2015 engineering & construction conference 2015 economic ... · 2015 engineering &...

2015 Engineering & Construction Conference

Patricia Buckley Jonathan Traub June 18, 2015

2015 Economic & Tax Perspectives

2015 Engineering & Construction Conference

Patricia Buckley June 18, 2015

Economic Outlook

Two big trends impacting world growth: falling price of oil and rising value of the dollar How one views these developments depends on where you are operating

Falling oil prices has many winners and losers

Source: Energy Information Agency and Federal Reserve Board

Crude Oil Prices (WTI)

But it is not just a supply story

US Energy Overview

Source: US Department of Energy, Energy Information Agency

The rising value of the dollar is a definite challenges to US exports, but helps US trading partners

Source: Federal Reserve Board

Trade-Weighted Value of the Dollar

What is going on with the US recovery?

The fundamentals are improving…mostly

Source: Bureau of Economic Analysis

But improvement has been very uneven

Change in real per capita GDP 2013 – 2014

National trends mask high variability

Compound annual growth in real per capita GDP 2007 – 2014

Most indicators show improvement

Individuals are doing better…on average

Household Net Worth

Unemployment Rate Real Disposable Income per Capita

Most indicators show improvement

Businesses are doing better

Corporate Profits

Business Investment Manufacturing Production

Most indicators show improvement…but structures are a special case

Most indicators show improvements

Financial sector shows improvement

Source: Federal Deposit Insurance Corporation

But we still have ground to make up

Housing is improving, but still has a long way to go

S&P/Case-Shiller Home Price Index

Housing Starts Construction Employment

So how are the sectors doing? Employment losing sectors (in addition to construction) include…

Financial Services

Manufacturing Government

Information

Source: Bureau of Labor Statistics

So how are the sectors doing? Winning sectors include…

Mining

Professional and Business Services Health Services

Leisure and Hospitality

Source: Bureau of Labor Statistics

The number of unemployed to job openings is back to pre-recession levels

Hiring is lagging compared to job openings Thousands

With so many on the sidelines, wages not likely to cause inflationary pressures

One factor that might impact future US growth are the Millenials…those born between 1980 – 1995 who are now 19 to 34

Percent In Billions 07:Q4 14: Q3 07:Q4 14:Q3

Mortgage 73.6% 69.4% 9,101 8,131 HE Revolving 5.2% 4.4% 647 512

Auto Loan 6.6% 8.0% 815 934 Credit Card 6.8% 5.8% 839 680 Student Loan 4.4% 9.6% 548 1,126

Other 3.4% 2.8% 422 327

Total 100% 100% 12,372 11,710

Source: FRBNY Consumer Credit Panel/Equifax

Millennial generation: Starting out with debt

Starting out with debt…and more bad debt

Millennial generation

Percent of Balance 90+ Days Delinquent by Loan Type

MORTGAGE HELOC AUTO CC STUDENT LOAN OTHER

Source: Federal Reserve Bank of NY Consumer Credit Panel/Equifax

Something has definitely changed

Source: Bureau of Labor Statistics and Bureau of the Cencus

Growth in population and household formation

Households Population 16+

Source: Bureau of the Census and Bureau of Labor Statistics

The overhang could make the future more problematic

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Less than 35 35–44 45–54 55–64 65–74 75 or more

2013 $ Real Median Household Net Worth by Age of Householder

2001 2004 2007 2010 2013

Source: Federal Reserve Board, Survey of Consumer Finances, 2013

Prospects for growth in the rest of the world also face a wide variety of challenges

As slow as it has been, US recovery has been relatively strong

Source: Eurostat

Although the other NAFTA partners have been growing faster

Source: Federal Reserve Board

United States

Canada

Mexico

Eurozone fundamentals are improving

The risk of deflation is now less

Source: Eurostat

Issues remain for the Eurozone

Source: Eurostat

Issues remain for the Eurozone

Source: Eurostat

Will Japan’s latest plan work? Maybe Mr. Abe’s economic stimulus plan’s three policy pillars: •monetary easing •fiscal expansion •structural reforms

Source: Haver Analytics

Japan faces serious structural issues

Source: US Census Bureau

2000 2010 2020 2030 2040 2050

Retiree Dependency Ratio Population 65 and above as a percent of 100 Population 15-64

Germany

How will China adjust?

India: Stronger than we thought

Old versus New GDP Estimates

Brazil: Into the Storm

Questions?

About this presentation

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

Tax Policy in 2015

Jonathan Traub Deloitte Tax LLP June 18, 2015

Looking for Signals Amid the Noise

If you have a client logo or other co-branding to include, this should go here. It should never be larger than the Deloitte logo.

Setting the stage

Problem not solved: Near-term deficits manageable, but set to climb again after 2018

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Current Law Revenues Current Law Spending

Note*: Assumes current law remains unchanged (e.g., tax extenders are allowed to lapse, Medicare physician reimbursements are allowed to be cut by nearly one-third, sequester cuts are allowed to transpire as scheduled, etc.) Source: Congressional Budget Office (CBO), The Budget and Economic Outlook: 2015-2025 (Jan. 2015).

% of GDP $7.6 trillion deficit* 50‏-Year Averages

Spending 20.1% ‏

Revenues 17.4% ‏

Deficit 2.7% ‏

And then things really take a turn for the worse….

2015 2020 2025 2030 2035 2040 2045 2050

Current Law Deficits Alternative Fiscal Scenario ("Current Policy")

Yr. Average Deficit (3.2% of GDP)-40‏

Projected Budget Deficits % of GDP

Source: Congressional Budget Office, The 2014 Long-Term Budget Outlook (July 2014); the Alternative Fiscal Scenario assumes, among other things, that the “tax‏extenders” are extended without offset, revenues are held constant at 18% of GDP after 2024, and discretionary spending returns to its two-decade average as a share of GDP after 2024.

Tax reform: Irresistible forces vs. immovable objects

U.S. Tax Policy

0% 20% 40% 60% 80% 100%

Cost of capital/Financing

Could not be substantially stronger*

Weak global demand/Economy

Regulatory issues

Note:*Full response: Do not believe U.S. domestic investment spending could be substantially stronger than it currently is. Source: CEO Survey News Release Q4, 2014. “CEOs Forecast Weak Economic Growth in 2015.” Business Roundtable. 2 Dec., 2014.

What two factors do CEOs say are holding back the pace of domestic investment?

The irresistible forces

Corporate income tax rates taxes around the world

Source: Pomerleau, Kyle. “Corporate Income Tax Rates around the World, 2014.” Tax Foundation. Tax Foundation. 20 Aug, 2014. Available at http://taxfoundation.org/article/corporate-income-tax-rates-around-world-2014

Nineteen Highest Corporate Tax Rates

Top Rate (%)

United Arab Emirates 55

Chad 40

United States 39.1 Cameroon 38.5

Japan 37

Angola 35

Zambia 35

Equatorial Guinea 35 Malta 35

Argentina 35

Congo, Democratic Republic of the 35

Yemen 35

Saint Kitts and Nevis 35

Guyana 35

France 34.4

Brazil 34

Venezuela 34

Pakistan 34

India 34

OECD Average 28.5

Country Statutory Corporate Rate

Effective Rate

“Tax Code Inefficiency”

Benin 33.99% 7.14% 26.85%

Cambodia 20% 3.65% 16.35%

Belgium 33.99% 19.12% 14.87%

Nigeria 30% 16.76% 13.24%

Panama 25% 12.21% 12.79%

United States 40% 28.09% 11.91%

Philippines 30% 19.35% 10.65%

Zambia 35% 24.69% 10.31%

Sierra Leone 30% 20.54% 9.46%

Estonia 21% 12.58% 8.42%

India 33.99% 26.41% 7.58%

Countries with largest gap between statutory and effective tax rates

Source: http://aswathdamodaran.blogspot.com/2015/01/the-tax-story-in-2015-myths.html

Country Ranking

Estonia 1

Switzerland 3

Luxembourg 6

Ireland 15

Germany 20

U.K. 21

Canada 24

Japan 25

United States 32

France 34

Corporate Tax 33

Individual Taxes 30

International Tax Rules 34

Property Taxes 31

Consumption Taxes 4

The Path to 32nd: How the U.S. ranked on individual metrics

Note: “The Tax Foundation’s International Tax Competitiveness Index (ITCI) measures the degree to which the 34 OECD countries’ tax systems promote competitiveness through low tax burdens on business investment and neutrality through a well-structured tax code.” Source: Tax Foundation, “International Tax Competitiveness Index,” Table 1, September 2015

Selected OECD countries ranked by tax competitiveness

The immovable objects

• Extenders are already expired

• Highway trust fund exhaustion on the horizon (again)

• Debt limit suspension ended March 15, 2015, but Treasury can use extraordinary measures to extend the “X-Date” for several months

• The upcoming Supreme Court decision in King v. Burwell (tax credit subsidy case) could create substantial pressure on Congress to address ACA issues

• 2016 Presidential campaign is already underway

Question: what should we read into recent accomplishments in Congress, including a permanent fix of the Medicare physician payment system and passage of budget blueprints in both the House and Senate?

Immovable object #1: Congress facing multiple deadlines; do recent actions create reason for optimism?

Immovable object #2: Which Tax Plan Do You Prefer?

Plan Top Rate

Plan A 45%

Plan B 32%

First $14 trillion of individual’s income exempt from tax Applies to first dollar of income; no deductions, credits, exclusions, or exemptions; 32% rate also applies to all income, including capital gains, dividends, and currently tax-exempt interest

Key Features

Immovable object #3: Tax reform means tough choices on the individual side

• New limits on deductions for charitable contributions and mortgage interest (Camp)

• Immediate and full repeal of most other itemized deductions, including for state & local taxes (Camp)

• 10% surtax applied to a broad base of income (but with exception for manufacturing income) (Camp)

• Dollar-for-dollar phase-out of exclusion of capital gains on sale of principal residence when joint filer’s MAGI exceeds $500K (Camp)

• Top individual tax rate of 35%, but applied to married couples with taxable incomes over $140,000 (Wyden)

Immovable object #4: Tax reform means tough choices on the business side, too

• Slower cost recovery (Baucus, Camp, Wyden)

• Amortize some or all of R&E and advertising expenditures (Baucus, Camp)

• Phase-out Section 199 manufacturing deduction (Camp, Wyden)

• Prevent the further migration of C Corps into REITs and PTPs (would also affect some existing entities) (Camp)

• Repeal deferral (Wyden)

• Restrict employee compensation deduction to first $1M (no performance-based exception) (Camp)

• Limit value of corporate interest deduction (Wyden)

• Tax carried interest as ordinary income (Camp)

Immovable object #5: Still can’t decide whether tax revenues are high enough or need to rise further

Note: The updated May baseline for current law basically mirrors the House GOP budget but for some minor technical adjustments. Source: House Budget Committee, Path to Prosperity (FY14)—Summary Tables (Mar. 2013); Senate Budget Committee, Foundation for Growth (FY14)--Summary Tables (Mar.2013)

House GOP FY14 Budget Proposal

(in trillions) $923 B

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Current Law Revenues

What is the “right” revenue number?

Note*: Outlays are not included, but total approximately $90B for the modification of the AOTC and child tax credit. Source: Congressional Budget Office (CBO), The Budget and Economic Outlook: 2014-2024 (Aug 2014); Joint Committee on Taxation (JCT) Description of H.R.2807, H.R.4619, H.R.4719, H.R.3134, H.R.4691, H.R.4718 (May 29, 2014); JCT Description of H.R. 4429, H.R.4438, H.R.4453, H.R.4454, H.R.4457, H.R. 4464 (April 29, 2014); JCT Description of H.R.3393 and H.R.4935 (June 25, 2014)

% of GDP

$730 billion*

Why the baseline matters: Twelve revenue offsets from H.R. 1

Amortize R&E costs: $193b SIFI tax: $86b

New limits on deductibility of executive comp: $12b

Amortize advertising costs: $167b

Repeal credit for adoption expenses: $5b

End tax exclusion of certain fringe benefits: $39b

Phased-out repeal of Sec. 199 deduction: $116b

Modify rules for excluding gain on home sale: $16b

Tax certain carried interest as ordinary income: $3b

LIFO repeal: $79b Repeal percentage depletion: $5b

Related party reinsurance rule changes:$9b

Immovable object #6: How do we know if Americans are paying a “fair” amount of tax?

Note: Before Tax Income is the sum of market income and government transfers. Note: The breaks are (in 2011$) for a one person household are: $0(1st), $24,000(2nd), $36,200(3rd), $51,900(4th), $77,800(5th), $319,900(Top 1%); For a four-person household, the breaks are: $0(1st), $48,100(2nd), $72,400(3rd), $103,800(4th), $155,500(5th) and $639,800(Top 1%) Source: CBO, The Distribution of Household Income and Federal Taxes, 2011 (Nov. 2014)

-10%0%

10%20%30%40%50%60%70%80%90%

1st 2nd 3rd 4th 5th Top 1%Before-Tax Income (2011)Share of Individual Income Tax Liabilities (2011)Share of Total Federal Tax Liabilities (2011)

Distribution of tax and income, by quintile

Segmented Tax Reform?

• “Business only” or “International only” comes with their own policy and political concerns

Tax Reform via Budget Reconciliation?

• Recent uses: 1996 welfare reform, 2001 tax cuts, 2003 tax cuts, 2010 health reform law

• Legislation moved under reconciliation may pass with 51 votes, but substantial procedural hurdles remain

• Not veto proof - would the GOP want to force through tax reform that gets less than 60 votes and is then vetoed by the President?

Potential policy release valves?

Immovable object #7: The current state of politics creates substantial barriers to action

Percentage of Americans who think Hillary Clinton’s decision to maintain a private email account while Secretary of State is a “very serious problem”

Republicans Democrats

Source: Huffington Post / YouGov poll‏

Growing number of Americans don’t want their children to marry someone from the other political party

Republicans Democrats

Source: New York Times, How Did Politics Get So Personal Thomas B. Edsall, January 15, 2015‏

2010: Percentage of parents who would be “upset”

1960: Percentage of parents who would be “displeased”

Measuring the increasing ideological divide in Congress

Note: 93% of Republican House members represent districts carried by Republican Mitt Romney in 2012 and 96% of Democrat House members represent districts won by President Obama. In 1993, there were 99 crossover seats, there are 26 crossover seats today. (A keep-the-bums-in mood may prevail in midterm election, Los Angeles Times, Jan. 1, 2014) Source: Norman J. Ornstein, Thomas E. Mann, Michael J. Malbin and Andrew Rugg, Vital Statistics on Congress, Tables 8-9 & 8-10, available at www.brookings.edu/vitalstats.

Senate Democrats Senate Republicans

Center

More Liberal‏ More Conservative‏

Turnout among primary voters has fallen to record lows…

23.8 21.5 22.0 19.4 18.6 19.1 16.1 18.3 14.8 0

1020304050

Primary Voters in Midterm Elections (as a Percentage of

Eligible Population) Since 1982

Sources: Deloitte analyses of data from the Center for the Study of the American Electorate and the Bipartisan Policy Center‏

…. While primary voters are more partisan than the general electorate

Source: Pew Research Center, Political Polarization in Action: Insights into the 2014 Election from the American Trends Panel‏

2010 Mid-Term: Primary Voters Compared to Democrat & Republican Parties Generally

29% 43%

32% 33%

35% 20%

All Democrats Primary Voters

ModerateMostly LiberalConsistent Liberal

23% 37%

31% 17%

All Republicans Primary VotersModerate

% of Total

Presidential leadership could help. But …

Source: Gallup Politics “Obama’s Fourth Year in Office Ties as Most Polarized Ever,” Jan. 24, 2013, available at http://www.gallup.com/poll/160097/obama-fourth-year-office-ties-polarized-ever.aspx. For up-to-date Obama ratings, see http://www.gallup.com/poll/124922/Presidential-Approval-Center.aspx (last visited January 20, 2015); others are averages for entire term.

Nixon Ford Carter Reagan Bush 41 Clinton Bush 43 Obama

President's party Other party

41% 31%

55% 61%

Average Presidential Approval Ratings, by Party Affiliation

Six final thoughts and takeaways

Final thoughts and takeaways

1. Extenders debate is the “Groundhog Day” of tax policy

2. Key players are gearing up to take another run at tax reform in 2015; funding shortfall for the highway bill could be the needed action-forcing event

3. Presidential leadership is the Catch-22 of tax reform

4. Allowing the broader politics of tax reform to be defined by a single variable – marginal tax rates – makes compromise especially difficult

5. Congress members’ stated desire to “make the tough choices” sometimes exceeds their willingness to actually do so, especially if final outcome is uncertain

6. Even with the timing of passage of tax reform uncertain at best, it would be a mistake to ignore it now:

• Tax reform remains inevitable; work being done now (along with what Camp et al worked on last year) likely will form the basis of what is eventually enacted

• The OECD BEPS project introduces additional risk into the tax policy environment

Jonathan Traub joined the Washington National Tax practice of Deloitte Tax LLP in June 2012 as managing principal of its Tax Policy Group. Jon leads a team that identifies, evaluates and monitors legislative proposals, and interprets the practical issues surrounding the application of tax proposals on behalf of Deloitte’s clients. Jon assists Deloitte’s clients in their efforts to stay aware of the numerous and often complicated debates in tax policy.

With considerable career experience in the legislative arena, especially in tax policy, Jon is able to provide clients with critical insights on the most complicated issues impacting their businesses and offer recommendations and guidance. His immense experience on Capitol Hill has provided him the valuable ability to anticipate legislation and the various impacts associated with new or revamped policies, which will in turn prove essential to the success of clients’ businesses.

Jon was previously the staff director for the Committee on Ways and Means of the U.S. House of Representatives, his most recent senior staff position in the U.S. House of Representatives. During his tenure as Staff Director for the Committee on Ways and Means, Jon was responsible for developing legislative policies and strategy on issues in the Committee’s jurisdiction, including taxes, healthcare and trade.

He also played a key role in the Tax Relief Act of 2010 and the Budget Control Act (debt limit increase, 2011). He was also deeply involved in the work of the Joint Select Committee on Deficit Reduction, better known as the Super Committee.

Jon received his bachelor’s degree from Haverford College and juris doctor from the University of Virginia.

Phone: +1 202 220 2055 Email: jtraub@deloitte.com

Speaker bio

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates and related entities, shall not be responsible for any loss sustained by any person who relies on this presentation.

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