CLIENT LOGIN


TREASURY CONSIDERATIONS

BUSINESS USES

TAX RATES

Deferred compensation is tax revenue neutral to positive for the government. It is not a "tax shelter," and does not constitute "tax evasion." Tax-deferred compensation affects the timing of taxation. When the compensation becomes taxable, it is taxable as ordinary income. In essence, it is a public-private partnership in a long term investment.

Unlike with qualified deferred compensation, an employer does not deduct nonqualified deferred compensation until it becomes taxable to the service provider. If the employer’s tax rate is as high as the service provider’s then nonqualified deferred compensation does not cause the Treasury to collect less tax currently. Although the service provider defers tax, and thus saves on current taxes, the employer’s current taxes go up by a similar amount, assuming the employer has current taxable income.

Even in cases where the service recipient is indifferent to deferred compensation, the government should benefit. For example, if $100 is taxed currently, the Treasury collects about $40. If the compensation were deferred for 10 years, and it doubles, Treasury would collect twice as much, or $80. If the government’s cost of money is less than the return on the deferred comp, the government wins.

Controversy over Revenue Estimating

Have you ever wondered why a tax bill can produce so many different "official" forecasts of revenue effects? For example, according to the Joint Committee on Taxation (JCT), the American Taxpayer Relief Act of 2012 will reduce revenue by $3.9 trillion over the next 10 years. According to the White House, the Act will raise revenues by $600 billion.

As Compared to What?

The JCT used a "current law" baseline. It assumed that the Bush tax cuts would expire. The White House, on the other hand, used a "current policy" baseline, and assumed the tax cuts would have continued.

Static vs Dynamic

The JCT models have been characterized as "static" by critics who advocate that the models should take into account macroeconomic effects. Many experts disagree, however, and advise that projecting effects on GDP and jobs would undermine accuracy and confidence in the projections.

10-Year Window

The JCT considers only effects during the 10 years following the tax change. It ignores tax effects outside the window, and gives equal weight to effects in each year of the budget window. In other words, $1 billion in the 10th year is counted the same as $1 billion in the first year.