Wednesday, September 28, 2016

Health Care Fraud Investigations

Comments for the Record
United States House of Representatives
Committee on Ways and Means
Health Subcommittee
Hearing on Health Care Fraud Investigations
Wednesday, September 28, 2016, 10:00 AM

By Michael G. Bindner
Center for Fiscal Equity

Chairman Roskam and Ranking Member McDermott, thank you for the opportunity to submit comments on this topic. I will leave it to the Administration and CBO’s witnesses to explain the current state of these investigations and will address how to make such investigations unnecessary.  As usual, our comments are based on our four-part tax reform plan, which is as follows:

·         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% in either 5% or 10% increments.  Heirs would also pay taxes on distributions from estates, but not the assets themselves, with distributions from sales to a qualified ESOP continuing to be exempt.
·         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), 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 sixty.

The relevant part of our proposal is the net business receipts tax, which is a value added tax with exclusions for such items as employee and retiree health care.  This provision may also fund a single-payer plan – again with exemptions for firms which provide direct medical services to their employees with no third party payment, except for purchased hospital services.

In these cases, the onus for preventing fraud would be the tax paying employers (or social service providers) and the scale would likely be small enough to make professional scams unlikely – save for the biggest employers, like the auto unions served by the UAW, who already have experience in fraud prevention and could probably teach the United States Government a thing or two – unless of course we adopt that employer-based model.  Such a model is also in use by the Veterans Administration and the military itself.  Of course, there is likely fraud in the system, but it is not the wholesale fraud experienced by Medicare and Medicaid.  Employer based health care puts the responsible tax payer in charge of preventing fraud.  Their incentive is greater than any government agency who acts based on the priorities given to it by the Administration and Congress.  As successful as Obamacare has been in reducing fraud, employer-funders will be that much more successful.


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.

Wednesday, September 21, 2016

Understanding Social Security’s Solvency Challenge

Comments for the Record
United States House of Representatives
Committee on Ways and Means
Social Security Subcommittee
Hearing on Understanding Social Security’s
Solvency Challenge
Wednesday, September 21, 2016, 10:00 AM

By Michael G. Bindner
Center for Fiscal Equity

Chairman Johnson and Ranking Member Becerra, thank you for the opportunity to submit my comments on this topic. I will leave it to the Administration and CBO’s witnesses to explain the difference between the future projections, except to say that both forecasts are required to be conservative.  As the Economic Policy Institute found many years ago when attempts were being made to justify personal accounts in Social Security, there is truly no solvency problem if more realistic estimates are used.  Of course, that relates to the system as a whole, not on how the Trust Fund is to be reimbursed, as I reiterate below. 
As usual, our comments are based on our four-part tax reform plan, which is as follows:

·         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% in either 5% or 10% increments.  Heirs would also pay taxes on distributions from estates, but not the assets themselves, with distributions from sales to a qualified ESOP continuing to be exempt.
·         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), 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 sixty.

Lessons from the Great Recession

The 2008 Recession triggered by our continuing asset-based Depression has both temporary and permanent effects on the trust fund’s cash flow. The temporary effect was a decline in revenue caused by a slower economy and the temporary cut in payroll tax rates to provide stimulus that has since been repealed, although the amount was added to the Trust Fund for later withdrawal, regardless of contributions not made.

The permanent effect is the early retirement of many who had planned to work longer, but because of the recent recession and slow recovery, this cohort has decided to leave the labor force for good when their extended unemployment ran out. This cohort is the older 77ers and 99ers who needed some kind of income to survive. The combination of age discrimination and the ability to retire has led them to the decision to retire before they had planned to do so, which impacts the cash flow of the trust fund, but not the overall payout (as lower benefit levels offset the impact of the decision to retire early on their total retirement cost to the system).  In addition, it has been made easier for workers over 50 to retire on disability (as I have done), with many of us approved on the first try.

The Reagan-Pepper Compromise

When Social Security was saved in the early 1980s, payroll taxes were increased to build up a Trust Fund for the retirement of the Baby Boom generation. The building of this allowed the government to use these revenues to finance current operations, allowing the President and his allies in Congress to honor their commitment to preserving the last increment of his signature tax cut.

This trust fund is now coming due, so it is entirely appropriate to rely on increased income tax revenue to redeem them. It would be entirely inappropriate to renege on these promises by further extending the retirement age, cutting promised Medicare benefits or by enacting an across the board increase to the OASI payroll tax as a way to subsidize current spending or tax cuts.

The cash flow problem currently experienced by the trust fund is not the trust fund’s problem, but a problem for the Treasury to address, either through further borrowing – which will require continued comity on renewing the debt limit – or the preferable solution, which higher taxes for those who received the lion’s share of the benefit’s from the tax cuts of 1981, 1986, 2001, 2003 and 2010.  Many also complain that this recovery is anemic.  That is likely because too many upper-middle income taxpayers were given a permanent tax cut from 2001.  Less savings and more taxation would boost spending on
both transfer payments and government purchases – especially transfers to the retired and disabled.

The cost of delaying actions to address Social Security’s fiscal challenges for workers and beneficiaries.

Actions should be taken as soon as possible, especially when they must be phased in, as it is a truism that a little action early will have a larger impact later.

This should not be done, however, as an excuse to use regressive Old Age and Survivors Insurance payroll taxes to subsidize continued tax cuts on the top 20% of wage earners who pay the majority of income taxes. Retirement on Social Security for those at the lowest levels is still inadequate. Any change to the program should, in time, allow a more comfortable standard of living in retirement.

The ultimate cause of the trust fund’s long term difficulties is not financial but demographic. Thus, the solution must also be demographic – both in terms of population size and income distribution. The largest demographic problem facing Social Security and the health care entitlements, Medicare and Medicaid, is the aging of the population. In the long term, the only solution for that aging is to provide a decent income for every family through more generous tax benefits.

The free market will not provide this support without such assistance, preferring instead to hire employees as cheaply as possible. Only an explicit subsidy for family size overcomes this market failure, leading to a reverse of the aging crisis.

We propose a $1000 per month refundable child tax credit payable with wages as part of our proposal for a Net Business Receipts Tax.  This will take away the disincentive to have kids a slow economy provides. Within twenty years, a larger number of children born translates into more workers, who in another decade will attain levels of productivity large enough to reverse the demographic time bomb faced by Social Security in the long term.

Such an approach is superior to proposals to enact personal savings accounts as an addition to Social Security, as such accounts implicitly rely on profits from overseas labor to fund the dividends required to fill the hole caused by the aging crisis. This approach cannot succeed, however, as newly industrialized workers always develop into consumers who demand more income, leaving less for dividends to finance American retirements. The answer must come from solving the demographic problem at home, rather than relying on development abroad.

This proposal will also reduce the need for poor families to resort to abortion services in the event of an unplanned pregnancy. Indeed, if state governments were to follow suit in increasing child tax benefits as part of coordinated tax reform, most family planning activities would be to increase, rather than prevent, pregnancy. It is my hope that this fact is not lost on the Pro-Life Community, who should score support for this plan as an essential vote in maintaining a perfect pro-life voter rating.

This is not to say that there is no room for reform in the Social Security program. Indeed, comprehensive tax reform at the very least requires calculating a new tax rate for the Old Age and Survivors Insurance program. My projection is that a 6.5% rate on net income for employees and employers (or 13% total) will collect about the same revenue as currently collected for these purposes, excluding sums paid through the proposed enhanced child tax credit. This calculation is, of course, subject to revision.

While these taxes could be merged into the net business income/revenue tax, VAT or the Fair Tax as others suggest, doing so makes it more complicated to enact personal retirement accounts. My proposal for such accounts differs from the plan offered in by either the Cato Institute or the Bush Commission (aka the President’s Commission to Save Social Security).

As I wrote in the January 2003 issue of Labor and Corporate Governance, I would equalize the employer contribution based on average income rather than personal income. I would also increase or eliminate the cap on contributions. The higher the income cap is raised, the more likely it is that personal retirement accounts are necessary.

A major strength of Social Security is its income redistribution function. I suspect that much of the support for personal accounts is to subvert that function – so any proposal for such accounts must move redistribution to account accumulation by equalizing the employer contribution.

I propose directing personal account investments to employer voting stock, rather than an index funds or any fund managed by outside brokers. There are no Index Fund billionaires (except those who operate them). People become rich by owning and controlling their own companies. Additionally, keeping funds in-house is the cheapest option administratively. I suspect it is even cheaper than the Social Security system – which operates at a much lower administrative cost than any defined contribution plan in existence.

Safety is, of course, a concern with personal accounts. Rather than diversifying through investment, however, I propose diversifying through insurance. A portion of the employer stock purchased would be traded to an insurance fund holding shares from all such employers. Additionally, any personal retirement accounts shifted from employee payroll taxes or from payroll taxes from non-corporate employers would go to this fund.

The insurance fund will save as a safeguard against bad management. If a third of shares were held by the insurance fund than dissident employees holding 25.1% of the employee-held shares (16.7% of the total) could combine with the insurance fund held shares to fire management if the insurance fund agreed there was cause to do so. Such a fund would make sure no one loses money should their employer fail and would serve as a sword of Damocles’ to keep management in line. This is in contrast to the Cato/ PCSSS approach, which would continue the trend of management accountable to no one. The other part of my proposal that does so is representative voting by occupation on corporate boards, with either professional or union personnel providing such representation.

The suggestions made here are much less complicated than the current mix of proposals to change bend points and make OASI more of a needs based program. If the personal account provisions are adopted, there is no need to address the question of the retirement age. Workers will retire when their dividend income is adequate to meet their retirement income needs, with or even without a separate Social Security program.

No other proposal for personal retirement accounts is appropriate. Personal accounts should not be used to develop a new income stream for investment advisors and stock traders. It should certainly not result in more “trust fund socialism” with management that is accountable to no cause but short term gain. Such management often ignores the long-term interests of American workers and leaves CEOs both over-paid and unaccountable to anyone but themselves.

Progressives should not run away from proposals to enact personal accounts. If the proposals above are used as conditions for enactment, I suspect that they won’t have to. The investment sector will run away from them instead and will mobilize their constituency against them. Let us hope that by then workers become invested in the possibilities of reform.

All of the changes proposed here work more effectively if started sooner. The sooner that the income cap on contributions is increased or eliminated, the higher the stock accumulation for individuals at the higher end of the age cohort to be covered by these changes – although conceivably a firm could be allowed to opt out of FICA taxes altogether provided they made all former workers and retirees whole with the equity they would have otherwise received if they had started their careers under a reformed system. I suspect, though, that most will continue to pay contributions, with a slower phase in – especially if a slower phase in leaves current management in place.

One new wrinkle is that I would also put a floor in the employer contribution to OASI, ending the need for an EITC – the loss would be more than up by gains from an equalized employer contribution – as well as lowering the ceiling on benefits. Since there will be no cap on the employer contribution, we can put in a lower cap for the employee contribution so that benefit calculations can be lower for wealthier beneficiaries, again reducing the need for bend points.


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, September 13, 2016

Back to School: Tax-Exempt College and University Endowments

Comments for the Record
United States House of Representatives
Committee on Ways and Means
Subcommittee on Oversight
Hearing on Back to School:
Tax-Exempt College and University Endowments
Tuesday, September 13, 2016, 10:00 AM
By Michael G. Bindner
Center for Fiscal Equity

Chairman Roskam and Ranking Member Lewis, thank you for the opportunity to submit these comments for the record to the House Ways and Means Committee Subcommittee on Oversight.  We will leave it to the university witnesses to describe how excess endowments are now being used to help students deal with higher tuition prices, although we will address ways to reduce such out of control rates. 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 Center recommends a four track education finance system.  Track on is for n0n-college bound students who need technical and soft-skills training to succeed in the modern workforce.  Such students would find an employment sponsor who would pay them to go to school, receiving any family subsidies such as the expanded Child Tax Credit we have explained elsewhere as an offset to the employer’s Net Business Receipts Tax/Subtraction VAT.  There would also be an NBRT credit for providing a portion of tuition, with another portion satisfied in a service requirement of say two years for every year of training.  To prevent peonage in work situations that don’t succeed there will also be a student loan program to buy out these obligations so the worker can move on.   These schools, of course, lack the large endowments referred to in the hearing advisory.
In some industries, of course, there are plenty of low wage workers who are not as productive as the wage is high (although this makes one wonder whether such industries are worth supporting in the economy).  For these employees, paid education should be available – and by pay we mean tuition and wages.
Workers that are less than literate at a tenth grade level deserve full remedial education, with pay at minimum wage levels.  This can be paid for in a variety of ways under our model.  The usual model is for state governments to provide this education – and in our model the educational institution will also provide case management and stipends and would be funded by the NBRT/Subtraction VAT.  There are other options as well.
Employers could provide remedial education and payroll as an offset of their NBRT obligations.  They could also contribute to a third party provider, such as Catholic Charities and their related education systems, again offsetting their NBRT with the contribution (a full credit for both tuition and stipends).  Again, these students will access no university endowment.
 Some employees require college educations to advance.  The first two years of college would be grouped with the last two years of high school and would be provided by the state (including parochial high school and college).  Here is a point where continued state and federal aid will be important and we would expect that University, and indeed secondary school, endowments would offset higher tuition prices – as well as being shared with schools in less prosperous neighborhoods who need updated physical plan.  These students would also receive a Child Tax Credit through the school’s Net Business Receipts Tax (where faculty salaries are taxed, et al) if their family circumstances require it.  None of the Child Tax Credit, student stipend or tuition would be paid back.
The last two baccalaureate years and graduate education would be paid by employers, who would sponsor and pay students (including child tax credits).  Like technical schools, there would be a service requirement.  Unlike junior college level tuition, employers would negotiate for groups of students.  It is expected that this will substantially decrease tuition, just as we found when participating in the H-1B Technical Skills Training Program.  Any special equipment would be borrowed rather than endowment funded and would meet the needs to the client businesses, who would certainly do nothing to grow the endowment.

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.

Wednesday, September 07, 2016

Unemployment Insurance: An Overview of the Challenges and Strengths of Today’s System

Comments for the Record
United States House of Representatives
Committee on Ways and Means
Subcommittee on Human Resources
Hearing on Unemployment Insurance:
An Overview of the Challenges and Strengths of Today’s System
Wednesday, September 7, 2016, 10:00 A.M.
By Michael G. Bindner
Center for Fiscal Equity

Chairman Buchanan and Ranking Member Doggett, thank you for the opportunity to submit these comments for the record to the Human Resources Subcommittee. 
 We will leave it to the Administration witnesses to comment on program integrity and trust fund solvency and will concern our comments with reemployment strategies, as well as the unmentioned and most urgent topic of program payment sufficiency within the Unemployment Insurance system.  
Unemployment insurance should offer workers the ability to step up, seeking further training and even more advanced education at the community college level and higher.  Of course, the Unemployment Insurance Trust Fund is not the place to fund such projects – new funding streams should be developed.  Because this training will ultimately benefit employers, some kind of employer subtraction value added tax would be the appropriate vehicle for both training costs and the training stipend.  The H-1B technical skills training program can also be used for some of these funds.  More highly trained workers would be given placement assistance and would be eager to demonstrate their new skills in the marketplace.
Unemployment benefit adequacy is the difference between losing your home and paying your credit cards and seeking bankruptcy protection.  The recovery has not yet attained the velocity to make re-employment an automatic thing – even with placement assistance is the One Stop system. 
There is a movement to increase the minimum wage to $15 an hour.  It has already succeeded in some states and is likely to go national in the very near future.  When it does so, Unemployment Compensation should be increased to match what a full-time minimum wage worker receives, lest the unemployed be forced to take jobs at that level of skill (when in fact, such workers should be receiving the paid training described above).  Likewise, people on SSDI – and even SSI – should receive the same level of basic benefit – with higher benefiting recipients receiving the same higher benefits they receive now, boosted by the new minimum wage – which should pay for the transition in tax revenues.
For many, the United States has become the home of the poor.  We can and should fix that.  It will simply require employers to transfer productivity gains from CEOs to rank and file employees.  We can do this now, without fuss, or we can bring back wage and price controls and the 70% tax rate to keep these funds out of executive hands.  I suggest we do so the easy way without engaging punitive tax rates and price controls.

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, June 28, 2016

Examining the Proposed Medicare Part B Drug Demonstration

Comments for the Record

Senate Committee on Finance
Examining the Proposed Medicare Part B Drug Demonstration
Tuesday, June 28, 2016, 10:00 AM

by Michael Bindner
The Center for Fiscal Equity
14448 Parkvale Road
Rockville, Maryland 20853


Chairman Hatch and Ranking Member Wyden, thank you for the opportunity to submit our comments on this topic.  We will leave the description of the experiment to the Administration witnesses and concentrate on why the experiment may or may not be necessary.  As usual, our comments are based on our four-part tax reform plan, which is as follows:

  • 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% in either 5% or 10% increments.  Heirs would also pay taxes on distributions from estates, but not the assets themselves, with distributions from sales to a qualified ESOP continuing to be exempt.
  • 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), 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 sixty.

While the Administration may be correct in siting this experiment as a way to both improve cost and care, the underlying reason has to be cost minimization.  As we saw with Medicare Part C in the mid-90s, minimization on its own leads to decreased care and providers who exit the system and need premium pay to return.
Aside from throwing up our hands and agreeing to deficit spending, as Congress did in establishing such incentives for Part C when it established Part D, some form of revenue increase is required.

Both the Simpson-Bowles Commission and the Rivlin-Domenici Commission recommended an increase in Part B and D premiums. That is all well and good, but seniors and the disabled don’t simply have spare cash to throw around without decreasing other spending, like housing or food.  For most people, that European vacation only comes as a gift from grateful children or merciful siblings.  Therefore, the only way to increase premiums is to also increase the basic Social Security and Disability benefit (which will need to happen anyway if the drive to a $15 minimum wage keeps gaining success).

Increasing the benefit is usually seen as a matter of raising the income cap and making the bend points in benefit calculation more severe so that the contribution increase does not simply lead to higher benefits for wealthier retirees.  There is, however, another option.

Our proposal is to lower the employee income cap on contributions to decrease the entitlement for richer retirees while the employer income cap is eliminated, the employer and employee payroll taxes are decoupled and the employer contribution credited equally to each employee at some average which takes in all income.  If a payroll tax is abandoned in favor of some kind of consumption tax, all income, both wage and non-wage, would be taxed and the tax rate may actually be lowered.

Ultimately, fixing health care reform will require more funding, probably some kind of employer payroll or net business receipts tax – which would also fund the shortfall in Medicare and Medicaid (and take over most of their public revenue funding), regardless of whether Part B and D premiums are adjusted.

Our Net Business Receipts Tax/Subtraction VAT proposal above is the recommended consumption tax.  It would not show up on the receipt because it can be offset by employer provided substitutes.

The NBRT can provide an incentive for cost savings if we allow employers to offer services privately to both employees and retirees in exchange for a substantial tax benefit, either by providing insurance or hiring health care workers directly and building their own facilities. Employers who fund catastrophic care or operate nursing care facilities 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 no so much that the free market is destroyed.

This proposal is probably the most promising way to arrest 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.

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.


Thank you for this opportunity to share these ideas with the committee.  As always, we are available to meet with members and staff or to provide direct testimony on any topic you wish.

Friday, June 24, 2016

Response to the Tax Reform Blueprint

The Center for Fiscal Equity chides you for not listening, so we would like to make a few things clear.

What the new generation needs is not necessarily tax simplification or promises of growth on a discredited supply side economic model (luckily, the CBO and JTC has a copy of our model and appears to have used it in scoring the President's latest budget) - it needs a plan to both cut the deficit, begin paying rather than rolling over net interest costs and ultimately begin paying down the debt to the level necessary to provide the Federal Reserve with bonds to back the currency.

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.

The way to increase growth is to give more money to households, particularly households with children. This should not be an end-of-the-year payout, but should be included each week with wage and it should be substantial. Each child should be worth a tax credit of $1000 per month. To pay for this, put a floor on Social Security employee contributions and eliminate the EITC (while taking the cap from the employer contribution and crediting it equally rather than as a match to the employee levy) and eliminate the mortgage interest deduction. A $1000 per child per month refundable credit will cause a housing boom - people need money, not borrowing assistance, when they require shelter. Indeed, such a move will likely may abortion less likely, so this is a pro-life matter. Not only is it pro-life, it is pro-growth.

The task force has identified a series of very real problems. Let me suggest some solutions:

Problem #1: The Current Code Imposes Burdensome Paperwork and Compliance Costs.

Shifting tax reporting for most families to a combination of a consumer Value Added Tax (yes, it makes people who think they have avoided taxes actually pay - but taking away the possibility of avoidance lowers the costs inherent in such schemes) and a business subtraction VAT/Net Business Receipts Tax. The latter should replace corporate income taxes (yes, they should be zero), payroll taxes and some income taxes. Shifting these many taxes to one will hugely reduce paperwork, especially with the ending of many, but not all, corporate tax preferences. The research deduction should be ended, because personnel costs must be taxed - and so should profit. The remaining income tax would be much simpler with no pass through reporting and only the charitable contribution and ESOP sales deductions.

Problem #2: The Current Code Delivers Special Interest Subsidies and Crony Capitalism - Agreed, shifting to a subtraction VAT would do that.

Problem #3: The Current Code Penalizes Savings and Investment.

Individuals in the lower and middle classes should have these incentives. Higher income tax payers should not - paying normal income rates on their high income surtax. Note that every economic crisis in the last 100 years came about because someone cut the rate on savings and investment. The problem is that most investment in industrial production is already handled - there is just not that much of it. As a result, extra investment capital has gone to speculative ventures in small business (most of which fail) and housing finance - see comments above on 2008.

Problem #4: The Current Code Encourages Businesses to Move Overseas

Eliminate the Corporate Income Tax entirely and businesses will move back. Actually, businesses have left in name only (unless they have done so to reduce labor costs) - that part can be stopped by not allowing businesses to locate their headquarters to an inbox in Ireland or the Cayman Islands.

Problem #5: The Current Code Enables a Broken Tax Collector

Under-funding the IRS is what has broken it - and the latest appropriation bill is more of the same non-sense. Still, our proposal would move all VAT and Subtraction VAT collection to the states, with the IRS only collecting the high income and inheritance surtax.

On tax rates, we recommend a 13% Value added tax (although we can go 12), a 25%-33% Subtraction VAT (the 8% spread is for health insurance benefits provided by employers plus the child tax credit) and a high income and inheritance surtax (with disbursements from estates taxed as normal income, but not assets held) ranging from 8% to 32% for the mega-wealthy.

While it is impossible to do this in an election year, it is our hope that our response can provide a way forward to reduce the debt and grow the economy for the next Congress and the new President. 

Thank you for the opportunity to comment on this way forward. As always, we are available for consultation.

Wednesday, June 22, 2016

2016 Social Security Trustees Report

Comments for the Record
United States House of Representatives
Committee on Ways and Means
Social Security Subcommittee
Hearing on the 2016 Annual Report of the
Social Security Board of Trustees
Wednesday, June 22, 2016, 2:00 PM
By Michael G. Bindner
Center for Fiscal Equity

Chairman Johnson and Ranking Member Becerra, thank you for the opportunity to submit my comments on this topic. I will leave it to the Administration’s witnesses to explain the Trustees’ Report and will instead confine myself to what needs to be done in the future, with special emphasis on what not to do.  These remarks will be similar to those regarding the 2011 Trustees report, but at this point they bear repeating.
Lessons from the Great Recession
The only observation I will make regarding the Trustees report is that the 2008 Recession triggered by our continuing asset-based Depression has both temporary and permanent effects on the trust fund’s cash flow. The temporary effect is a decline in revenue caused by a slower economy and the temporary cut in payroll tax rates to provide stimulus.

The permanent effect is the early retirement of many who had planned to work longer, but because of the recent recession and slow recovery, this cohort has decided to leave the labor force for good when their extended unemployment ran out. This cohort is the older 77ers and 99ers who needed some kind of income to survive. The combination of age discrimination and the ability to retire has led them to the decision to retire before they had planned to do so, which impacts the cash flow of the trust fund, but not the overall payout (as lower benefit levels offset the impact of the decision to retire early on their total retirement cost to the system).

When Social Security was saved in the early 1980s, payroll taxes were increased to build up a Trust Fund for the retirement of the Baby Boom generation. The building of this allowed the government to use these revenues to finance current operations, allowing the President and his allies in Congress to honor their commitment to preserving the last increment of his signature tax cut.

This trust fund is now coming due, so it is entirely appropriate to rely on increased income tax revenue to redeem them. It would be entirely inappropriate to renege on these promises by further extending the retirement age, cutting promised Medicare benefits or by enacting an across the board increase to the OASI payroll tax as a way to subsidize current spending or tax cuts.

The cash flow problem currently experienced by the trust fund is not the trust fund’s problem, but a problem for the Treasury to address, either through further borrowing – which will require a quick resolution to the debt limit extension and preferable through higher taxes for those who received the lion’s share of the benefit’s from the tax cuts of 1981, 1986, 2001, 2003 and 2010.

The cost of delaying actions to address Social Security’s fiscal challenges for workers and beneficiaries.

Actions should be taken as soon as possible, especially when they must be phased in, as it is a truism that a little action early will have a larger impact later.

This should not be done, however, as an excuse to use regressive Old Age and Survivors Insurance payroll taxes to subsidize continued tax cuts on the top 20% of wage earners who pay the majority of income taxes. Retirement on Social Security for those at the lowest levels is still inadequate. Any change to the program should, in time, allow a more comfortable standard of living in retirement.

The ultimate cause of the trust fund’s long term difficulties is not financial but demographic. Thus, the solution must also be demographic – both in terms of population size and income distribution. The largest demographic problem facing Social Security and the health care entitlements, Medicare and Medicaid, is the aging of the population. In the long term, the only solution for that aging is to provide a decent income for every family through more generous tax benefits.

The free market will not provide this support without such assistance, preferring instead to hire employees as cheaply as possible. Only an explicit subsidy for family size overcomes this market failure, leading to a reverse of the aging crisis.

The recommendations for raising net income are within the context of comprehensive tax reform, where the first 25-28 percent of personal income tax rates, the corporate income tax, unemployment insurance taxes, the Hospital Insurance payroll tax, the Disability Insurance payroll tax and the portion of the Survivors Insurance payroll tax funding survivors under the age of 60 have been subsumed by a Value Added Tax (VAT) and a Net Business Receipts Tax (where the net includes all value added, including wages and salaries).

Net income would be adjusted upward by the amount of the VAT percentage and an increased child tax credit of $500 to $1000 per child per month. This credit would replace the earned income tax credit, the exemption for children, the current child tax credit, the mortgage interest deduction and the property tax deduction. This will lead employers to decrease base wages generally so that the average family with children and at an average income level would see no change in wage, while wages would go up for lower income families with more children and down for high income earners without children.

Gross income would be adjusted by the amount of tax withholding transferred from the employee to the employer, after first adjusting net income to reflect the amount of tax benefits lost due to the end of the home mortgage and property tax deductions.

This shift in tax benefits is entirely paid for and it would not decrease the support provided in the tax code to the housing sector – although it would change the mix of support provided because the need for larger housing is the largest expense faced by growing families. Indeed, this reform will likely increase support for the housing sector, as there is some doubt in the community of tax analysts as to whether the home mortgage deduction impacted the purchase of housing, including second homes, by wealthier taxpayers.

Within twenty years, a larger number of children born translates into more workers, who in another decade will attain levels of productivity large enough to reverse the demographic time bomb faced by Social Security in the long term.

Such an approach is superior to proposals to enact personal savings accounts as an addition to Social Security, as such accounts implicitly rely on profits from overseas labor to fund the dividends required to fill the hole caused by the aging crisis. This approach cannot succeed, however, as newly industrialized workers always develop into consumers who demand more income, leaving less for dividends to finance American retirements. The answer must come from solving the demographic problem at home, rather than relying on development abroad.

This proposal will also reduce the need for poor families to resort to abortion services in the event of an unplanned pregnancy. Indeed, if state governments were to follow suit in increasing child tax benefits as part of coordinated tax reform, most family planning activities would be to increase, rather than prevent, pregnancy. It is my hope that this fact is not lost on the Pro-Life Community, who should score support for this plan as an essential vote in maintaining a perfect pro-life voter rating.

Obviously, this proposal would remove both the mortgage interest deduction and the property tax deduction from the mix of proposals for decreasing tax rates while reducing the deficit. This effectively ends the notion that deficit finance can be attained in the short and medium term through tax reforms where the base is broadened and rates are reduced. The only alternatives left are a generalized tax increase (which is probably necessary to finance future health care needs) and allowing tax rates for high income individuals to return to the levels already programmed in the law as of January 1, 2013. In this regard, gridlock is the friend of deficit reduction. Should the President show a willingness to let all rates rise to these levels, there is literally no way to force him to accept anything other than higher rates for the wealthy.

This is not to say that there is no room for reform in the Social Security program. Indeed, comprehensive tax reform at the very least requires calculating a new tax rate for the Old Age and Survivors Insurance program. My projection is that a 6.5% rate on net income for employees and employers (or 13% total) will collect about the same revenue as currently collected for these purposes, excluding sums paid through the proposed enhanced child tax credit. This calculation is, of course, subject to revision.

While these taxes could be merged into the net business income/revenue tax, VAT or the Fair Tax as others suggest, doing so makes it more complicated to enact personal retirement accounts. My proposal for such accounts differs from the plan offered in by either the Cato Institute or the Bush Commission (aka the President’s Commission to Save Social Security).

As I wrote in the January 2003 issue of Labor and Corporate Governance, I would equalize the employer contribution based on average income rather than personal income. I would also increase or eliminate the cap on contributions. The higher the income cap is raised, the more likely it is that personal retirement accounts are necessary.

A major strength of Social Security is its income redistribution function. I suspect that much of the support for personal accounts is to subvert that function – so any proposal for such accounts must move redistribution to account accumulation by equalizing the employer contribution.

I propose directing personal account investments to employer voting stock, rather than an index funds or any fund managed by outside brokers. There are no Index Fund billionaires (except those who operate them). People become rich by owning and controlling their own companies. Additionally, keeping funds in-house is the cheapest option administratively. I suspect it is even cheaper than the Social Security system – which operates at a much lower administrative cost than any defined contribution plan in existence.

Safety is, of course, a concern with personal accounts. Rather than diversifying through investment, however, I propose diversifying through insurance. A portion of the employer stock purchased would be traded to an insurance fund holding shares from all such employers. Additionally, any personal retirement accounts shifted from employee payroll taxes or from payroll taxes from non-corporate employers would go to this fund.

The insurance fund will save as a safeguard against bad management. If a third of shares were held by the insurance fund than dissident employees holding 25.1% of the employee-held shares (16.7% of the total) could combine with the insurance fund held shares to fire management if the insurance fund agreed there was cause to do so. Such a fund would make sure no one loses money should their employer fail and would serve as a sword of Damocles’ to keep management in line. This is in contrast to the Cato/ PCSSS approach, which would continue the trend of management accountable to no one. The other part of my proposal that does so is representative voting by occupation on corporate boards, with either professional or union personnel providing such representation.

The suggestions made here are much less complicated than the current mix of proposals to change bend points and make OASI more of a needs based program. If the personal account provisions are adopted, there is no need to address the question of the retirement age. Workers will retire when their dividend income is adequate to meet their retirement income needs, with or even without a separate Social Security program.

No other proposal for personal retirement accounts is appropriate. Personal accounts should not be used to develop a new income stream for investment advisors and stock traders. It should certainly not result in more “trust fund socialism” with management that is accountable to no cause but short term gain. Such management often ignores the long-term interests of American workers and leaves CEOs both over-paid and unaccountable to anyone but themselves.

Progressives should not run away from proposals to enact personal accounts. If the proposals above are used as conditions for enactment, I suspect that they won’t have to. The investment sector will run away from them instead and will mobilize their constituency against them. Let us hope that by then workers become invested in the possibilities of reform.

All of the changes proposed here work more effectively if started sooner. The sooner that the income cap on contributions is increased or eliminated, the higher the stock accumulation for individuals at the higher end of the age cohort to be covered by these changes – although conceivably a firm could be allowed to opt out of FICA taxes altogether provided they made all former workers and retirees whole with the equity they would have otherwise received if they had started their careers under a reformed system. I suspect, though, that most will continue to pay contributions, with a slower phase in – especially if a slower phase in leaves current management in place.

One new wrinkle is that I would also put a floor in the employer contribution to OASI, ending the need for an EITC – the loss would be more than up by gains from an equalized employer contribution – as well as lowering the ceiling on benefits. Since there will be no cap on the employer contribution, we can put in a lower cap for the employee contribution so that benefit calculations can be lower for wealthier beneficiaries, again reducing the need for bend points.


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.