Wednesday, May 24, 2017

President’s Fiscal Year 2018 Budget Proposals

Comments for the Record
United States House of Representatives
U.S. Secretary of the Treasury Steven Mnuchin
Wednesday, May 24, 2017,2:00 P.M.
1100 Longworth House Office Building
By Michael G. Bindner
Center for Fiscal Equity

Chairman Brady and Rankin Members Neal, thank you for the opportunity to submit these comments for the record to the Committee on Ways and Means on the FY 2018 Budget.  As usual, we will preface our comments with our comprehensive four-part approach, which will provide context for our comments.
  • A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure very American pays something.
  • Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates between 5% and 25%.  
  •  Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.
  • A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support,  health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.
News reports indicate that the Administration proposes deep cuts in entitlement programs benefiting the poor. We agree that these programs are non-functional and should be replaced by a $15 minimum wage or a literacy and job training program paying the same wage to participants, a $1000 child tax credit per month per dependent through the net business receipts tax described above and health coverage mandated through the employer or training program provider. Medicaid for the disabled and elderly should be entirely federalized. Don’t just make smalls, which is torture. Go big or go home.
These proposals are identical to what we have stated previously, but they bore highlighting. Let us return to the usual details and analysis.
We have no proposals regarding environmental taxes, customs duties, excise taxes and other offsetting expenses, although increasing these taxes would result in a lower VAT. American competitiveness is enhanced by enacting a VAT, as exporters can shed some of the burden of taxation that is now carried as a hidden export tax in the cost of their products.  The NBRT will also be zero rated at the border to the extent that it is not offset by deductions and credits for health care, family support and the private delivery of governmental services.
The proposed Destination-Based Cash Flow Tax is a compromise between those who hate the idea of a value-added tax and those who seek a better deal for workers in trade. It is not a very good idea because it does not meet World Trade Organization standards, though a VAT would. It would be simpler to adopt a VAT on the international level and it would allow an expansion of family support through an expanded child tax credit. Many in the majority party oppose a VAT for just that reason, yet call themselves pro-life, which is true hypocrisy. Indeed, a VAT with enhanced family support is the best solution anyone has found to grow the economy and increase jobs.
Some oppose VATs because they see it as a money machine, however this depends on whether they are visible or not.  A receipt visible VAT is as susceptible to public pressure to reduce spending as the FairTax is designed to be, however unlike the FairTax, it is harder to game.  Avoiding lawful taxes by gaming the system should not be considered a conservative principle, unless conservatism is in defense of entrenched corporate interests who have the money to game the tax code.
Our VAT rate estimates are designed to fully fund non-entitlement domestic spending not otherwise offset with dedicated revenues.  This makes the burden of funding government very explicit to all taxpayers.  Nothing else will reduce the demand for such spending, save perceived demands from bondholders to do so – a demand that does not seem evident given their continued purchase of U.S. Treasury Notes.
Value Added Taxes can be seen as regressive because wealthier people consume less, however when used in concert with a high-income personal income tax and with some form of tax benefit to families, as we suggest as part of the NBRT, this is not the case.
The shift from an income tax based system to a primarily consumption based system will dramatically decrease participation in the personal income tax system to only the top 20% of households in terms of income.  Currently, only roughly half of households pay income taxes, which is by design, as the decision has been made to favor tax policy to redistribute income over the use of direct subsidies, which have the stink of welfare.  This is entirely appropriate as a way to make work pay for families, as living wage requirements without such a tax subsidy could not be sustained by small employers.
The income surtax is earmarked for overseas military, naval sea and international spending because this spending is most often deficit financed in times of war.  Earmarking repayment of trust funds for Social Security and Medicare, acknowledges the fact that the buildup of these trust funds was accomplished in order to fund the spending boom of the 1980s without reversing the tax cuts which largely benefited high income households.
Earmarking debt repayment and net interest in this way also makes explicit the fact that the ability to borrow is tied to the ability to tax income, primarily personal income.  The personal or household liability for repayment of that debt is therefore a function of each household’s personal income tax liability.  Even under current tax law, most households that actually pay income taxes barely cover the services they receive from the government in terms of national defense and general government services.  It is only the higher income households which are truly liable for repayment of the national debt, both governmental and public.
If the debt is to ever be paid back rather than simply monetized, both domestically and internationally (a situation that is less sustainable with time), the only way to do so without decreasing economic growth is to tax higher income earners more explicitly and at higher rates than under current policy, or even current law.
The decrease in economic class mobility experienced in recent decades, due to the collapse of the union movement and the rapid growth in the cost of higher education, means that the burden of this repayment does not fall on everyone in the next generation, but most likely on those who are living in high income households now.
Let us emphasize the point that when the donors who take their cues from Americans for Tax Reform bundle their contributions in support of the No Tax Pledge, they are effectively burdening their own children with future debt, rather than the entire populace.  Unless that fact is explicitly acknowledged, gridlock over raising adequate revenue will continue.
CBO projections on the size of the debt and the role of Net Interest are troubling, however, in that they show that while most discretionary and entitlement spending are projected to remain flat while net interest is due to explode.  It is helpful to explore the reasons for this.  This explosion essentially fuels the growth of the growth of the Dollar as the world’s currency.  Essentially, this means that we pay our expenses with taxation (even without adopting the Center for Fiscal Equity Plan) while we roll over our debt without repaying it.  This seems like a wonderful way for American consumers to continue to live like imperial Rome, however it cannot last.
There are two possible ends to this gravy train.  The first is the internationalization of the Dollar, the Federal Reserve and our entire political system into a world currency or government and its concurrent loss of national sovereignty or the eventual creation of rival currencies, like a tradable Yuan or a consolidated European Debt and Income Tax to back its currency.  In the prior case, all nations which use the Dollar will contribute to an expanded income tax to repay or finance the interest on the global debt.  In the second case, the American taxpayer will be required to pay the debt back – and because raising taxes on all but the wealthy will hurt the economy, it will be the wealthy and their children who will bear the burden of much higher tax levies.
To avert either crisis, there are two possibilities.  The first is the elimination of deductions, including the Charitable Deduction itemized on personal income taxes – especially for the wealthy.  If the charitable sector, from the caring community to the arts, industrial and education sectors, convince wealthier taxpayers to fight for this deduction, then the only alternative is higher rates than would otherwise occur, possibly including a much more graduated tax system.
Unlike other proposals, a graduated rate for the income surtax is suggested, as at the lower levels the burden of a higher tax rate would be more pronounced.  More rates make the burden of higher rates easier to bear, while providing progressivity to the system rather than simply offsetting the reduced tax burden due to lower consumption and the capping of the payroll tax for Old Age and Survivors Insurance.
One of the most oft-cited reforms for dealing with the long-term deficit in Social Security is increasing the income cap to cover more income while increasing bend points in the calculation of benefits, the taxability of Social Security benefits or even means testing all benefits, in order to actually increase revenue rather than simply making the program more generous to higher income earners.  Lowering the income cap on employee contributions, while eliminating it from employer contributions and crediting the employer contribution equally removes the need for any kind of bend points at all, while the increased floor for filing the income surtax effectively removes this income from taxation.  Means testing all payments is not advisable given the movement of retirement income to defined contribution programs, which may collapse with the stock market – making some basic benefit essential to everyone.
Moving the majority of Old Age and Survivors Tax collection to a consumption tax, such as the NBRT, effectively expands the tax base to collect both wage and non-wage income while removing the cap from that income.  This allows for a lower tax rate than would otherwise be possible while also increasing the basic benefit so that Medicare Part B and Part D premiums may also be increased without decreasing the income to beneficiaries.
If personal accounts are added to the system, a higher rate could be collected, however recent economic history shows that such investments are better made in insured employer voting stock rather than in unaccountable index funds, which give the Wall Street Quants too much power over the economy while further insulating ownership from management.  Too much separation gives CEOs a free hand to divert income from shareholders to their own compensation through cronyism in compensation committees, as well as giving them an incentive to cut labor costs more than the economy can sustain for purposes of consumption in order to realize even greater bonuses.  Employee-ownership ends the incentive to enact job-killing tax cuts on dividends and capital gains, which leads to an unsustainable demand for credit and money supply growth and eventually to economic collapse similar to the one most recently experienced.
The NBRT base is similar to a Value Added Tax (VAT), but not identical. Unlike a VAT, an NBRT would not be visible on receipts and should not be zero rated at the border – nor should it be applied to imports. While both collect from consumers, the unit of analysis for the NBRT should be the business rather than the transaction. As such, its application should be universal – covering both public companies who currently file business income taxes and private companies who currently file their business expenses on individual returns.
In the long term, the explosion of the debt comes from the aging of society and the funding of their health care costs.  Some thought should be given to ways to reverse a demographic imbalance that produces too few children while life expectancy of the elderly increases.
Unassisted labor markets work against population growth.  Given a choice between hiring parents with children and recent college graduates, the smart decision will always be to hire the new graduates, as they will demand less money – especially in the technology area where recent training is often valued over experience.
Separating out pay for families allows society to reverse that trend, with a significant driver to that separation being a more generous tax credit for children.  Such a credit could be “paid for” by ending the Mortgage Interest Deduction (MID) without hurting the housing sector, as housing is the biggest area of cost growth when children are added.  While lobbyists for lenders and realtors would prefer gridlock on reducing the MID, if forced to chose between transferring this deduction to families and using it for deficit reduction (as both Bowles-Simpson and Rivlin-Domenici suggest), we suspect that they would chose the former over the latter if forced to make a choice.  The religious community could also see such a development as a “pro-life” vote, especially among religious liberals.
Enactment of such a credit meets both our nation’s short term needs for consumer liquidity and our long term need for population growth.  Adding this issue to the pro-life agenda, at least in some quarters, makes this proposal a win for everyone.
The expansion of the Child Tax Credit is what makes tax reform worthwhile. Adding it to the employer levy rather than retaining it under personal income taxes saves families the cost of going to a tax preparer to fully take advantage of the credit and allows the credit to be distributed throughout the year with payroll. The only tax reconciliation required would be for the employer to send each beneficiary a statement of how much tax was paid, which would be shared with the government. The government would then transmit this information to each recipient family with the instruction to notify the IRS if their employer short-changes them. This also helps prevent payments to non-existent payees.
Assistance at this level, especially if matched by state governments may very well trigger another baby boom, especially since adding children will add the additional income now added by buying a bigger house. Such a baby boom is the only real long term solution to the demographic problems facing Social Security, Medicare and Medicaid, which are more demographic than fiscal. Fixing that problem in the right way definitely adds value to tax reform.
The NBRT should fund services to families, including education at all levels, mental health care, disability benefits, Temporary Aid to Needy Families, Supplemental Nutrition Assistance, Medicare and Medicaid. If society acts compassionately to prisoners and shifts from punishment to treatment for mentally ill and addicted offenders, funding for these services would be from the NBRT rather than the VAT.
The NBRT could also be used to shift governmental spending from public agencies to private providers without any involvement by the government – especially if the several states adopted an identical tax structure. Either employers as donors or workers as recipients could designate that revenues that would otherwise be collected for public schools would instead fund the public or private school of their choice. Private mental health providers could be preferred on the same basis over public mental health institutions. This is a feature that is impossible with the FairTax or a VAT alone.
To extract cost savings under the NBRT, allow companies to offer services privately to both employees and retirees in exchange for a substantial tax benefit, provided that services are at least as generous as the current programs. Employers who fund catastrophic care would get an even higher benefit, with the proviso that any care so provided be superior to the care available through Medicaid. Making employers responsible for most costs and for all cost savings allows them to use some market power to get lower rates, but not so much that the free market is destroyed.  Increasing Part B and Part D premiums also makes it more likely that an employer-based system will be supported by retirees.
Enacting the NBRT is probably the most promising way to decrease health care costs from their current upward spiral – as employers who would be financially responsible for this care through taxes would have a real incentive to limit spending in a way that individual taxpayers simply do not have the means or incentive to exercise. While not all employers would participate, those who do would dramatically alter the market. In addition, a kind of beneficiary exchange could be established so that participating employers might trade credits for the funding of former employees who retired elsewhere, so that no one must pay unduly for the medical costs of workers who spent the majority of their careers in the service of other employers.
Conceivably, NBRT offsets could exceed revenue. In this case, employers would receive a VAT credit.
In testimony before the Senate Budget Committee, Lawrence B. Lindsey explored the possibility of including high income taxation as a component of a Net Business Receipts Tax. The tax form could have a line on it to report income to highly paid employees and investors and pay surtaxes on that income.
The Center considered and rejected a similar option in a plan submitted to President Bush’s Tax Reform Task Force, largely because you could not guarantee that the right people pay taxes. If only large dividend payments are reported, then diversified investment income might be under-taxed, as would employment income from individuals with high investment income. Under collection could, of course, be overcome by forcing high income individuals to disclose their income to their employers and investment sources – however this may make some inheritors unemployable if the employer is in charge of paying a higher tax rate. For the sake of privacy, it is preferable to leave filing responsibilities with high income individuals.
Dr. Lindsey also stated that the NBRT could be border adjustable.  We agree that this is the case only to the extent that it is not a vehicle for the offsets described above, such as the child tax credit, employer sponsored health care for workers and retirees, state-level offsets for directly providing social services and personal retirement accounts.  Any taxation in excess of these offsets could be made border adjustable and doing so allows the expansion of this tax to imports to the same extent as they are taxed under the VAT.  Ideally, however, the NBRT will not be collected if all employers use all possible offsets and transition completely to employee ownership and employer provision of social, health and educational services.

Thank you for the opportunity to address the committee.  We are, of course, available for direct testimony or to answer questions by members and staff.

Tuesday, May 23, 2017

Increasing U.S Competitiveness and Preventing American Jobs from Moving Overseas

Comments for the Record
United States House of Representatives
and Preventing American Jobs from Moving Overseas
How Border Adjustment and Other Policies Will Boost Jobs,
Investment, and Growth in the U.S
Tuesday, May 23, 2017, 10:00 A.M.
1100 Longworth House Office Building
By Michael G. Bindner
Center for Fiscal Equity

Chairmen Brady and Roskam and Ranking Members Neal and Doggett, thank you for the opportunity to submit these comments for the record to the Committee on Ways and Means and the Tax Policy Subcommittee.  
These comments continue the conversation on Tax Reform over the past several years, including the most recent hearing of May 18th. Many of our comments are a restatement of those made in May of last year on Member Day on Tax Reform.
The Center offered a flurry of comments for the record during that period where Chairman Camp and his subcommittee held almost weekly hearings on tax reform, partly because tax reform was seen as a way to make lower taxes enacted by President Bush permanent, although the Republican and Democratic caucuses had differing views on whether there should be increased revenue from wealthier taxpayers, with the bipartisan Bowles-Simpson and Domenici-Rivlin commissions arguing for revenue positive reforms.  
Chairman Camp offered his own comprehensive reform, which was essentially a “school solution” which lowered rates and broadened the base.  The approach harkened back to the Tax Reform of 1986, although the historical model had its problems – the first being that it lowered rates on the highest taxpayers to such an extent that they had an incentive to demand labor cost savings with rewards for CEOs who accomplished that mission, leading to wage stagnation that plagues the economy even today, as well as too much money available for investment – leading ultimately to investments in home mortgages that caused the Savings and Loan crisis and the 2008 market crash.  The second problem, also leading to the mortgage crisis and market crash was the deductibility of second mortgage interest, which encouraged borrowers in an ever increasing housing market to use their homes as an ATM machine.  The Center for Fiscal Equity hopes that we do not go this way again.
President Obama offered solutions that year much like those of Domenici-Rivlin or Bowles-Simpson. Of course, after he secured passage of the American Tax Relief Act of 2013, which made the tax cuts for the bottom 98% of taxpayers permanent while renewing the Clinton era rates for the top 2%, all talk of tax reform ended, save for discussions of international and corporate reform, which seem to have gone nowhere until now.   Let us caution that due to the number of businesses which file under the individual code, no reform that is not entirely comprehensive is appropriate.
As usual, we will preface our comments with our comprehensive four-part approach, which will provide context for our comments.
  • A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure very American pays something.
  • Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates between 5% and 25%.  
  •  Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.
  • A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support,  health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.
The proposed Destination-Based Cash Flow Tax is a compromise between those who hate the idea of a value-added tax and those who seek a better deal for workers in trade. It is not a very good idea because it does not meet World Trade Organization standards, though a VAT would. It would be simpler to adopt a VAT on the international level and it would allow an expansion of family support through an expanded child tax credit. Many in the majority party oppose a VAT for just that reason, yet call themselves pro-life, which is true hypocrisy. Indeed, a VAT with enhanced family support is the best solution anyone has found to grow the economy and increase jobs. Even then, a DBCFT is preferable to the current corporate income tax system, so what is said below about VAT is at least partially applicable to the DCBFT (with any increased subsidies for Children added to the personal income tax).
Value added taxes act as instant economic growth, as they are spur to domestic industry and its workers, who will have more money to spend.  The Net Business Receipts Tax as we propose it includes a child tax credit to be paid with income of between $500 and $1000 per month.  Such money will undoubtedly be spent by the families who receive it on everything from food to housing to consumer electronics. 
American competitiveness is enhanced by enacting a VAT, as exporters can shed some of the burden of taxation that is now carried as a hidden export tax in the cost of their products.  The NBRT will also be zero rated at the border to the extent that it is not offset by deductions and credits for health care, family support and the private delivery of governmental services.
Some oppose VATs because they see it as a money machine, however this depends on whether they are visible or not.  A receipt visible VAT is as susceptible to public pressure to reduce spending as the FairTax is designed to be, however unlike the FairTax, it is harder to game.  Avoiding lawful taxes by gaming the system should not be considered a conservative principle, unless conservatism is in defense of entrenched corporate interests who have the money to game the tax code.

Our VAT rate estimates are designed to fully fund non-entitlement domestic spending not otherwise offset with dedicated revenues.  This makes the burden of funding government very explicit to all taxpayers.  Nothing else will reduce the demand for such spending, save perceived demands from bondholders to do so – a demand that does not seem evident given their continued purchase of U.S. Treasury Notes.
Value Added Taxes can be seen as regressive because wealthier people consume less, however when used in concert with a high-income personal income tax and with some form of tax benefit to families, as we suggest as part of the NBRT, this is not the case.
The shift from an income tax based system to a primarily consumption based system will dramatically decrease participation in the personal income tax system to only the top 20% of households in terms of income.  Currently, only roughly half of households pay income taxes, which is by design, as the decision has been made to favor tax policy to redistribute income over the use of direct subsidies, which have the stink of welfare.  This is entirely appropriate as a way to make work pay for families, as living wage requirements without such a tax subsidy could not be sustained by small employers.
Moving the majority of Old Age and Survivors Tax collection to a consumption tax, such as the NBRT (or even a DBCFT), effectively expands the tax base to collect both wage and non-wage income while removing the cap from that income.  This allows for a lower tax rate than would otherwise be possible while also increasing the basic benefit so that Medicare Part B and Part D premiums may also be increased without decreasing the income to beneficiaries.
If personal accounts are added to the system, a higher rate could be collected, however recent economic history shows that such investments are better made in insured employer voting stock rather than in unaccountable index funds, which give the Wall Street Quants too much power over the economy while further insulating ownership from management.  Too much separation gives CEOs a free hand to divert income from shareholders to their own compensation through cronyism in compensation committees, as well as giving them an incentive to cut labor costs more than the economy can sustain for purposes of consumption in order to realize even greater bonuses.  Employee-ownership ends the incentive to enact job-killing tax cuts on dividends and capital gains, which leads to an unsustainable demand for credit and money supply growth and eventually to economic collapse similar to the one most recently experienced.
The NBRT base is similar to a Value Added Tax (VAT), but not identical. Unlike a VAT, an NBRT would not be visible on receipts and should not be zero rated at the border – nor should it be applied to imports. While both collect from consumers, the unit of analysis for the NBRT should be the business rather than the transaction. As such, its application should be universal – covering both public companies who currently file business income taxes and private companies who currently file their business expenses on individual returns.
In the long term, the explosion of the debt comes from the aging of society and the funding of their health care costs.  Some thought should be given to ways to reverse a demographic imbalance that produces too few children while life expectancy of the elderly increases.
Unassisted labor markets work against population growth.  Given a choice between hiring parents with children and recent college graduates, the smart decision will always be to hire the new graduates, as they will demand less money – especially in the technology area where recent training is often valued over experience.
Separating out pay for families allows society to reverse that trend, with a significant driver to that separation being a more generous tax credit for children.  Such a credit could be “paid for” by ending the Mortgage Interest Deduction (MID) without hurting the housing sector, as housing is the biggest area of cost growth when children are added.  While lobbyists for lenders and realtors would prefer gridlock on reducing the MID, if forced to choose between transferring this deduction to families and using it for deficit reduction (as both Bowles-Simpson and Rivlin-Domenici suggest), we suspect that they would chose the former over the latter if forced to make a choice.  The religious community could also see such a development as a “pro-life” vote, especially among religious liberals.

Enactment of such a credit meets both our nation’s short term needs for consumer liquidity and our long term need for population growth.  Adding this issue to the pro-life agenda, at least in some quarters, makes this proposal a win for everyone.
The expansion of the Child Tax Credit is what makes tax reform worthwhile. Adding it to the employer levy rather than retaining it under personal income taxes saves families the cost of going to a tax preparer to fully take advantage of the credit and allows the credit to be distributed throughout the year with payroll. The only tax reconciliation required would be for the employer to send each beneficiary a statement of how much tax was paid, which would be shared with the government. The government would then transmit this information to each recipient family with the instruction to notify the IRS if their employer short-changes them. This also helps prevent payments to non-existent payees.
Assistance at this level, especially if matched by state governments may very well trigger another baby boom, especially since adding children will add the additional income now added by buying a bigger house. Such a baby boom is the only real long term solution to the demographic problems facing Social Security, Medicare and Medicaid, which are more demographic than fiscal. Fixing that problem in the right way definitely adds value to tax reform.
The NBRT should fund services to families, including education at all levels, mental health care, disability benefits, Temporary Aid to Needy Families, Supplemental Nutrition Assistance, Medicare and Medicaid. If society acts compassionately to prisoners and shifts from punishment to treatment for mentally ill and addicted offenders, funding for these services would be from the NBRT rather than the VAT.
The NBRT could also be used to shift governmental spending from public agencies to private providers without any involvement by the government – especially if the several states adopted an identical tax structure. Either employers as donors or workers as recipients could designate that revenues that would otherwise be collected for public schools would instead fund the public or private school of their choice. Private mental health providers could be preferred on the same basis over public mental health institutions. This is a feature that is impossible with the FairTax or a VAT alone.

To extract cost savings under the NBRT, allow companies to offer services privately to both employees and retirees in exchange for a substantial tax benefit, provided that services are at least as generous as the current programs. Employers who fund catastrophic care would get an even higher benefit, with the proviso that any care so provided be superior to the care available through Medicaid. Making employers responsible for most costs and for all cost savings allows them to use some market power to get lower rates, but not so much that the free market is destroyed.  Increasing Part B and Part D premiums also makes it more likely that an employer-based system will be supported by retirees.
Enacting the NBRT is probably the most promising way to decrease health care costs from their current upward spiral – as employers who would be financially responsible for this care through taxes would have a real incentive to limit spending in a way that individual taxpayers simply do not have the means or incentive to exercise. While not all employers would participate, those who do would dramatically alter the market. In addition, a kind of beneficiary exchange could be established so that participating employers might trade credits for the funding of former employees who retired elsewhere, so that no one must pay unduly for the medical costs of workers who spent the majority of their careers in the service of other employers.
Conceivably, NBRT offsets could exceed revenue. In this case, employers would receive a VAT credit.
In testimony before the Senate Budget Committee, Lawrence B. Lindsey explored the possibility of including high income taxation as a component of a Net Business Receipts Tax. The tax form could have a line on it to report income to highly paid employees and investors and pay surtaxes on that income.
The Center considered and rejected a similar option in a plan submitted to President Bush’s Tax Reform Task Force, largely because you could not guarantee that the right people pay taxes. If only large dividend payments are reported, then diversified investment income might be under-taxed, as would employment income from individuals with high investment income. Under collection could, of course, be overcome by forcing high income individuals to disclose their income to their employers and investment sources – however this may make some inheritors unemployable if the employer is in charge of paying a higher tax rate. For the sake of privacy, it is preferable to leave filing responsibilities with high income individuals.
Dr. Lindsey also stated that the NBRT could be border adjustable.  We agree that this is the case only to the extent that it is not a vehicle for the offsets described above, such as the child tax credit, employer sponsored health care for workers and retirees, state-level offsets for directly providing social services and personal retirement accounts.  Any taxation in excess of these offsets could be made border adjustable and doing so allows the expansion of this tax to imports to the same extent as they are taxed under the VAT. 
What is not needed are attempts to cut taxes on business or income to make capital more available.  There is plenty of capital available now.  It is not being used because demand is anemic.  The last time we tried cutting capital gains tax rates to spur growth we got the tech bubble.  People got capital for all sorts of projects for which there was no demand. Let us not repeat that mistake.
In the tech industry there exists the Computer-Aided Manufacturing – International Multi-Attribute Decision (MAD) Model.  The first element of the model is the market.  Not the stock market, but the product market.  Questions of the cost of capital are buried in Return on Investment figures and are of little importance.
If a committee staffer joined a tech firm and tried to push investments because of low tax rates, he would be fired as an ideologue and sent packing back to the committee.  If, however, he could promise more spending in the tech industry by the government – or even more money for social programs, then he would go far in industry.  Of course, if he could get a $15 minimum wage enacted (along with the measures suggested above), which would spur pent up demand by the working class, they might make him CEO.
Let’s not make the same mistakes as the late 90s.  Instead, give families what they need and business will succeed beyond our wildest dreams.

Thank you for the opportunity to address the committee.  We are, of course, available for direct testimony or to answer questions by members and staff.

Thursday, May 18, 2017

How Tax Reform Will Grow Our Economy and Create Jobs

Comments for the Record
United States House of Representatives
Hearing on How Tax Reform Will Grow Our Economy and Create Jobs
Thursday, May 18, 2017, 10:00 A.M.
1100 Longworth House Office Building
By Michael G. Bindner
Center for Fiscal Equity

Chairmen Brady and Roskam and Ranking Members Neal and Doggett, thank you for the opportunity to submit these comments for the record to the Committee on Ways and Means and the Tax Policy Subcommittee.  As usual, we will preface our comments with our comprehensive four-part approach, which will provide context for our comments.
  • A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure very American pays something.
  • Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates between 5% and 25%.  
  •  Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.
  • A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support,  health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.
First, allow us to address the current state of tax reform and the comments in the press release announcing this hearing and the recent remarks by the President about priming the pump. We will then identify how our four-part approach meets the goal of this hearing to create economic growth and more jobs. The latter should be familiar to those who read our comments submitted to the tax reform hearing of one year ago.
What the Center said in June of last year in response to the release of the Blueprint bears repeating.  We have tried the reduce rates and broaden the base. In 1986, it actually happened, although second mortgage interest was left deductible, leading quickly to the savings and loan crisis and eventually the 2008 Great Recession, abetted by capital gains cuts which gave us the tech bubble. Efforts to call tax cuts a prelude to growth ring hollow and even those economists who backed them no longer support such theory.
In The Economist, President Trump and Secretary Mnuchin cast doubt on their support for the DBCFT, instead preferring to simply cut rates for pump priming. This would mainly benefit the wealthy, which is ill advised.
Lower marginal tax rates for the wealthiest taxpayers lead them to demand lower labor costs. The benefit went to investors and CEOs because the government wasn’t taxing away these labor savings. In prior times, we had labor peace, probably to the extent of causing inflation, because CEOs got nothing back for their efforts to cut costs.
The tax reforms detailed here will make the nation truly competitive internationally while creating economic growth domestically, not by making job creators richer but families better off. The Center’s reform plan will give you job creation. The current blueprint and the President’s proposed tax cuts for the wealthy will not.
In September 2o11, the Center submitted comments on  Economic Models Available to the Joint Committee on Taxation for Analyzing Tax Reform Proposals. Our findings, which were presented to the JCT and the Congressional Budget Office (as well as the Wharton School and the Tax Policy Center), showed that when taxes are cut, especially on the wealthy, only deficit spending will lead to economic growth as we borrow the money we should have taxed. When taxes on the wealthy are increased, spending is also usually cut and growth still results. The study is available at  
and it is likely in use by the CBO and JTC in scoring tax and budget proposals. We know this because their forecasts and ours on the last Obama budget matched. Advocates for dynamic scoring should be careful what they wish for.
The national debt is possible because of progressive income taxation. The liability for repayment, therefore, is a function of that tax. The Gross Debt (we have to pay back trust funds too) is $19 Trillion. Income Tax revenue is roughly $1.8 Trillion per year. That means that for every dollar you pay in taxes, you owe $10.55 in debt. People who pay nothing owe nothing. People who pay tens of thousands of dollars a year owe hundreds of thousands. The answer is not making the poor pay more or giving them less benefits, either only slows the economy. Rich people must pay more and do it faster. My child is becoming a social worker, although she was going to be an artist. Don’t look to her to pay off the debt. Trump’s children and grandchildren are the ones on the hook unless their parents step up and pay more. How’s that for incentive?
The proposed Destination-Based Cash Flow Tax is a compromise between those who hate the idea of a value-added tax and those who seek a better deal for workers in trade. It is not a very good idea because it does not meet World Trade Organization standards, though a VAT would. It would be simpler to adopt a VAT on the international level and it would allow an expansion of family support through an expanded child tax credit. Many in the majority party oppose a VAT for just that reason, yet call themselves pro-life, which is true hypocrisy. Indeed, a VAT with enhanced family support is the best solution anyone has found to grow the economy and increase jobs.
Value added taxes act as instant economic growth, as they are spur to domestic industry and its workers, who will have more money to spend.  The Net Business Receipts Tax as we propose it includes a child tax credit to be paid with income of between $500 and $1000 per month.  Such money will undoubtedly be spent by the families who receive it on everything from food to housing to consumer electronics. 
The high income and inheritance surtax will take money out of the savings sector and put it into government spending, which eventually works down to the household level.  Growth comes when people have money and spend it, which causes business to invest.  Any corporate investment manager will tell you that he would be fired if he proposed an expansion or investment without customers willing and able to pay.  Tax rates are an afterthought.
Our current expansion and the expansion under the Clinton Administration show that higher tax rates always spur growth, while tax cuts on capital gains lead to toxic investments – almost always in housing.  Business expansion and job creation will occur with economic growth, not because of investment from the outside but from the recycling of profits and debt driven by customers rather than the price of funds.  We won’t be fooled again by the saccharin song of the supply siders, whose tax cuts have led to debt and economic growth more attributable to the theories of Keynes than Stockman.
Simplicity and burden reduction are very well served by switching from personal income taxation of the middle class to taxation through a value added tax.  For these people, April 15th simply be the day next to Emancipation Day for the District.  The child tax credit will be delivered with wages as an offset to the Net Business Receipts tax without families having to file anything, although they will receive two statements comparing the amount of credits paid to make sure there are no underpayments by employers or overpayments to families who received the full credit from two employers.  
Small business owners will get the same benefits as corporations by the replacement of both pass through taxation on income taxes and the corporate income tax with the net business receipts tax.  As a result, individual income tax filing will be much simpler, with only three deductions: sale of stock to a qualified ESOP, charitable contributions and municipal bonds – although each will result in higher rates than a clean tax bill.
For the Center, the other key motivator is expanding employee-ownership.  We propose to do that by including an NBRT deduction, to partially reduce income to Social Security, to purchase employer voting stock, with each employee receiving the same contribution, regardless of salary or wage level.  In short order, employees will have the leverage to systematically insist on better terms, including forcing CEO candidates to bid for their salaries in open auction, with employee elections to settle ties. 
Employee-ownership will also lead multi-national corporations to include its overseas subsidiaries in their ownership structure, while assuring that overseas and domestic workers have the same standard of living.  This will lead to both the right type of international economic development and eventually more multinationalism.
Simultaneously, the high income and inheritance surtax will be dedicated to funding overseas military and naval sea deployments, net interest payments (rather than rolling them over), refunding the Social Security Trust Fund and paying down the debt.
Both employee-ownership with CEO pay reduction and paying off the debt will lead to two things – less pressure to deploy U.S. forces overseas and sunset of the income tax.
Military spending both overseas and domestic will decline under this plan.  The VAT will make domestic military spending less attractive and overseas spending on deployments will be fought by income taxpayers, who are currently profiteering from such expenses.  Instead, defense spending can shift to space exploration, which also increases invention and economic growth while keeping the defense industrial complex healthy, although now they can pursue profitable enterprises rather than lethality.
In short, our plan promises both peace and prosperity, not for the few but for the many.  Prosperity bubbles up.  It has never flowed down and tax reform should reflect that.

Thank you for the opportunity to address the committee.  We are, of course, available for direct testimony or to answer questions by members and staff.