taxes and tax reform in an era of hyper-deficits and gridlock
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Taxes and Tax Reform in an Era of Hyper-Deficits and Gridlock. by Jon Forman Alfred P. Murrah Professor of Law University of Oklahoma http://www.law.ou.edu/faculty/forman.shtml Oklahoma City Economic Roundtable March 2, 2011. Overview. The Budget Outlook Short-term Long-term Taxes - PowerPoint PPT PresentationTRANSCRIPT
Taxes and Tax Reform in an Era of Hyper-Deficits
and Gridlockby Jon Forman
Alfred P. Murrah Professor of LawUniversity of Oklahoma
http://www.law.ou.edu/faculty/forman.shtml
Oklahoma CityEconomic Roundtable
March 2, 2011
Overview
The Budget Outlook Short-term Long-term
Taxes The Current Tax System Recent Tax Reform Proposals
2
Short-Term:Projected Budget Totals
Budget Totals, $billions 2011 2012-2021
Receipts $2,228 $39,084
Outlays $3,708 $46,055
Deficit $1,480 $ 6,971
Budget Totals, % GDP
Receipts 14.8% 19.9%
Outlays 24.7% 23.5%
Deficit 9.8% 3.6%
Public Debt, % GDP 69.4% 75.3%
3Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011 to 2021 (January 2011), http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf.
4Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011 to 2021 (January 2011), http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf.
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6Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011 to 2021 (January 2011), http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf.
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10U.S. Department of the Treasury, Financial Management Service, A Citizen’s Guide to the Financial Report of the United States Government (2009).
11Congressional Budget Office, The Long-Term Budgt Outlook (Revised August 2010), at 5, http://www.cbo.gov/ftpdocs/115xx/doc11579/06-30-LTBO.pdf.
Factors Explaining Future Federal Spending on Medicare, Medicaid, and Social Security (percentage of GDP)
Congressional Budget Office, The Long-Term Budget Outlook (June 2009), at 12 (Box 1-2).
Taxes
Overview of the federal tax system Recent tax reform proposals
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14Joint Committee on Taxation, Present Law and Historical Overview of the Federal Tax System (JCX-1-11), January 18, 2011, at 71, www.jct.gov.
Proposed Budget Receipts
Receipts, $billions 2011 2014
Individual income taxes 998 1,671
Corporation income taxes 279 398
Payroll taxes 819 1,092
Excise taxes 73 86
Estate and gift taxes 11 14
Custom duties and other receipts 47 75
Total receipts 2,228 3,442
GDP $15,034 $17,258
Receipts, % GDP 14.8% 19.9%
15Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011 to 2021 (January 2011), http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf.
16Joint Committee on Taxation, Present Law and Historical Overview of the Federal Tax System (JCX-1-11), January 18, 2011, www.jct.gov.Joint Committee on Taxation, Present Law and Historical Overview of the Federal Tax System
(JCX-1-11), January 18, 2011, at 70, www.jct.gov.
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U.S. Payroll Tax Rates: Selected Years
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2
4
6
8
10
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1940 1960 1980 2010
Year
Perc
ent p
aid
join
tly b
y em
ploy
ee a
nd e
mpl
oyer
Medicare
Social Security
19Edward D. Kleinbard, Muddling Through the Budget Crisis (January 6, 2011); OECD Tax Database, http://www.oecd.org.
20Joint Committee on Taxation, Present Law and Historical Overview of the Federal Tax System (JCX-1-11), January 18, 2011, at 72, www.jct.gov.
21Congressional Budget Office, Trends in Federal Tax Revenues and Rates (December 2, 2010), at 10, http://finance.senate.gov/imo/media/doc/120210DEtest.pdf.
22Joint Committee on Taxation, Present Law and Historical Overview of the Federal Tax System (JCX-1-11), January 18, 2011, at 66, www.jct.gov.
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Top 10 Income Tax Expenditures, 2012 (Billions)
Health insurance exclusion $184
Mortgage interest deduction 99
401(k) plans 68
Step-up of basis at death 61
Exclusion of net imputed rental income 51
Deductible nonbusiness state and local taxes other than on houses
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Employer plans 45
Charitable contrib. (other than health & education) 43
Capital gains (except agriculture, timber, iron, coal) 38
Exclusion of interest on tax-exempt bonds 372012 Federal Budget, Analytical Perspectives, Chapter 17, Tax Expenditures, Table 17-3, http://www.whitehouse.gov/omb/budget/Analytical_Perspectives.
24Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2011 to 2021 (January 2011), http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_FY2011Outlook.pdf.
25Office of Management and the Budget, A New Era of Responsibility: Renewing America’s Promise (2009).
Rising Poverty
26U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2009, (Current Population Report No. P60-238, September 2010), http://www.census.gov.
27Congressional Budget Office, Trends in Federal Tax Revenues and Rates (December 2, 2010), at 24, http://finance.senate.gov/imo/media/doc/120210DEtest.pdf.
Rising Inequality
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29Congressional Budget Office, Trends in Federal Tax Revenues and Rates (December 2, 2010), at 15, http://finance.senate.gov/imo/media/doc/120210DEtest.pdf.
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Shares of Total Business Returns and Net Income, 1980-2007
1980 1990 2000 2007
S Corporations
Returns 4% 8% 11% 12%
Net Income 1% 8% 14% 14%
Partnerships
Returns 11% 8% 8% 10%
Net Income 3% 3% 18% 23%
Sole Proprietorships
Returns 69% 74% 72% 72%
Net Income 17% 26% 15% 10%
C Corporations
Returns 17% 11% 9% 6%
Net Income 80% 62% 53% 53%31
Internal Revenue Service, Statistics of Income, www.irs.gov/taxstats.
Expired Tax Provisions 2010
First-time homebuyer credit Making work pay credit Build America Bonds Estate and gift tax regime for 2010
32Joint Committee on Taxation, List of Expiring Federal Tax Provisions, 2010-2020 (JCX-2-11), January 21, 2011, www.jct.gov.
Expiring Tax Provisions 2011
Tax credit for research and experimentation expenses
Increased AMT exemption amount Increase in expensing to
$500,000/$2,000,000 Above-the-line deduction for qualified
tuition and related expenses Temporary 2% payroll tax cut
33Joint Committee on Taxation, List of Expiring Federal Tax Provisions, 2010-2020 (JCX-2-11), January 21, 2011, www.jct.gov.
Expiring Tax Provisions 2012
Most 2001 and 2003 tax cuts 35% maximum rate 10% minimum rate $1,000 child tax credit 15% capital gain and dividend rates
Expanded earned income tax credit American opportunity tax credit Reduced estate and gift taxes
34Joint Committee on Taxation, List of Expiring Federal Tax Provisions, 2010-2020 (JCX-2-11), January 21, 2011, www.jct.gov.
Recent Tax Reform Proposals President’s Economic Recovery Advisory
Board, The Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation (August 2010).
National Commission on Fiscal Responsibility and Reform, The Moment of Truth (December 2010).
Bipartisan Policy Center, Restoring America’s Future (November 2010). Co-Chairs: Pete Domenici & Alice Rivlin
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Recent Tax Reform Proposals
Bipartisan Tax Fairness and Simplification Act of 2010 (2010). Senators Ron Wyden and Judd Gregg
Rep. Paul Ryan, The Roadmap Plan (2010).
National Taxpayer Advocate, 2010 Annual Report to Congress (December 31, 2010).
President Obama’s FY2012 Budget
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Principles of Sound Tax Policy
Simplicity Transparency Neutrality Stability No Retroactivity Broad Bases and Low Rates
37Tax Foundation, The Principles of Sound Tax Policy , http://www.taxfoundation.org/publications/show/25982.html.
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More Principles of Sound Tax Policy Distribution matters
A just distribution of economic resources Intergenerational justice/ Deficits
Behavioral consequences matter Encourage work and savings Marriage penalties and bonuses Keep effective rates as low as possible Growth and a stronger dollar
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Tax Base
Income Consumption Earnings Wealth
President Obama: Reform Corporate & Individual Tax “I’m asking Democrats and Republicans to
simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years –- without adding to our deficit. It can be done.”
“In fact, the best thing we could do for all Americans is to simplify the individual tax code. This will be a tough job, but members of both parties have expressed interest in doing this, and I am prepared to join them.”
40Text of President Barack Obama’s State of the Union Address , http://www.politico.com/news/stories/0111/48181.html.
PERAB: Simplification Options
Simplification for Families Consolidate Family Credits and Simplify
Eligibility Rules Simplify and Consolidate Tax Incentives
for Education
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42PERAB, The Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation, at 6, http://www.whitehouse.gov/sites/default/files/microsites/PERAB_Tax_Reform_Report.pdf.
PERAB: Simplification Options
Simplify Savings and Retirement Incentives Consolidate Retirement Accounts Integrate IRA and 401(k)-type
Contribution Limits and Disallow Nondeductible Contributions
Consolidate Non-Retirement Savings Reduce Retirement Account Leakage Simplify Taxation of Social Security
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PERAB: Simplification Options
Simplify Taxation of Capital Gains Harmonize Rules and Tax Rates for Long-
Term Capital Gains Simplify Capital Gains Tax Rate Structure Limit or Repeal Section 1031 Like-Kind
Exchanges Capital Gains on Principal Residences
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PERAB: Simplification Options
Simplify Tax Filing The Simple Return Data Retrieval Raise the Standard Deduction and
Reduce the Benefit of Itemized Deductions
Simplification for Small Business The Alternative Minimum Tax
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PERAB: Compliance Options
Dedicate More Resources to Enforcement and Enhance Enforcement Tools
Increase Information Reporting and Source Withholding
Clarify the Definition of a Contractor
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PERAB: Corporate Tax Reform
Reduce Marginal Corporate Rates Broaden the Corporate Tax Base Eliminate or Reduce Tax Expenditures
Eliminate the Domestic Production Deduction
Eliminate or Reduce Accelerated Depreciation
Eliminate Other Tax Expenditures
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PERAB: International Corporate Tax Issues
Option 1: Move to a Territorial System Option 2: Move to a Worldwide
System with a Lower Corporate Tax Rate
Option 3: Limit or End Deferral with the Current Corporate Tax Rate
Option 4: Retain the Current System but Lower the Corporate Tax Rate
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President’s Fiscal Commission
Co-chairs: Alan Simpson & Erskine Bowles Designed to raise 21% of GDP Individual tax rates of 12, 22, and 28% Eliminate the AMT Eliminate the phase-out of personal
exemptions & limits on itemized deductions Eliminate itemized deductions but retain
standard deduction & personal exemptions Tax capital gains & dividends as ordinary
income49The National Commission on Fiscal Responsibility and Reform, The Moment of Truth (December
2010), http://www.fiscalcommission.gov; Tax Policy Center, http://www.taxpolicycenter.org.
President’s Fiscal Commission
Eliminate tax expenditures except: child credit and earned income tax credit mortgage interest deduction—replace
with 12% credit; $500,000 mortgage cap cap and phase out the exclusion for
employer-sponsored health care charitable giving deduction—replace with
12% credit for contributions over 2% AGI
50The National Commission on Fiscal Responsibility and Reform, The Moment of Truth (December 2010), http://www.fiscalcommission.gov.
President’s Fiscal Commission
Eliminate tax expenditures except: exclusion of interest on state and
municipal bonds—tax interest only on newly-issued bonds
retirement savings—maintain basic preferences, but consolidate retirement accounts and cap annual tax-preferred contributions at lower of $20,000 or 20 percent of income; expand savers’ credit
defined benefit pensions51The National Commission on Fiscal Responsibility and Reform, The Moment of Truth (December
2010), http://www.fiscalcommission.gov.
President’s Fiscal Commission
Eliminate corporate tax expenditures & reduce corporate tax rate to 28%
Territorial tax system for active foreign-source income
Increase Social Security taxable wage base to 90% of wages, by 2050
Increase the gasoline excise tax on gasoline by 15¢ per gallon
52The National Commission on Fiscal Responsibility and Reform, The Moment of Truth (December 2010), http://www.fiscalcommission.gov.
Bipartisan Policy Center
Co-Chairs: Pete Domenici & Alice Rivlin
one-year payroll tax holiday in 2011 to help stimulate economic recovery
individual tax rates: 15% on the 1st $50,000 of taxable income ($100,000 for married couples, 27% on excess
eliminate the AMT
53Bipartisan Policy Center, Restoring America’s Future (November 2010), http://bipartisanpolicy.org/sites/default/files/FINAL%20DRTF%20REPORT%2011.16.10.pdf.
Bipartisan Policy Center
Eliminate tax expenditures: exclusion from tax of the inside buildup
of life insurance and deferred annuities credits and deductions for higher
education expenses credit for child & dependent care exclusion from income of benefits under
Section 125 cafeteria plans foreign earned income exclusion
54Bipartisan Policy Center, Restoring America’s Future (November 2010), http://bipartisanpolicy.org/sites/default/files/FINAL%20DRTF%20REPORT%2011.16.10.pdf.
Bipartisan Policy Center
Exempt the first $1,000 of net long-term gains from taxation (indexed for inflation) tax any additional long-term gains and
all qualified dividends as ordinary income include in income unrealized capital
gains at death
Cap and phase out the exclusion for employer-sponsored health care
55Bipartisan Policy Center, Restoring America’s Future (November 2010), http://bipartisanpolicy.org/sites/default/files/FINAL%20DRTF%20REPORT%2011.16.10.pdf.
Bipartisan Policy Center
Eliminate deduction for state and local taxes
Replace charitable contributions and mortgage interest deductions with 15% refundable credits
Retain medical deduction
56Bipartisan Policy Center, Restoring America’s Future (November 2010), http://bipartisanpolicy.org/sites/default/files/FINAL%20DRTF%20REPORT%2011.16.10.pdf.
Bipartisan Policy Center
Replace the standard deduction, personal exemptions, head of household filing status, the child tax credit, and the earned income tax credit with two refundable credits: $1,600 for each dependent child an earnings credit equal to 21.3 percent
of the first $20,300 of earnings
57Bipartisan Policy Center, Restoring America’s Future (November 2010), http://bipartisanpolicy.org/sites/default/files/FINAL%20DRTF%20REPORT%2011.16.10.pdf.
Bipartisan Policy Center
Tax all Social Security benefits, eliminate the elderly credit & provide 2 new credits: 7.5% of Social Security benefits 15% of the current standard deduction
for individuals age 65 or older
Increase Social Security taxable wage base to 90% of wages
58Bipartisan Policy Center, Restoring America’s Future (November 2010), http://bipartisanpolicy.org/sites/default/files/FINAL%20DRTF%20REPORT%2011.16.10.pdf.
Bipartisan Policy Center
Impose a 6.5% broad-based consumption tax
Impose an excise tax 1¢/ounce on sugar-sweetened beverages
Raise the excise tax on alcoholic beverages to 25¢/ounce
Estate tax: $3.5 million exemption and 45%
59Bipartisan Policy Center, Restoring America’s Future (November 2010), http://bipartisanpolicy.org/sites/default/files/FINAL%20DRTF%20REPORT%2011.16.10.pdf.
Bipartisan Policy Center
Corporate taxes reduce the corporate rate to 27% eliminate many tax expenditures:
domestic production deduction research and experimentation credit accelerated depreciation for rental housing
retain deferral of income for controlled foreign corporations
60Bipartisan Policy Center, Restoring America’s Future (November 2010), http://bipartisanpolicy.org/sites/default/files/FINAL%20DRTF%20REPORT%2011.16.10.pdf.
Wyden-Gregg Tax Act
Like the Tax Reform Act of 1986 Individuals
top tax rate of 35% standard deduction of $15,000 ($30,000
for couples) repeal AMT 35% exclusion for capital gains and
qualified dividends eliminate lots of tax breaks
61Senators Ron Wyden & Judd Gregg, Bipartisan Tax Fairness and Simplification Act of 2010 (2010), http://wyden.senate.gov/issues/issue/?id=FB5B603A-ED94-48A8-8FF1-C220C1052B3F.
Wyden-Gregg Tax Act
Corporate & business replaces the graduated corporate rate
structure with a flat rate of 24% eliminates many business tax breaks allow unlimited expensing of equipment
and inventories for small businesses
62Senators Ron Wyden & Judd Gregg, Bipartisan Tax Fairness and Simplification Act of 2010 (2010), http://wyden.senate.gov/issues/issue/?id=FB5B603A-ED94-48A8-8FF1-C220C1052B3F.
Rep. Ryan’s Roadmap
Designed to raise 19% of GDP Pay income taxes through existing
law, or Through a highly simplified code with
virtually no tax breaks 10% on the first $50,000 ($100,000 for
couples), 25% on the rest $39,000 standard deduction & personal
exemptions for a family of 4
63Paul Ryan, The Roadmap Plan (2010), http://www.roadmap.republicans.budget.house.gov.
Rep. Ryan’s Roadmap eliminate the AMT eliminate taxes on interest, capital gains,
and dividends
Eliminate the estate tax Replace the corporate income tax
with a border-adjustable business consumption tax of 8.5%
64Paul Ryan, The Roadmap Plan (2010), http://www.roadmap.republicans.budget.house.gov.
National Taxpayer Advocate
Repeal the AMT Consolidate the family tax provisions Improve other provisions relating to
taxation of the family unit Consolidate education savings
incentives Consolidate retirement savings
incentives
65National Taxpayer Advocate, 2010 Annual Report to Congress (December 31, 2010), http://www.taxpayeradvocate.irs.gov/Media-Resources/Annual-Report-To-Congress-Full-Report.
National Taxpayer Advocate
Simplify worker classification determinations
Eliminate (or reduce incentives for lawmakers to enact tax sunsets
Eliminate (or simplify) phase outs Streamline the penalty regime
66National Taxpayer Advocate, 2010 Annual Report to Congress (December 31, 2010), http://www.taxpayeradvocate.irs.gov/Media-Resources/Annual-Report-To-Congress-Full-Report.
President Obama’s 2012 Budget
Extend the Earned Income Credit Expand the Dependent Care Credit Extend American Opportunity Credit Tax Dividends and Net Long-Term
Capital Gains at a 20-Percent Rate for Upper-Income Taxpayers
Reduce the Value of Certain Tax Expenditures for Upper-Income
67U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals (February 2011), http://www.treasury.gov/.
Enhance and Make Permanent the Research and Experimentation (R&E) Tax Credit
Reform & Extend Build America Bonds Reform Treatment of Financial
Institutions and Products Reinstate Superfund Taxes Reform U.S. International Tax System
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President Obama’s 2012 Budget
U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals (February 2011), http://www.treasury.gov/.
President Obama’s 2012 Budget
Eliminate Oil and Gas Preferences Eliminate Coal Preferences Expand Information Reporting Improve Compliance by Businesses
Require Greater Electronic Filing Worker Classification
Strengthen Tax Administration Expand Penalties
69U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals (February 2011), http://www.treasury.gov/.
Consumption Tax Options
Progressive Personal Consumption Tax
Subtraction method Value Added Tax Treasury Department proposal for
Business Activity Tax (BAT) Credit-method (European) VAT National retail sales tax (RST)
70Charles E. McClure, Jr., Why the United States Needs a Value Added Tax (2009), http://www.taxadmin.org/Fta/meet/09am/papers/McClure.pdf.
Earlier Tax Reform Proposals
President’s Advisory Panel on Tax Reform, Final Report (November 1, 2005), http://govinfo.library.unt.edu/taxreformpanel.
David Bradford and the U.S. Treasury Tax Policy Staff. Blueprints for Tax Reform (Arlington, VA: Tax Analysts. 2nd ed. 1984).
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Conclusion President needs 60 votes in the
Senate and Cooperation in the House The whole tax system is in play
And will be in play for years Lobbyists will be tripping over each other
Change is almost always incremental Boil the frog slowly
Sources The President’s Economic Recovery Advisory Board, The
Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation (August 2010), http://www.whitehouse.gov.
The National Commission on Fiscal Responsibility and Reform, The Moment of Truth (December 2010), http://www.fiscalcommission.gov.
The Bipartisan Policy Center Debt Reduction Task Force, Restoring America’s Future: Reviving the Economy, Cutting Spending and Debt, and Creating a Simple, Pro-Growth Tax System (November 2010), http://bipartisanpolicy.org.
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Sources Senators Ron Wyden & Judd Gregg, Bipartisan Tax
Fairness and Simplification Act of 2010 (2010), http://wyden.senate.gov/issues/issue/?id=FB5B603A-ED94-48A8-8FF1-C220C1052B3F.
Representative Paul Ryan, The Roadmap Plan (2010), http://www.roadmap.republicans.budget.house.gov.
National Taxpayer Advocate, 2010 Annual Report to Congress (December 31, 2010), http://www.taxpayeradvocate.irs.gov/Media-Resources/Annual-Report-To-Congress-Full-Report.
Joint Committee on Taxation, Present Law and Historical Overview of the Federal Tax System (JCX-1-11), January 18, 2011, www.jct.gov.
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Sources Joint Committee on Taxation, List of Expiring Federal Tax
Provisions, 2010-2020 (JCX-2-11), January 21, 2011, www.jct.gov.
The Tax Policy Center, Deficit Reduction Proposals, http://www.taxpolicycenter.org/taxtopics/Deficit-Reduction-Proposals.cfm.
Joshua Rosenberg, The U.S. Fiscal Trajectory: Causes and Consequences (January 21, 2011), http://www.abanet.org/tax/MID11/papers/Rosenberg-slidesABA-Boca-Rosenberg.pdf.
Office of Management and Budget, 2012 Federal Budget, http://www.whitehouse.gov/omb/budget.
76U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals (February 2011), http://www.treasury.gov/.
About the Author Jonathan Barry Forman (“Jon”) is
the Alfred P. Murrah Professor of Law at the OU College of Law, teaching tax and pension law;
a member of the board of trustees of the Oklahoma Public Employees Retirement System (OPERS)
a member of the State of Oklahoma Incentive Review Committee;
a member of the State of Oklahoma Task Force on Comprehensive Tax Reform; and
the author of Making America Work (Washington, DC: Urban Institute Press, 2006).
Jon was the Professor in Residence at the Internal Revenue Service Office of Chief Counsel, Washington, DC, for the 2009-2010 academic year.
Jon can be reached at [email protected], 405-325-4779, www.law.ou.edu/faculty/forman.shtml.
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