Hearing on Improper Payments in the Administration of Refundable Tax Credits

Thank you, Chairman Boustany and Ranking Member Lewis, for the opportunity to submit comments on this topic. I will leave it to the scheduled witnesses to outline the current situation and its causes and will address my comments to how we can do things better in the future.

It is no surprise that there is a significant fraud problem in this area. The tax code provisions which provide these credits are not easy to understand for the average tax preparer, let alone for the working poor population eligible for these credits. This drives most of those eligible toward paid preparers with no certification requirement who often charge a premium for their services and for the inevitable refund anticipation loans. Because interest on such loans is a percentage of the total refund, preparers have every incentive to stretch the truth.

While tax reform may simplify how these credits are determined, they cannot be simple enough for those who are less literate as a rule than the general population. Indeed, many are not literate at all in English, so they don’t really understand what they are signing. Unless tax forms are available in Spanish and a multitude of other languages (Korean and Eritrean are very popular in my neighborhood as well), removing these credits from personal income taxation – and indeed removing the need for most people to file at all – seems to be the only real solution. Throwing more money at the IRS enforcement budget does not get to the root of the problem at all. A four pronged system is called for.

The first prong is a Value Added Tax (VAT) of between 10% and 15%, which should be a replacement for low rate income taxation rather than being a supplement to it. In the transition, net wages could be increased by the rate of the VAT so that consumers are not unduly burdened – while still being conscious of taxation, as the tax total can appear on the receipt, as sales taxes do now. It would be all the better to have this tax fund discretionary military and civilian spending, making the pursuit of pork less attractive to Members and constituents alike.

The second prong is a VAT-like Net Business Receipts Tax. It would be on the same base as the VAT (wages and profits), but would have deductions and credits – among them the health insurance exclusion, additional credits from the Patient Protection and Affordable Care Act and an enhanced refundable Child Tax Credit.

The expanded credit would be paid by employers with wages, rather than through tax refunds and would not depend on the base wage (which would be lower with the credit factored out – although the wage cuts would be on the higher end of the scale – indeed, the minimum wage should be increased so lower wage workers are paid by more than their credits).

If the home mortgage interest and property tax deductions were not retained and the same amount transferred to this credit, along with the end of the tax exemption for children, the Child Tax Credit could be expanded to $500 per month per child. That is roughly half the cost of raising a child. States could give a credit for the other half in some areas, with some states requiring much less to cover the cost of living.

Note well that such levels would undoubtedly reduce the need for abortion and contraceptive services, so that supporting this proposal should be counted as a must-support for a perfect pro-life rating. It would also, by encouraging more children and better housing, bring back the economy in the short term and solve our entitlement crisis in the long term by ending the aging crisis.

This tax would replace mid-range income tax revenue, the Corporate Income Tax and the payroll taxes for Survivors under 60, Disability Insurance and Hospital Insurance. This tax would cover all entitlement and non-entitlement/non-OASI social spending. The rate would be 27% after exclusions and 33% with exclusions. These are the balanced budget rates. They will go lower as programs which duplicate the enhanced benefits are eliminated or turned into additional tax credits – an employer credit for both college and elementary education come to mind. Additionally, in the short term and in similar economic times, income tax revenue and borrowing could supplement this category of spending.

In the transition, this tax would lower net wages to account for the tax benefits for children, plus the loss of certain deductions by higher income individuals, as well as gross wages, which would be lowered to the net wage plus Child Tax Credits plus the OASI contribution, which would be the third prong and would be increased to 6.5% for individuals and employers (with the option that the employer contribution be credited equally, regardless of income). The reason for the higher rate is that it is charged to the new net income (less credits) rather than to the current gross wage. Note that if Survivors Insurance for non-retirees is not split out, the rate will be higher. Separation of this tax from the NBRT is necessary unless the employee contribution is to be totally eliminated with a uniform benefit. A separate payroll contribution is required as long as benefit levels are set according to income.

The fourth prong is an income surtax on wages and distribution from the sale of inherited assets (with distributions remaining tax free when they are the result of a sale to a qualified Employee Stock Ownership Plan), capital gains and dividend income above $100,000 for joint or widowed filers (half that for single and couples filing separately) – or $150,000 at current gross income levels. The rates would be cut by 24% from current rates, so that the current 28% rate would be 4% and the Clinton era 39.6% rate would be 15.6%.

We recommend even higher rate structures be put in place to account for the fact that in the short term, higher income individuals do not spend all of their money. The highest rate should be 27% to match the Net Business Receipts Tax rate and should kick in at $550,000 in income.

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 surtax on that income. We 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.

This tax would fund overseas, sea and strategic military deployments, other foreign operations, net interest on the debt and repayment of the Social Security Trust Fund, as well as any additional debt reduction, down to and including total debt repayment – which is required if the Gentleman from Texas and his followers are serious about ending the Federal Reserve and we are all serious about not burdening our children with debt.

Thank you again for the opportunity to offer comments on this topic.

Comments to Ways and Means on How Other Countries Have Used Tax Reform to Help Their Companies Compete in the Global Market and Create Jobs

I will leave it to others to describe how other companies compete and confine my remarks to how the United States should restructure its tax system with an eye to both competitiveness and how other countries should respond to what I propose.
There is more to tax reform than international competitiveness, as tax policy takes a back seat to factor prices in determining where retailers seek their suppliers, unless of course this committee is willing to enact a substantial value added tax to decrease imports and decrease exports. I do not believe that is the intention of the Committee, at least not at this time.

Tax reform, if undertaken at all, should have the goal of simplifying the collection of revenue while maintaining or improving its basic progressive structure (which in current law is more honored in its breach, given low taxes on capital gains and dividends). The use of the tax code to provide subsidies to working families must be maintained, but this should occur without requiring that every household file a tax return to receive them, often by paying others to do so and paying a premium for refund anticipation loans which are heavily marketed to those least able to afford the finance costs.

On the other hand, the number of people paying no tax as a result of these benefits has justly drawn criticism that a sense of shared sacrifice has been abandoned. This has led many to demand some form of consumption tax so that all are conscious of some sacrifice. Some form of visible consumption tax will also provide an incentive to save to those who otherwise would not because their incomes are too low to do so. The wealthy, however, need no such incentive – having the ability to satisfy all of their current economic needs with additional income to spare.
To satisfy both demands, the Center proposes a four part tax structure.

Part One is a Value Added Tax (VAT), which is suggested because of its difficulty to evade, because it can be as visible to the ultimate consumer as a retail sales tax and because it can be zero rated at the border for exports and collected fully for imports. As this feature has been well explained by others, I will not go into detail on this point. What is more important is to exercise care in delineating what is funded by such a tax.

We believe that VAT funding should be confined to funding domestic discretionary military and civilian spending. Zero rating a tax supporting such spending is totally appropriate, as foreign consumers gain no benefit from these expenditures. Likewise, making imports fully taxable for this spending correctly burdens the consumers who fully benefit from these services. As importantly, making such a tax visible provides an incentive to taxpayers to demand less of such spending.
An extreme example of such spending incentives would be the creation of a regional VAT funding regional appropriations, with varying rates depending upon spending levels. While creation of regional appropriations panels and government agencies can be accomplished under the Constitution as currently written, creation of any regional excise would require a constitutional amendment, as the Constitution requires all excises to be uniform.

In order to fully fund current domestic obligations, the Center calculates that the tax rate should be 13.3%. In order for this to be affordable, during the transition, income tax withholding tables should be adjusted to increase net income by the same percentage, with Social Security beneficiaries receiving a similar bump in payments. This is a “balanced budget” rate. It could be set lower if the spending categories funded receive a supplement from income taxes.

Part Two is a VAT-like Net Business Receipts Tax (NBRT). Its base is similar to a VAT, but not identical. Unlike a VAT, and 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.

The key difference between the two taxes is that the NBRT should be the vehicle for distributing tax benefits for families, particularly the Child Tax Credit, the Dependent Care Credit and the Health Insurance Exclusion, as well as any recently enacted credits or subsidies under the Patient Protection and Affordable Care Act (ACA). In the event the ACA is reformed, any additional subsidies or taxes should be taken against this tax (to pay for a public option or provide for catastrophic care and Health Savings Accounts and/or Flexible Spending Accounts).

The Child Tax Credit should be made fully refundable and should be expanded to include revenue now collected under the dependent exemption, the home mortgage interest deduction and the property tax deduction. Transitioning these deductions will allow a $500 per month per child distribution with payroll. It will likely increase incentives to expand affordable housing and may not decrease housing for the wealthy, who are less likely to forgo vacation housing or purchase of luxury housing for wont of a tax cut, as the richest families likely pay the alternative minimum tax anyway, so that they do not fully use this tax benefit now.

This tax 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.

An extreme example of this proposal is to have a differential regional rate and differential benefit levels for this tax, which may or may not require an amendment – as this tax may be far enough removed from the transaction level to be considered an income tax rather than an excise.

Again, in the extreme, this tax 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.

Employers receive a tax credit if their retirees opt out of Medicare and Medicaid for seniors by fully employer funding of retiree health care, either by hiring doctors or purchasing comparable coverage, including catastrophic coverage in return for some kind of tax credit. This proposal 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.
It is not appropriate for this tax to be zero rated, as doing so would decrease the incentive to pass these tax benefits to employees. As importantly, the tax benefits and government services provided under this tax go to workers and their families. As such, overseas purchasers accrue benefits from these services and should therefore participate in their funding.

If the NBRT is enacted in this way, the United States should seek modification to our trade agreements to require that similar expenditures not be funded with taxes that are zero rated at the border. As foreign consumers benefit from subsidies for American families, American consumers benefit from services provided to overseas workers and their families. This benefit should be recognized in international tax and trade policy and American workers should not be penalized when other nations refuse to distribute the cost of benefits to foreign workers to the American consumers who receive the benefit of these services. If our trading partners do not match this initiative, some items of spending could be shifted from NBRT funding to VAT funding, so that we are not making unilateral concessions in this area.

The VAT would replace income taxes collected at the lowest rate, while the NBRT would replace disability insurance, hospital insurance, the corporate income tax, business income taxation through the personal income tax and the mid range of personal income tax collection, effectively lowering personal income taxes by 25% in most brackets. Note that collection of this tax would lead to a reduction of gross wages, but not necessarily net wages – although larger families would receive a large wage bump, while wealthier families and childless families would likely receive a somewhat lower net wage due to loss of some tax subsidies and because reductions in income to make up for an increased tax benefit for families will likely be skewed to higher incomes. For this reason, a higher minimum wage is necessary so that lower wage workers are compensated with more than just their child tax benefits.

The NBRT rate is projected to be 27% before offsets for the Child Tax Credit and Health Insurance Exclusion, or 33% after the exclusions are included. This is a “balanced budget” rate. It could be set lower if the spending categories funded receive a supplement from income taxes.

Part Three is the continuation of a payroll tax for Old Age and Survivors Insurance (although insurance for survivors under age 60 may be shifted to the NBRT). Given the across the board decrease in gross income, the tax rate would have to be increased to 6.5% for employees and employers (provided younger survivors are excluded). To improve program progressivity, the employer contribution could be credited on an equal basis, moving redistributive effects from benefit distribution to revenue collection. Additionally, the amount subject to tax should be increased or the income cap eliminated, which would help both program income and support for lower income retirees.

Separation of this tax from the NBRT is necessary unless the employee contribution is to be totally eliminated with a uniform benefit or uniform. A separate payroll contribution is required as long as benefit levels are set according to income. If a uniform benefit is desired, then payroll taxes can be discontinued and the NBRT expanded. Employee contributions could not be zero rated at the border. If employer contributions are equalized and contributed to a public system, however, they could be incorporated into a VAT rather than an NBRT. This allows the Social Security system to benefit from foreign labor where outsourcing has occurred. Indeed, it would be an essential expansion of the tax base if globalization is to continue unabated.

The prospect of Personal Retirement Accounts can also be considered, although doing so is like holding a lightning rod in a thunderstorm. I do agree with President Obama that such accounts should not be used for speculative investments or even for unaccountable index fund investments where fund managers ignore the interests of workers. Investing such accounts in insured employee-ownership of the workplace would have an entirely different outcome, especially if voting shares occurred on an occupational basis with union representation. The impact at the international level of such employee-ownership if extended to subsidiaries and the supply chain is also potentially profound, especially in regard to transfer pricing and the international growth of the union movement. Those interested in my thoughts on this issue can contact me for more information.

Part Four is surtax on high income earners and heirs. It would replace the Inheritance or Death Tax by instead taxing only cash or in-kind distributions from inheritances but not asset transfers, with distributions remaining tax free they are the result of a sale to a qualified Employee Stock Ownership Plan.

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 a surtax on that income. We 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.

This surtax could have few rates or many rates, although I suspect as rates go up, taxpayers of more modest means would prefer a more graduated rate structure. The need for some form of surtax at all is necessary both to preserve the progressivity of the system overall, especially if permanent tax law enacted before 2001 is considered the baseline (which it should be) and to take into account the fact that at the higher levels, income is less likely to be spent so that higher tax rates are necessary to ensure progressivity.

This tax would fund net interest on the debt, repayment of the Social Security Trust fund, any other debt reduction and overseas civilian, military, naval and marine activities, most especially international conflicts, which would otherwise require borrowing to fund. It would also fund transfers to discretionary and entitlement spending funds when tax revenue loss is due to economic recession or depression, as is currently the case. Unlike the other parts of the system, this fund would allow the running of deficits.

Explicitly identifying this tax with net interest payments highlights the need to raise these taxes as a means of dealing with our long term indebtedness, especially in regard to debt held by other nations. While consumers have benefited from the outsourcing of American jobs, it is ultimately high income investors which have reaped the lion’s share of rewards. The loss of American jobs has led to the need for foreign borrowing to offset our trade deficit. Without the tax cuts for the wealthiest Americans, such outsourcing would not have been possible. Indeed, there would have been any incentive to break unions and bargain down wages if income taxes were still at pre-1981 or pre-1961 levels. The middle class would have shared more fully in the gains from technical productivity and the artificial productivity of exploiting foreign labor would not have occurred at all. Increasing taxes will ultimately provide less of an incentive to outsource American jobs and will lead to lower interest costs overall. Additionally, as foreign labor markets mature, foreign workers will demand more of their own productive product as consumers, so depending on globalization for funding the deficit is not wise in the long term.
Identifying deficit reduction with this tax recognizes that attempting to reduce the debt through either higher taxes on or lower benefits to lower income individuals will have a contracting effect on consumer spending, but no such effect when progressive income taxes are used. Indeed, if progressive income taxes lead to debt reduction and lower interest costs, economic growth will occur as a consequence.

Using this tax to fund deficit reduction explicitly shows which economic strata owe the national debt. Only income taxes have the ability to back the national debt with any efficiency. Payroll taxes are designed to create obligation rather than being useful for discharging them. Other taxes are transaction based or obligations to fictitious individuals. Only the personal income tax burden is potentially allocable and only taxes on dividends, capital gains and inheritance are unavoidable in the long run because the income is unavoidable, unlike income from wages.

Even without progressive rate structures, using an income tax to pay the national debt firmly shows that attempts to cut income taxes on the wealthiest taxpayers do not burden the next generation at large. Instead, they burden only those children who will have the ability to pay high income taxes. In an increasingly stratified society, this means that those who demand tax cuts for the wealthy are burdening the children of the top 20% of earners, as well as their children, with the obligation to repay these cuts. That realization should have a healthy impact on the debate on raising income taxes.
 
Bonus material on PRAs
Separation of this tax from the NBRT is important for future consideration of Personal Retirement Accounts (PRA) unless the employee contribution is to be totally eliminated with a uniform benefit or uniform PRA contribution paid to all employees without regard to income. Even without the prospect of PRAs, a separate payroll contribution is required as long as benefit levels are set according to income. If a uniform benefit is desired, then payroll taxes can be discontinued and the NBRT expanded.

PRAs should not be invested in speculative investments, expensive managed funds or even index funds – which break the accountability between share ownership and corporate governance which is essential for capitalism to be a moral exercise. Instead, PRAs should be invested in employer voting stock, with a portion invested in an insurance fund of similar employee-held companies. Employees of non-stock companies would invest their shares solely in the insurance fund. Individual contributions to PRAs would also go to the insurance fund so that higher income employees do not exercise a disproportionate share of control, which would violate the principle of equality in employee ownership. Such equality of accumulation is essential to employee morale.

Workers would select their own representatives to participate in corporate governance on an occupational basis, rather than allowing fund managers to do so – often their Taft Hartley organization or professional society. Shareholders who suspect that management is not voting in their interests could petition an examination of management actions by the Insurance Fund (which would be privately managed). If the insurance fund agrees that something is amiss, it can vote the shares it holds in trust with the petitioning share holders to sack management.

Transition to PRAs would be gradual unless the employing firm makes all of its former workers whole, that is unless it funds them as if they had participated in PRAs from day one of their employment. There would be no vesting period or waiting period before contributions would commence and other employee-ownership and retiree contribution plans would be ended, except that stock sales to employee-ownership plans would continue to be free of both income and inheritance taxes. As with health care, 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 retirement costs of workers who spent the majority of their careers in the service of other employers.

There are many possible options for the international treatment of OASI contributions. Contributions to a PRA would not be zero rated, nor could employee contributions. If employer contributions are equalized and contributed to a public system, however, they could be incorporated into a VAT rather than an NBRT. This allows the Social Security system to benefit from foreign labor where outsourcing has occurred. Indeed, it would be an essential expansion of the tax base if globalization is to continue unabated.

The international consequences of adopting PRAs which include employee-ownership are also interesting. As employees begin to own and control their workplace, they will find it in their best interests to include overseas subsidiaries and their supply chains in the same type of arrangement. They are also more likely to set transfer pricing so that all employees in an international enterprise receive the same standard of living from work, so that incentives to exploit other workers would be eliminated. This development would not only revive the labor movement, it would make it international in a way that trading agreements have not been able to accomplish. Recognition of this fact should make the possibility of PRAs more attractive to progressives and the more populist members of the Tea Party, but not to the more corporatist members of either party.

Solving the Problem of Medicare Parts B and D

Bruce Bartlett wrote in the New York Times on May 17 on the nature of the Medicare financial problem and how to fix it. The information he imparted is invaluable, however I disagree with his solution, which is to stop doing the Doc Fix.

He relates that the Affordable Care Act (ACA) expansion of funding brought the Hospital Insurance Trust Fund (Part A) into balance, with parts B (doctor visits) and D (Drug coverage) responsible for most of the unsustainable cost growth, as patient premiums have declined from 50% of spending to 25% and with Drug coverage not at all close to covering program costs.

Stopping doctor bills from going up on the demand side will not work. We know that because it did not work for Medicaid - since restricting payments have stopped most doctors from taking Medicaid).

As the Center for Budget and Policy Priorities reports, allowing the Bush/Obama tax cuts to expire on schedule will rather automatically cut the deficit to net interest costs - essentially stopping the need for any cuts at all - although many doubt the President has the intestinal fortitude or the desire to do this, since he listens to donors as much as the GOP does. This solution will happen only if Obama does not cave.

Frequent readers know that my solution is to consolidate all funding for health care, child tax subsidies and other support to individuals and families into a net business receipts tax, which would work like a no-visibility value added tax (VAT) with offsets for employers who provide services rather than having the government do it - up to and including retiree health care. Because of the option to provide private sector care, I believe it to be the most libertarian of plans possible - aside from simply cutting benefits and hoping everyone copes (which to my view is faux libertarianism, even though it is mainstream in that community).

Premium support is an oft mentioned alternative, although this will only work if the ACA is left in place, which Ryan does not do for partisan reasons, even though the pre-existing condition reforms and exchanges under it would gaurantee that seniors will be covered and repealing them will not.

The issue with the pre-existing condition reforms, which no one is talking about, is that the mandates under the ACA may be inadequate to keep people from dropping insurance - and will certainly not work if the mandate is rejected altogether (which is now Dogma in the GOP). This will lead to either the collapse of private insurance or the need to repeal pre-existing condition reforms and replace them with a subsidized public option for those who cannot get insurance. Of course, since seniors would be in that group in a premium support reform, such a solution would ultimate do nothing to fix Medicare.

The problem with Medicare Part B is that increases cannot keep up with costs, like they do in the private market, because doing so violates the commitment to not cut Social Security benefit checks. The cost of living adjustment must be high enough to cover the premium increase each year - although for many that is all it does. Further cuts brings up the spectre of seniors eating cat foot to make ends meet, hence the reason that the Fiscal Commission was called the Cat Food Commission by progressives.

Premium support and not patching doctor fees are attempts to make doctors restrict their costs - both to seniors and overall. Prices naturally rise more quickly than inflation because these services are subsidized, so any copay must be increased to slow demand from users in exactly the same way the market would without subsidies or insurance. The desire to make doctors pay more is a recognition that the main impact of both insurance and subsidies (and subsidies for insurance) is higher income for doctors and a larger medical care sector than would otherwise occur in a free market.

Our hybrid system is the most expensive option - either going to much less comprehensive insurance for everyone or an entirely governmental system would be cheaper, but is politically untenable (at least until private insurance collapses or is eventually supplanted by an ever expanding public option).

Going after doctors still won't work, however, as the Medicaid experience clearly shows. Premium support is a way to have insurance companies go after doctors instead, but that will likely yield the same result. Shifting the financial obligation to employers and past employers, as I have suppested previously, would likely control doctor costs, however I don't see the establishment stomaching such a reform just yet, even though it is the most likely to save money. Irregardless, some employers are too small to support a medical staff or support retiree health care, so some kind of public program is still necessary, with reform all the more crucial.

Making patients more conscious of their care might do the trick, both with more realistic premiums for Part B and Part D, with both rising to absorb half the cost - although premiums could be lowered by increasing copays and providing seniors with Flexible Spending and/or health savings accounts. The problem is that this is untenable when dealing with a population with largely fixed incomes. That problem, however, is not unsolvable.

The obvious solution, which no one has yet suggested, is to change how COLAs are calculated, moving from the wage index to an index based on what seniors actually buy - especially health care. If premiums were increased quickly, COLA changes would have to be as rapid.

Such a proposal would hasten the date that the Old Age and Survivors Insurance fund needs rescue. It also impacts lower income seniors to a greater extent than higher income seniors, since they have less left over after any mandatory copay. Either bend points would have to be reset or the entire complicated system of bend points would have to be replaced a new method of crediting contributions, where employer contributions are credited equally rather than as a match to the employee contribution - thus moving redistribution from the benefits side to the revenue side.

An average employer contribution would provide even more incentive for increasing the amount of income subject to benefits - or even eliminating the cap altogether. Of course, if you do the latter, we might as well simply use a Net Business Receipts Tax or a VAT to replace the employer contribution (which captures all income with the latter burdening imports as well) - unless of course we adopted Personal Retirement Accounts.

Before my fellow liberals get all upset, the accounts I suggest are not the kind the Cato Institute, with backing from Wall Street, want - but instead accounts which hold insured employer voting stock - which would instead diminish both Wall Street and the financial sector until they can be drowned in the same bathtub Grover Norquist wants to use to drown government.

Comments for the Record: Perspectives on Deficit Reduction: Social Security

United States Senate Committee on Finance
Tuesday, May 10, 2011, 10:00 AM
215 Dirksen Senate Office Building

Chairman Baucus and Ranking Member Hatch,

Thank you for this opportunity to provide comments to the Committee.

My comments are within the context of comprehensive tax reform, where the first 25 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 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.

The largest 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.

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.

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.

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.

Comments for the Record: Is the Distribution of Tax Burdens and Tax Benefits Equitable?

United States Senate Committee on Finance
Tuesday, May 3, 2011, 10:00 AM
215 Dirksen Senate Office Building

Chairman Baucus and Ranking Member Hatch,

Thank you for this opportunity to provide comments to the Committee.

I will leave it to the other witnesses and to the Brookings Urban Tax Policy Center to describe the current distribution of tax burdens and tax benefits and will instead address what is possible through tax reform.

Much of the thrust of public debate on tax burden reflects the fact that 51% of filers pay no Federal Income Tax. That figure is still entirely too low, since for most people the filing of personal income taxes duplicates efforts already put in by their employers, who do most of the paperwork, often at great cost, and write the checks to the U.S. Treasury. Of the 51% who file and get all of their withholding back, a significant majority require the help of professional tax preparers. Apparently, paying no taxes is not easy, although it is quite profitable for tax preparers, especially if refund anticipation loans are part of the picture. Such loans are usually quite predatory, but because the payees consider this “free money” they willingly pay up.

This money, of course, is not free. Indeed, it is not at all adequate for the main purpose for which it is designed for lower income tax payers, the provision of adequate income for low income families.

While one must look askance at any programs which transfer the responsibility for providing adequate wages from the employer and the consumer to the taxpayer, such programs make both economic and social sense in the area of family income maintenance, since in the free market, employers naturally prefer lower cost employees, all things being equal, forcing families to work harder for the same level of well being from work.

The recently expired Making Work Pay tax credit subsidized low wage labor where the preferred option would be a higher minimum wage, forcing employers and ultimately consumers to pay for the services they receive. Minimum wage laws are necessary because they level the playing field so that employers cannot initiate a “race to the bottom” by allowing workers to compete against each other to offer ever lower wages, often leaving families in the impossible position of having to bid well below what would otherwise be a reasonable standard of living in order to survive.

Income support for families, however, addresses real market failure in the employment market. It is entirely appropriate to use tax benefits to assure that all families receive a decent wage.

The United States Department of Agriculture estimates that it should cost $1,000 per month per child to provide a decent level of subsistence. The federal government could easily guarantee half of this amount using tax reform, with states providing the other half with coordinated tax benefits.

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.

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.

An enhanced Child Tax Credit could be used to end most income maintenance programs for poor families as well. Parents could be employed at the minimum wage to become functionally literate rather than undertake training for a job with no long term future and receive the child tax credit to supplement their incomes. No other subsistence would be required, with the training provider paying all benefits rather than relying on large, yet underfunded, social welfare bureaucracies at the state level.

The net effect of these reforms will be to end the culture of poverty. Individuals will be trained, either at public or employer expense (in lieu of taxes) to rise to the full measure of their potential. Both parents should be eligible for such benefits and occupational training without literacy training should be abolished. All too often, the fiscal, welfare and immigration policy of the United States seems designed to provide a pool of low wage workers for the food service industry – from the field to the fast food counter. While these jobs may provide some degree of upward mobility, at times they are akin to slavery. In the 21st Century, we can do better than that. If some products cannot be produced without what amounts to subsistence wages, than perhaps those products should not be produced at all, either at home or abroad. It should not, indeed it must not, be the policy of the United States Government to shield consumers from paying decent wages to those who feed us. Tax reform can be the tool to change this, from VAT on imported goods to a decent sized child tax credit to a livable minimum wage. I urge the Congress to do so.

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.

Ultimately, tax rates need to rise for wealthier individuals, heirs and families. There is a natural limit on how much taxes can be increased across the board without lowering consumer spending. Tax increases to higher income individuals are not so limited, since they take from savings and returns from investment. Incentives to work less hard simply do not apply to the taxation of dividend streams, since even off-shoring these investments still requires the funds to re-enter the United States in order for them to be spent.

In the long run, continuing the tax cuts to the highest 20% of taxpayers, which includes the upper middle class, simply delays their payment to the children of the same taxpayers. As wealth becomes more stratified, it is the children of privilege rather than the entire next generation who will inherit the responsibility for repaying the national debt. Once wealthier taxpayers appreciate this fact, they will welcome higher income taxes so as not to unduly burden their own grandchildren with higher taxes in the future.

The distribution of tax benefits and burdens relates directly to the question of the distribution of the national debt, both among individuals and between the several states. I am including a separate paper on this topic as a supplement to my statement.

Again, thank you for the opportunity to submit these comments for the record.