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The show welcomed back CPA Don Eppich of Polito Eppich. The accounting firm focuses on serving companies that generate between half a million to 150 million dollars in revenue a year. The discussion will revolve around the premise of the article below by Dean Zerbe, managing Director for alliantgroup. The article talks about a one-year patch for expiring tax cuts.
The Deal for Taxes
By Dean Zerbe, alliantgroup National Managing Director | December 11, 2012
The deal on taxes is fairly straightforward – or can be. The outlook is for a one-year patch for expiring tax provisions from the Bush 2001 and 2003 tax bills as well as the Obama 2010 tax bill (the patch would also include AMT and extenders – such as the R&D tax credit and 179). The patch would most likely include a cap on deductions for wealthy individuals (and perhaps an uptick on rates).
Hand-in-hand with the one-year patch would be an agreement about the general parameters of what reform and reconciliation would look like in 2013 – i.e. how much in increased revenues; how much in savings from entitlements; how much in savings from discretionary spending. The details of how those revenue increases are met and savings in spending are realized will be ironed out through 2013 (with President Obama seeking a bill to be concluded by August 1, 2013). However, I would anticipate whatever deal is struck on capping deductions and rates for high-income individuals for the one-year patch would stay in place for tax reform.
The one-year deal.
As some will recall, the concept of capping deductions has been around for a while – with the President campaigning on and including in his budget a 28 percent limit on deductions for high income individuals. The Republican proposals that have been out there (calling for a cap anywhere from $17k – to $50k or as a percentage of AGI) are actually more aggressive as to high-wage individuals than the 28 percent limit. A cap of $17k would raise roughly $1.7 trillion over ten years. That can certainly be scaled back to deal with policy concerns (for instance, to only cover incomes above a certain level) and still allow for significant revenues. As the Republicans proposed $800 billion in revenues – it is a cap on deductions that is the tent pole for their proposal.
The Democrats are growing insistent that they want to see a rate increase for ordinary income. The fight on the deal in regards to taxes is not about who to tax – but rather how to increase taxes and by how much. It is hard to determine where this one ends but I suspect that the Republicans are going to dig their feet in and demand that if they are going to be forced to eat vegetables (raise taxes on higher income) – they should get to decide how they want them cooked (cap v. raising rates).
The other issue in regards to ordinary is what level of income would be hit by a cap (or rate increase). While the discussion has focused on $200k/$250k there has been quite a lot of signaling of flexibility coming from the Democrats on the dollar level. I would expect $400k – $500k will be where we end up in regards to any rate increase or caps.
The general betting line is for estate tax to stay at $5 billion and 35 percent – in part because as has been widely reported and recognized in D.C., the Democrats themselves are split on this issue. I could see a delinking of gift and estate tax as a possible compromise (bringing gift for instance back to $1 million – raises a good amount of money) – but that is more likely for reform and not the one-year patch. No one is currently talking about the administration’s proposals on family limited partnerships and GRATs (which don’t raise much money in any event).
The Republicans will fight hard on capital gains and keeping it at 15 percent (and point to the in place increase of 3.8 percent from the health care bill, starting January 1, 2013, as a reason to keep it there given that Obama had campaigned for a rate no greater than 20 percent). Perhaps some upward movement is possible but right now I don’t see it – especially if they give somewhat on an increase in rates for individuals.
Dividends are another area where Democrats are somewhat split (and in fact, in the Senate Democrat tax proposal they kept dividends linked to capital gains – albeit at 20 percent). While increasing dividends to ordinary income rates does bring in a good amount of revenues – over $200 billion over ten years – it is a difficult issue for elected officials concerned about the negative impact on dividends being made by companies (and the hit that then has on income for the elderly). The outlook currently is that dividends will stay linked to capital gains (and therefore, if capital gains go to 20 percent – so will dividends).
Payroll tax – I have for a long time felt that the holiday was not going to go away. Recent statements by the White House Council of Economic Advisors about the benefits to the economy of a continued payroll holiday, adds much fuel to the fire that as part of any overall deal that payroll tax holiday will stay in place for this year.
Carried interest – this proposal is not cooked and ready to go (unless it’s as an 83b election), with a number of Democrats also uncomfortable with doing anything in the one-year patch, and I see carried interest being put off as well to the land of bluebells that is tax reform.
Are we going to get a deal? Every day is a different day, but I think the House Republican proposal began to get us on good footing and the comments by the President to Bloomberg are in the right direction. In the mindset of D.C. there is all the time in the world to have a lot more press conferences and talk shows before a deal is done (outlined by December 17th and passed say the 21st or 24th); However, bear in mind that while for many the filing season looms large – Congress is not as focused on the filing season. It is possible we could go past the New Year. However, a deal will be there at the end of the day.
This article is posted with the permission of Dean Zerbe. Mr. Zerbe is alliantgroup’s National Managing Director based in Washington D.C. Prior to joining alliantgroup, Dean was Senior Tax Counsel to the U.S. Senate Committee on Finance.
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