Where Will New Revenues for Deficit Reduction Come From?

Where Will New Revenues for Deficit Reduction Come From? by Howard Gleckman

My answer:

Eliminating the tax cuts on the wealthy is not possible without eliminating all the temporary tax cuts. Indeed, with a Republican House, the only window for reform during Obama’s first term is the election of a Democratic House and seat pickups in the Senate, with action during a January lame duck session in 2013. Of course if Obama is reelected and these things occur, he can take his time.

The more probably scenario is gridlock. In a strong economy, Obama wins – however in a middling economy gridlock results in letting the tax cuts for all die, while a poor economy means temporary tax cuts will stay with us – even though increasing taxes on the wealthy would actually have a STIMULATIVE effect by moving money from those who save it and fatten already fat corporate bank accounts to those who spend it – and afterall, consumption is the main component of economic growth.

As to fiscal balance, the better answer is to not only reduce the deficit to interest costs (which negates the impact of the federal debt on the economy) but to begin paying off the debt – both as a percentage of GDP and in absolute terms.

Doing that cannot be confined to the wealthy, nor should it be.

I have laid out a scheme to do this, in my submission to the Fiscal Commission, which is posted on my web page from way back last summer (and was shared with TaxVox). Aside from miscellaneous excise taxes, there should be four major revenue streams, with each stream set to cover a separate set of expenditures.

VAT should cover all domestic military and civil discretionary spending. To do that, the VAT would need to be on the order of 13.3%

A separate Business Revenue Tax of 33.6% would include tax expenditures for families (a $500 per child per month refundable credit paid with wages) and the health care exclusion. Any other retained expenditures would necessitate a higher rate than 33.6%. This levy would fund entitlement and social spending (although this may be overstated, since it includes discretionary grant programs that may be better shifted to the VAT). It would not fund Old Age and Survivors Insurance (retired survivors over 60), but would replace payroll taxes on Disability Insurance, Hospital Insurance and Survivors under 60.

A separate payroll tax would cover Old Age and old Survivors. This is mainly so it can be eventually diverted to personal accounts – else it might as well be part of the VAT so that it is funded by imports as well as wages.

The final stream is a high income surtax (with distributions, but not assets, taxed as normal income). This would only apply to the higher 3, or possibly 2, brackets (depending upon the final BRT and VAT rates). It should fund overseas and sea military deployments (which would otherwise be paid with borrowed funds), net interest and debt retirment. Such a segregation turns the wealthy into both peaceniks and budget balancers, since they would be on the hook for future interest charges, not business taxpayers or their customers).

What about cutting spending? These levies would incentivize it. VATs, which would be receipt visible, would lessen the demand for discretionary government, especially military waste (the bloated bureaucracy, with soldiers on briefing tours in the Pentagon participating in a Byzantine planning process known as PPBE) and pork barrell spending. Net interest would be reduced by the drive toward balance and repayment. Old Age Savings would not be reduced, but could be channelled from a governmental system to a personal account system where funds are invested in the employing firm rather than Wall Street, with a third held in an investment insurance fund, possibly maintained by the Fed). Entitlement spending could be shifted from the government to employer sponsored health, education, mental health care (in lieu of corrections) and anti-poverty programs at both the federal and state levels. This might make the spending much more effective, both in terms of programatic effectiveness and cost effectiveness – especially if third party providers like Catholic Charities, Lutheran Social Services, Catholic Health Care and the parochial school system expand their roles and are duplicated by other sects and faiths.

If one does not wish to go so comprehensive, we could settle on letting the Bush cuts expire, cutting the Pentagon budget as suggested by the Fiscal Commission, introducing a smaller VAT or simply raising the Hospital Insurance payroll tax to fully fund the same share of Medicare costs that it did in prior years, plus a further increase to fund Medicare Part D (the base could also be broadened).

Tax Reform: The Wheels Are Beginning to Turn

Tax Reform: The Wheels Are Beginning to Turn by TPC Director David Marron

My response:

The biggest exclusions in Corporate Income Taxes are the fact that only corporations pay them, while other firms pay them as part of personal income taxes, and the fact that labor is not taxed.

If labor were taxed in business revenue taxes (Larry Linsey’s term) rather than personal taxes the base would be a lot broader and the rates could potentially be a bit lower, although not too much lower if we want to pay for health care in the long term. Any revenue increases should happen slowly, in time with needed spending, rather than collecting too much right away to build a trust fund – as this eventually requires higher income tax collections to repay the fund.

An income surtax should still be charged on the highest incomes to avoid undertaxing the rich and overtaxing the nonrich and to avoid requiring that high income individuals share all of their financial information with their employers and business interests. For their own confidentiality, it is better that the government act as the information clearing house, rather than any one business entity. Any such surtax should be earmarked to the payment of interest and repayment of debt, rather than using a more general levy for these purposes. Theoretically, if wealthier taxpayers were to transfer some of their investments into “tax futures” bonds that simply expire in a future tax year, then the national debt could be paid off fairly quickly – provided the Federal Reserve was willing to find another set of assets to back the currency – such as mortgage backed securities (marked to market).

Social Security reform also enters this equation – both because the income cap needs to be increased and because there is a desire to make the program more progessive. While some have floated the idea of making the bend points even harsher than they are, a better alternative is to begin crediting the employer contribution equally (as in, without regard to the amount of the employee contribution). This moves redistribution to the front end and makes the development of personal accounts possible. The more liberal of us could even see doubling the employer contribution and dispensing with the employee contribution entirely – adjusting gross but not net wages in the process. Gross wages would also take a hit with the aforementioned business revenue tax reform, although net wages would go up to compensate for any VAT component to business revenue taxes – with VAT’s being visibile and BRT’s staying hidden.

As to the composition of personal retirement accounts – they should hold employer voting stock rather than traded equities or corporate or government bonds. This would allow a shift in equity ownership to workers from the wealthy, government bond ownership from retirement funds and the Federal reserve to the wealthy and private and mortgage bonds from the government and retirment funds to the Fed. Indeed, the only non-employee holders of equities would be a fund holding shares in a third of every firms fund to act as insurance and leverage to back employee groups who claim mismanagement. Such a fund could investigate and join 1/4th of employee stock holdings in controlling any company in order to avoid bankruptcy. It could be either private or held by the Federal Reserve System (if needed to back the currency).

Somehow, I don’t think this Administration or this Congress will go quite that far – even if they adopt comprehensive tax reform. If populists on the left and the right form a coalition like they did on the second engine for the F-35, however, the main features of this plan could very well see the light of serious debate. It would be nice if the TPC would score them, by the way. They are in more detail in my submission to the Fiscal Commission, which was copied to TPC but never commented upon – since TPC was working for Domenici Rivlin rather than scoring the options before the Fiscal Commission.

I can forward them to you if you wish to make up for lost time, including a model that allocates spending to various taxes.