt                  227

Total                                                  3,598

(Source:  Congressional Budget Office,  Jan. 2012)
  $ billions 


 

 New spending initiatives are disfavored - cutting spending is main force in Congress.

Cutting taxes still favored by Republicans (and by President Obama for middle class), but deficit presents steep hurdles

- Paygo

- Further credit rating downgrades?

Republicans opposed to increasing taxes, but may not resist forever.


 

 

 

 

 

 

 


 

Budget Deficit Outlook (assumes much pain)

CBO budget number don't include:

— Extension of any Bush 2001, 2003 tax cuts (income tax rates, capital gains, dividends, estate tax, etc.) beyond 2012

— Extensions of other expiring tax benefits

— Extension of individual AMT patch

— Extension of Medicare doctor fix

Also assume $1.2 trillion of Budget Control Act spending cuts will not be undone.  

 

            

 

Fiscal Time Bomb

Without Congressional action before December 31

– Payroll tax holiday ends

– Income taxes revert to pre-2001 levels

– Estate tax reverts to $1m exemption & 55%

– Across the board spending cuts triggered

– Medicare physician payments decrease 30%

Federal Reserve Chairman Bernanke has called this a "massive fiscal cliff" – equal to 3.5%-5% of GDP

 

Other Issues for the Lame Duck Session

Extensions of expiring business tax provisions

Individual AMT patch for 2012

Extension of the debt limit

Farm bill

Lame Duck Session

Post-election lame duck session is likely to decide what happens on all of these. Three scenarios:

–Big compromise on tax rates, deficit reduction

–Standoff – tax cuts expire, spending cuts take effect /p>

–One year extension of all tax cuts, postponement of spending cuts

 

 

 

Keep Your Lame Duck Expectations Low

Bruising status quo election not likely to create a more cooperative mood

Both parties say they want to avert fiscal cliff, but neither side has plan to forge the necessary compromise

Few legislative days

Likely scenario:

 

 

 

 

 

Dozens of Congressional hearings on tax reform held in 2011 and 2012

No legislation expected until 2013 or 2014

Results of the 2012 elections will determine the shape of tax reform

President Obama and Congressional Republicans have sharply different views

 

Income Tax Burden

The top 1/10th of 1 percent of Americans (about 137,000 taxpayers) pay 17 percent of all federal personal income taxes.

The top 1 percent pay 37 percent of all federal personal income taxes.

The top 5 percent pay 59 percent of federal personal income taxes.

The top 10 percent pay 70 percent of federal personal income taxes.

Half of Americans pay no federal income taxes.

If all income over $250,000 is taxed at a 100 percent rate, it would be $200 billion short of the annual deficit. 

 

 35% - the highest corporate tax rate in the world

U.S. international tax rules put U.S. multi-national companies at a competitive disadvantage

1/1/13 - tax rates on capital gains and dividends will increase corporate cost of capital

Expiration of Bush tax cuts and new Medicare tax, top
    dividend tax rate rises from 15% to 45%
Top capital gains rate rises from 15% to 23.8%


 

Shape of Corporate Tax Reform

 

Broaden the base and lower the rates

Republicans: top corporate tax rate of 25%

Administration: rate somewhere in the high 20s

Republicans: territorial system

Administration: restrict current ability to defer tax on
foreign subsidiary earnings

Republicans: business and individual concurrent

Administration: business and individual separate

 

What is tax expenditure?

 

Loopholes are provisions in the tax code which may be exploited in unintended ways to reduce tax liability.

Tax expenditures (200+ on books) are special exclusion, exemption, deduction, credit, rate, or deferral provisions that have been very deliberately put in the tax code for the clear purpose of conferring a tax benefit in connection with certain activities or attributes.

 

Tax Expenditure for Individuals Estimated Cost (2011 – 2015)
Health Care Exclusion $ 725 billion
Home Mortgage Deduction $ 464 billion
Reduced Taxes on Investments $ 457 billion
Defined Benefit Plans $ 264 billion
Defined Contribution Plans $ 376 billion
Earned Income Credit $ 294 billion
State and Local Tax Deduction $ 230 billion
   
   
Tax Expenditure for Corporations Estimated Cost (2011 – 2015)
Deferral of active income of CFCs $ 87 billion
Exclusion of interest on general
purpose state/local government debt
$ 47 billion
Domestic production income deduction $ 49 billion
Accelerated depreciation $ 75 billion
Credit/Deduction for R&D $ 44 billion
   


 

 

Expensing of timber growing costs -- $1.2 billion

Amortization and expensing of reforestation expenditures -- $1.1 billion

Special tax rate for qualified timber gain -- $2.2 billion

Estate tax -- $1.5 trillion

 

Although it is essential to be right on the substance –

it is not necessarily sufficient!

 

 

 

Patrick Raffaniello

Raffaniello & Associates

Website: www.lobbydc.com

 

 

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