tax reform update - kutak rock · tax reform update june 20, 2017 presented by: mitch woolery...
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Tax Reform UpdateJune 20, 2017
Presented by:
Mitch WooleryPartner
Kansas City
(816) 502-4657
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Tax Reform Is Really, Really Hard
• A brief journey down memory lane
• The Internal Revenue Code of 1986
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Competing Visions of Tax Reform
• Comprehensive income tax reform(Brady/Ryan/Camp)
• Cut rates/eliminate deductions/broaden the base(Possibly Hatch and definitely various others)
• Revenue neutral vs. deficit financed
(Brady/Ryan vs. Hatch/Trump)
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The Search for Revenue• Border-adjustment tax (BAT): raises about $1.1
trillion over 10 years if Year 1 fully phased-in.1
• Eliminating interest deductibility (ID): raises about$1.2 trillion over 10 years.2
• Everything else (estimates vary widely)
1 Tax Foundation January 20172 CNBC March 15, 2017 (citing Tax Foundation)
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The Search for Revenue
• Border-adjustment tax (BAT): raises about $1.1 trillion over10 years if Year 1 fully phased-in.1
• New BAT proposal (6/13/2017): five-year phase in.Raises about $900 billion over 10 years.2
• Interest deductibility (ID): raises about $1.2 trillion over 10years.3
• Everything else (estimates vary widely)
1 Tax Foundation January 20172 Tax Notes June 14, 2017 (citing Tax Foundation)3 CNBC March 15, 2017 (citing Tax Foundation)
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BAT*
• What is it?
*Per A.J. Auerbach (as cited by Investopedia)
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BAT: What is it?
• Fully expense capital investments rather than depreciatethem over a number of years or decades.
• No deduction of net interest expense against taxableincome.
• Foreign profits not subject to domestic taxation.
• Make corporate income tax “destination-based” (i.e., theU.S. income tax would be border-adjustable).
Source: Tax Foundation, February 2017
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What is Border Adjustment?
Imports. U.S. businesses no longer able to deduct thecost of purchases from abroad.
Exports. U.S. businesses no longer taxed on therevenue attributable to sales abroad.
Source: Tax Foundation, February 2017
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BAT: Macro effects
BAT opponents
(1) Pt
(2)
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BAT: Macro effects
BAT proponents
(1) $
(2) Dt
Result: Trade Effect Neutral
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BAT
• What is it?
• Who loves it?• Exporters
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BAT
• What is it?
• Who loves it?
• Who hates it?• Importers
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Eliminating ID
• What is it?
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Eliminating ID
• What is it?
• Who loves it?• Upper Market Companies that can pay cash and don’t
need to borrow.
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Eliminating ID
• What is it?
• Who loves it?
• Who hates it?• Middle Market Companies and Small Businesses who
need to borrow in order to grow.
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Organizations Opposed to Eliminating ID
• Build Coalition. http://buildcoalition.org/
• “You can’t expense what you can’t afford.”
• Association for Corporate Growth (ACG).• “The Voice of the Middle Market.”• Cites RGL study that estimates $1.1 trillion to $2.5 trillion
equity value loss for Middle Market companies.*
*https://www.rgl.com/assets/Uploads/Documents/RGL-CIT-Analysis.pdf
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Current status
• Revenue neutrality
• BAT
• ID
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Countervailing pressures
• Repealing Obamacare (frees up $1.2 trillion over 10years)*
*This depends on hundreds of assumptions which may or may not be true. Forbes,March 13, 2017 (citing CBO)
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Countervailing pressures
• Repealing Obamacare (frees up $1.2 trillion over 10years)
• House Freedom Caucus
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Countervailing pressures
• Repealing Obamacare (frees up $1.0 trillion over 10years)*
• House Freedom Caucus
• Vladimir Putin
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Timeline
• Brady/Ryan
• Hatch
• Trump
• House Freedom Caucus