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Monday, March 5, 2001 Deloitte & Touche OnLine Bush Budget Estimates Conservative, Tax Cut Fully Paid For, Officials Say In two days of hearings before the House and Senate Budget Committees, Treasury Secretary Paul O’Neill and Office of Management and Budget Director Mitch Daniels defended President Bush’s budget package as “prudent” and “clear” in its intent and design, and argued that it fully financed his proposed 10-year, $1.6 trillion tax cut. The president sent a budget blueprint to Congress on February 28. He will submit a more detailed budget plan in late March or early April. Democratic Critique -- Senate Budget Committee Democrats on March 1 assaulted Bush’s tax cut plan on several fronts, telling O’Neill that it costs too much, that it favors the wealthy, and that it would be partially paid for with Medicare and Social Security funds. Ranking Democrat Kent Conrad of North Dakota insisted that the president’s numbers do not add up, arguing that just $300 billion would be left for unexpected contingencies -- not the $1.4 trillion the administration claims. The $1.1 trillion difference would be paid for with Medicare and Social Security funds, he said. (Conrad has suggested that Democrats could use part of the surplus to repay the long-term debt to prefund Social Security liabilities, putting money into private retirement accounts modeled after the Thrift Savings Plan offered to government employees, which allows individuals to choose from a limited number of investment options.) For his part, O’Neill maintained that the budget is conservative because it does not factor in the economic stimulus benefits of the tax cuts. O’Neill also stressed that the administration will not touch Social Security or Medicare funds.
Daniels, who testified before the committee on March 2, emphasized that Bush’s estimated budget revenues would grow at only 5 percent a year -- two percentage points below the average $2 trillion,” he said. Sen. Robert Byrd, D-W.Va., attacked the administration for not adhering to congressional pay-go rules, saying he cannot imagine a greater abuse of pay-go than to enact a $2 trillion tax without spending or revenue-raiser offsets, as the rules require. O’Neill replied that pay-go was written for a deficit era, not a surplus era. Trigger Happy? -- The Treasury Secretary reiterated his opposition to a trigger mechanism that would halt a tax cut if surpluses did not materialize. According to O’Neill, the trigger proposal, which has been put forward by congressional Democrats and moderate Republicans, would distort economic choices. O’Neill told the House Budget Committee that he would support a “reverse trigger” that would free up even more money for tax cuts if surpluses were larger than anticipated. For example, if non-Social Security surpluses at the close of a fiscal year were to exceed $25 billion, 60 to 70 percent of the residual should be returned to taxpayers, he explained. [Federal Reserve Board Chairman Alan Greenspan took a different approach to triggers in testimony before the House Budget Committee on March 2. For details, see sidebar.]
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No Credit Against Payroll Taxes -- The Treasury Secretary also dismissed proposals to allow an income tax credit against payroll taxes. Some Democrats have recently suggested this approach, which would give lower-wage workers a greater benefit than they would receive under the Bush tax cut plan. But O’Neill told the House Budget Committee that “it makes perfectly good sense to expect people to pay Social Security taxes” and that people should at a minimum put away funds for their own futures. Moreover, offering credits against payroll taxes could give the appearance of turning Social Security into a “welfare program,” he said. Rap on Reconciliation -- Senate Budget Committee Democrats also attacked the reconciliation process the GOP will use to bring a tax bill to the Senate floor, saying it would shortchange debate. (Reconciliation protects against filibuster and limits debate in the Senate.) Committee Chairman Pete Domenici, R-N.M., countered that Democrats have often used reconciliation to suit their own purposes, and signaled that the reconciliation issue will not be debated in committee. You Didn’t Hear This From Me -- Acknowledging that he “probably should not be saying this,” O’Neill told the House Budget Committee that the Bush administration wants to “overhaul the tax code” after it tackles reducing taxes and ensuring Social Security’s solvency. He did not indicate what changes he would like to see made. Service Issues Taxpayer-Friendly Proposed Guidance on Domestic Reverse Hybrid Entities The Internal Revenue Service has issued generally
taxpayer-favorable proposed regulations (REG-107101-00) on the treatment
of payments made by domestic reverse hybrid entities to
foreign interest holders. (Reverse hybrid entities are entities
that are not fiscally transparent under U.S. law, but fiscally transparent
under a foreign jurisdiction’s law.) Under the proposed regs,
which were published on February 26, the interest holder would be eligible
for treaty benefits such as lower withholding rates for payments received
from a domestic reverse hybrid entity. There is an exception to the
general rule for deductible treaty-benefited payments, such as interest,
that are made by the domestic reverse hybrid entity to a related foreign
interest holder. If the payment is made and the hybrid entity also
received a dividend from a related domestic entity, the payment would be
recharacterized as a dividend payment for all purposes of the Code. Thus,
the withholding rate on dividends would apply to the outbound payment, and
the domestic reverse hybrid entity’s interest deduction would be
disallowed. These regulations would apply
to payments made on or after the date final regulations are published in
the Federal Register. |
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Final Regs Offer New Life for FSC Redeterminations The Internal Revenue Service on March 2 issued final foreign sales corporation (FSC) regulations that provide taxpayers with time limits for filing grouping redeterminations. The regulations liberalize the previous rule in temporary regulations issued on March 2, 1998. That rule placed severe time limits on the ability of FSCs to change groupings or adopt transactional pricing. The final regulations provide that --
The final regs have added a special rule that allows taxpayers to make FSC grouping redeterminations for up to one year after they are notified that their FSC tax return was selected for audit. Bush Budget Includes Some Good News for IRS Staffing Plans President Bush has just made life a little easier for Internal Revenue Commissioner Charles Rossotti. In his fiscal year 2002 budget blueprint released February 28, the president included $400 million for the IRS to modernize its computer system as well as funds for the IRS to hire 4,000 additional employees through its Staffing Administration for Balance and Equity (STABLE) initiative. The STABLE initiative was begun by the IRS in FY 2001. In presenting his FY 2001 budget to Congress, Rossotti said that one of the reasons for his agency’s declining audit and collection rates was the lack of resources. The IRS’s workforce had declined over the last decade and because of funding constraints no hiring had been done for at least five years. Rossotti said that the additional staff hired through the STABLE program coupled with the modernization of the agency’s computer systems would enable the IRS to improve its customer service and collection activities. Congress reluctantly agreed to fund the STABLE program and the agency began hiring additional staff last year. In a March 1 speech before members of the Federal Bar Association, the commissioner said that collection rates will stabilize this year as a result of the new hires. Earlier published reports had indicated that the Bush administration would cut the agency’s FY 2002 budget. Although complete details on the administration’s budget are not yet available, it appears that the IRS will be able to complete hiring under the STABLE program.
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