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.
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.
posted by Michael Bindner at 12:20 PM
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