United States: President Calls For $1.5 Trillion In New Revenue

President Obama on Sept. 19 submitted a new deficit plan that calls for $1.5 trillion in new revenue. The president's stated goal is to raise this revenue through comprehensive tax reform, but the plan also includes specific tax provisions that are meant to be used either as part of the reform effort or enacted separately to raise the $1.5 trillion on their own.

The administration's deficit plan as a whole is designed to save over $3 trillion through increased revenue, spending cuts and savings on debt interest. The plan will be submitted to the congressional "supercommittee" on the deficit. The supercommitte is charged with finding at least $1.2 trillion in savings before the end of the year, and many congressional groups are expected to submit their own ideas.

The crux of the administration's new tax platform is a call for tax reform that raises $1.5 trillion over the next 10 years compared to what would be raised if the 2001 and 2003 tax cuts and alternative minimum tax (AMT) relief were extended. The plan also fully incorporates the American Jobs Act proposed by the White House last week. That bill includes over $250 billion in tax incentives and over $450 billion in revenue raisers.

Tax reform

The president does not propose a specific tax reform plan himself. Instead, he lays out five principles for tax reform — indicating that tax reform should:

• lower tax rates;
• end "inefficient" tax breaks;
• cut the deficit by $1.5 trillion;
• increase job growth; and
• adhere to a new "Buffett Rule."

The so:called "Buffett Rule" is named for investor Warren Buffett, who has reportedly argued that receptionists in his office pay a higher tax rate than him. The president's Buffett Rule is not a specific tax proposal, but is instead a principle the administration will follow during tax reform deliberations. The White House defines the principle as: "No household making over a $1 million annually should pay a smaller share of its income than middle:class families pay."

From a technical tax standpoint, the implications of the principle are unclear. Whether a specific tax reform proposal violates the principle could depend on what is considered "middle class," how a "household" is defined, or how income and effective tax rates are measured. The rule appears largely rhetorical in its current construction. It could imply that the president will support a "surtax" on income over $1 million or insist on higher tax rates on capital gains and dividends.

The president also offers specific revenue raising tax provisions to be used in tax reform efforts (in addition to the revenue raisers in the American Jobs Act). None of the provisions are new. They are culled from previous administration budgets and would:

• repeal LIFO (last:in, first:out) and LCM (lower of cost or market) methods of accounting ($60 billion);
• repeal several tax breaks for the coal industry ($2 billion);
• modify rules that apply to sales of life insurance contracts ($1 billion);
• modify the dividends received deduction for life insurance separate accounts ($5 billion);
• restrict the use of corporate:owned life insurance ($10 billion);
• defer deductions of interest expense until the related foreign source income is repatriated ($36 billion);
• determine the foreign tax credit on a pooling basis ($53 billion);
• tax excess returns associated with offshore transfers of intangibles ($19 billion);
• limit shifting of income through intangible property transfers ($1 billion);
• limit earnings stripping by expatriated entities ($4 billion);
• reinstate superfund taxes ($19 billion);
• make the federal unemployment surtax permanent ($15 billion); and
• tighten the rules for classifying workers as employees or independent contractors ($8 billion).

For a full description of these proposals, see Tax Legislative Update 2011:02.

The president indicated that this list is not meant to be exhaustive. His deficit plan calls for lawmakers to target "additional inefficient tax breaks." However, if tax reform fails, the president's plan is intended to raise $1.5 trillion through the stand:alone enactment of these provisions along with the repeal of the 2001 and 2003 tax cuts for taxpayers with income over $200,000 for singles or $250,000 for joint filers ($866 billion).

It is important to remember that this is one of many proposals that will be presented to the supercommittee. Given the makeup of the committee and the short time that remains before they must report a plan, the committee is unlikely to produce a detailed tax reform plan. However, the committee could set out general guidelines that, if adopted, would establish a framework for future tax reform efforts.

American Jobs Act

The president's deficit plan fully incorporates the American Jobs Act, which was proposed last week. That bill includes over $450 billion in additional provisions that would raise taxes, including proposals to:

• limit the tax benefit to individuals of many itemized deductions, above:the:line deductions and exclusions to 28 percent ($410 billion);
• change the tax treatment of "carried interests" ($13 billion);
• establish a seven:year depreciable life for general aviation aircraft ($5 billion);
• repeal a bevy of tax benefits for oil and gas companies ($41 billion); and
• modify rules for dual:capacity taxpayers ($10 billion).

The American Jobs Act is meant to boost job creation through almost $200 billion in new spending and over $250 billion in new tax incentives. The bill's tax incentives would:

• cut both the employer and employee Social Security tax rate in half (on up to $5 million in wages for employers);
• provide a 6.2% employer wage credit on the first $50 million in payroll increases;
• extend 100% bonus depreciation through 2012;
• expand the work opportunity tax credit; and
• delay government vendor withholding requirements until 2014.

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