Hearing on Supplemental Security Income Benefits for Children

Comments for the Record

House Ways and Means Committee

Subcommittee on Human Resources

Hearing on Supplemental Security Income Benefits for Children

Thursday, October 27, 2011, 9:00 AM

By Michael G. Bindner

Center for Fiscal Equity

Chairman Davis and Ranking Member Doggett, thank you for the opportunity to submit comments on these issues. This hearing raises two primary issues, the treatment of young people with learning disabilities and the financial challenges faced by families generally, particularly families in poverty.

Whether educationally disabled youth are over-medicated is to some extent outside of the scope of the Committee on Ways and Means. Generally, it is should not be a question for Congress at all, but instead should be debated in the medical community. The governmental response should be centered in the National Institutes of Health and its oversight committees, although the question of appropriate care should be given wide berth by Congress. While treatment of ADHD with nutritional supplements is an interesting field of endeavor, it is not within the purview of this committee.

Secondary to this issue is the role of basic nutrition in learning disabilities. Recent research and common sense both indicate that a diet that is too rich in simple sugars and lacking in protein is likely to aggravate learning disabilities.

Serious attention should be paid to whether federal nutrition aid to both families and schools is more a part of the problem than part of the solution. While high carbohydrate food is cheap, it is likely responsible for both hyperactivity and obesity in America’s at risk youth. Reversing bad practice in nutrition is neither cheap nor easy, especially when the role of agricultural subsidies for corn and its associated products, like high fructose corn syrup and import advantages for sugar are brought into the mix. The Agriculture Committees have jurisdiction over these issues and sadly they have been part of the problem rather than part of the solution.

While the Boston Globe article suggests that poor parents are using drug therapy as evidence of disability, the appropriate question is not whether this is an abuse practice, as the state of practice is a medical question. The more appropriate question for this question is much more basic, which is why parents would work so hard to make sure their children qualify for benefits?

The answer to that question is both obvious and uncomfortable. It includes the general approach for delivering these programs through the states and the adequacy of benefits provided from state to state and over time. Furthermore, the multiplicity of programs offered by various committees and agencies yields in consistent results.

The gutting of support for needy families under the auspices of reform has resulted in an epidemic of hunger, which has been made especially difficult during the recent economic downturn. It is no wonder that mothers are gaming the system any way they can.

The fact that it is primarily mothers who must deal with this issue is largely due to requirements which prevent aid to intact families, which is a product of the racism of a prior era that could not fathom providing aid to men, especially African Americans. One would hope that this racism is a thing of the past, however we have our doubts given the state of support for poor families and the level of rhetoric calling for still greater cuts which appears to be driven by more than mere philosophical difference on incentives to self improvement.

We would love to be proven wrong in this area. One way to do this is to use tax policy to provide for adequate incomes for all families.

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.

Our proposed tax plan includes expansion of the Child Tax Credit to a refundable $520 per month per child to be paid out with the wage as an offset to our proposed Net Business Receipts Tax. This tax would function like a Value Added Tax, except that it would be invisible on the receipt, non-refundable at the border and would contain offsets for employers who provide income support to families, health care to employees and retirees and alternative funding for other services now provided by the government, such as elementary and secondary education, remedial literacy for adults, vocational education, mental health services and post-secondary education.

We propose that participants in educational programs targeted at poor families, including secondary education, remedial adult literacy and vocational education, be paid a minimum wage (which would be increased above current levels) and include additional payments of the Child Tax Credit as if they were working in productive employment. This approach is far superior to current programs, especially when such programs push people into work when they are not even literate.

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.

Likewise, the shift in benefits from categorical and block grant programs to an equal refundable Child Tax Credit will pay for the shift in benefit distribution modalities for families, especially because these families are already eligible for the mix of tax benefits available to workers.

Participants in educational programs should also receive the same level of health insurance as if they were employees of the education provider – thus ending the second class care they receive through the Medicaid program, as well as the need to pay benefits through large, yet underfunded, social welfare bureaucracies at the state level. Public housing should be replaced with residential training programs for both parents and children.

Providing the families of disabled children with the health care services available to workers makes it more likely that health care providers will take the time to consider each case individually, rather than treating them as someone “in the system.” If the subcommittees prefers rehabilitation to permanent disability, it must mainstream medical care and family income levels rather than maintaining income support at what are arguably punitive levels.

Establishing a decent level of income through paid remedial training, increased minimum wages and increased family support through an enhanced refundable child tax credit 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.

In the long term, this makes all entitlement services more affordable, as the essential nature of our long-term budget problems are demographic. Providing for more children while giving the poor a way out is the nation’s best long term financial security.

Thank you again for the opportunity to present our comments. We are always available to members, staff and the general public to discuss these issues.

Hearing - Overview: Discretionary Outlays, Security and Non-Security

Hearing - Overview: Discretionary Outlays, Security and Non-Security

Wednesday, October 26, 2011

216 Hart Senate Office Building

Chairwoman Murray and Vice Chairman Hensarling, thank you for the opportunity to address this topic.  Our comments for the record are based on our four part plan for tax reform, which more closely links expenditures to revenue sources. This plan has been shared with the revenue committees in both houses, was shared with the Fiscal Commission and has its roots in our submission to President Bush’s Tax Reform Tax Force.  The key elements are

• a Value Added Tax (VAT) that everyone pays, except exporters,
• a VAT-like Net Business Receipts Tax (NBRT) that is paid by employers but, because it has offsets for providing health care, education benefits and family support, does not show up on the receipt and is not avoidable at the border,
• a payroll tax to for Old Age and Survivors Insurance (OASI) (unless, of course, we move from an income based contribution to an equal contribution for all seniors), and
• an income and inheritance surtax on high income individuals so that in the short term they are not paying less of a tax burden because they are more likely to save than spend – and thus avoid the VAT and indirect payment of the NBRT.

Discretionary spending in support of entitlement spending would be funded by primarily by the taxes that fund those entitlements.  As we propose the application of the Child Tax Credit to individuals pursuing adult education, rather than funding direct benefit programs, we anticipate that most discretionary spending in this area will be ended.  For example, there is no need for a new demonstration project for SNAP benefit distribution if SNAP is replaced.  As this will result in a more generous benefit than most poor families now receive, we cannot offset the loss of this spending with deficit reduction.

On the whole, under our program, discretionary spending will be funded by two taxes: the VAT and the surtax on wealthy individuals, families and heirs.

We believe that VAT funding should be confined to funding domestic discretionary military and civilian spending. 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 to fund regional appropriations, with varying regional rates depending upon spending levels.  Local leaders will be much more reticent about asking for increased federal discretionary spending when the VAT rate in their region will go up as a result.  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.  1.8% of that rate represents programs that are national in scope, with the remainder representing more regional spending.

Our estimates were derived by allocating expenditure items in the President’s budget to the various revenue sources in our plan.  Upon request, we can share this allocation with the Joint Select Committee.  These allocations are, of course, subject to revision by the Administration and Congress.  Domestic defense spending was estimated to be 60% of the defense budget that was not identifiable as overseas or strategic nuclear spending, which is to be funded by the Surtax.  We could find no publicly available information to make a more exact estimate.  Should our methodology be adopted, we recommend readjusting these figures based on information which would be provided by the Department of Defense.  Military retirement and some items of veterans spending are funded by the Surtax because they are of late they have been a consequence of overseas service. 

Overseas and strategic spending is identified with the Surtax for two reasons.  First, it cannot be allocated to a particular region, nor should it be.  Secondly, such deployments are most likely funded by deficit financing, as war is considered an extraordinary cost.  Because debt repayment is allocated to the Surtax, the expenditure item most likely to lead to the incurring of debt should be so allocated.  Should this approach be adopted, we expect that wealthier taxpayers will be in the vanguard of those seeking both fewer military commitments and more allied funding of these commitments when they occur, which cannot but help decrease the debt in the long term.

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.

The U.S.-China Economic Relationship and Tax Reform

Comments for the Record

House Ways and Means Committee

Hearing on the U.S.-China Economic Relationship

October 25, 2011, 10:00AM

1100 Longworth House Office Building

By Michael G. Bindner

Center for Fiscal Equity

Chairman Camp and Ranking Member Levin, thank you for the opportunity to submit comments for the record on this issue. When this issue was discussed in the Senate, there were no public hearings, so this opportunity is greatly appreciated. We will leave it to the Administration witnesses to discuss their plans and their reaction to the Senate bill and will instead how our tax reform plan impacts trade in general and trade with China in particular.

As you know, the Center for Fiscal Equity has a four part proposal for long term tax and health care reform. The key elements are 

• a Value Added Tax (VAT) that everyone pays, except exporters,
• a VAT-like Net Business Receipts Tax (NBRT) that is paid by employers but, because it has offsets for providing health care, education benefits and family support, does not show up on the receipt and is not avoidable at the border,
• a payroll tax to for Old Age and Survivors Insurance (OASI) (unless, of course, we move from an income based contribution to an equal contribution for all seniors), and
• an income and inheritance surtax on high income individuals so that in the short term they are not paying less of a tax burden because they are more likely to save than spend – and thus avoid the VAT and indirect payment of the NBRT.

A Value Added Tax (VAT) 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 such, it is superior to proposals for a FairTax or 9% National Sales Tax. As many others, particularly Michael Graetz, have pointed out, resorting to a VAT rather than imposing trade sanctions has the effect of imposing higher costs on imports and lower costs on exports, without provoking retaliation from our trading partners – mostly because our trading partners already use such a regime. By not adopting a similar tax structure, we essentially tie the hands of our exporters in the fight for international market share. There can be no retaliation when using VAT is already the international standard. In short, if the U.S. adopted a VAT, China would have no countermove as the use of VAT is part of global trade structures.

It is also important is to exercise care in delineating what is funded by a VAT. 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.

The NBRT would not be border adjustable because it is designed to pay for entitlement costs which benefit employees and their families directly, so that it is appropriate for the foreign beneficiaries of their labor to fund these costs. Additionally, the ultimate goal of enacting the NBRT is to include tax expenditures to encourage employers to fund activities now provided by the government – from subsidies for children to retiree health care to education to support for adult literacy. Allowing this tax to be zero-rated at the border removes the incentive to use these subsidies, keeping government services in business and requiring higher taxation to support the governmental infrastructure to arrange these services – like the Committee on Ways and Means.

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.

Separation of Old Age and Survivors Insurance Payroll taxes 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.

Personal accounts invested in index funds do not have that feature, although they do serve to support American retirees who because of them have a financial interest in firms utilizing foreign labor, particularly low-wage Chinese labor. The proposed USA accounts proposed by President Clinton had the same feature, although as a supplement to the Social Security benefit rather than a partial replacement, although this feature would be muted by enactment of value added taxes.

The flaw in using foreign investment to make up for lost worker revenue is that eventually foreign workers either radicalize or become consumers and demand their own union rights.

China is sitting on a time bomb, and this time bomb has nothing to do with its U.S. Treasury holdings. These holdings are secure as long as the Congress and Administration deal realistically with the expiration of the 2001/2003/2010 tax cuts at the end of next year by offsetting any cuts made permanent with spending cuts or and making sure that any tax reform raises the additional revenue required to cover the difference. Rather, their difficulties arise from their treatment of domestic migrants from rural areas working in Chinese factories. Eventually, these migrants will object to the locality system imposed upon them and demand the same level of pay, benefits and consumerism as is earned by those designated as urban. When this occurs, the valuation of the Yuan will occur, assuming that the Chinese Communist Party survives. We do not make this assumption, however.

It would be better for all concerned if American workers were already in an ownership position due to repeal of the Taft-Hartley Act prohibitions on concentrated pension fund ownership and the enactment of personal retirement accounts. If employee-owned firms extended this ownership to their overseas subsidiaries and purchased their supply chains, they could change the equality system in advance of revolution – however quick adoption of our suggestions to expand employee-ownership is probably less likely than revolution in China.

The tendency for consumerism to follow industrialization is why globalization is a poor substitute for expanding the domestic population, as the Center proposes with its expanded Child Tax Credit, which we propose as an offset to the NBRT.

In the long term, the explosion of the debt comes from the aging of society and the funding of their health care costs. Some thought should be given to ways to reverse a demographic imbalance that produces too few children while life expectancy of the elderly increases.

Unassisted labor markets work against population growth. Given a choice between hiring parents with children and recent college graduates, the smart decision will always be to hire the new graduates, as they will demand less money – especially in the technology area where recent training is often valued over experience.

Separating out pay for families allows society to reverse that trend, with a significant driver to that separation being a more generous tax credit for children. Such a credit could be “paid for” by ending the Mortgage Interest Deduction (MID) without hurting the housing sector, as housing is the biggest area of cost growth when children are added.

While lobbyists for lenders and realtors would prefer gridlock on reducing the MID, if forced to chose between transferring this deduction to families and using it for deficit reduction (as both Bowles-Simpson and Rivlin-Domenici suggest), we suspect that they would chose the former over the latter if forced to make a choice. The religious community could also see such a development as a “pro-life” vote, especially among religious liberals.

Enactment of such a credit meets both our nation’s short term needs for consumer liquidity and our long term need for population growth. Adding this issue to the pro-life agenda, at least in some quarters, makes this proposal a win for everyone.

The expansion of the Child Tax Credit is what makes tax reform worthwhile. Adding it to the employer levy rather than retaining it under personal income taxes saves families the cost of going to a tax preparer to fully take advantage of the credit and allows the credit to be distributed throughout the year with payroll. The only tax reconciliation required would be for the employer to send each beneficiary a statement of how much tax was paid, which would be shared with the government. The government would then transmit this information to each recipient family with the instruction to notify the IRS if their employer short-changes them. This also helps prevent payments to non-existent payees.

Assistance at this level, especially if matched by state governments may very well trigger another baby boom, especially since adding children will add the additional income now added by buying a bigger house. Such a baby boom is the only real long term solution to the demographic problems facing Social Security, Medicare and Medicaid, which are more demographic than fiscal. Fixing that problem in the right way definitely adds value to tax reform.

The fourth proposal is a surtax on high incomes from inheritance, wages, dividends and capital gains (essentially all income with the exception of sales to a qualified ESOP). It would fund overseas military operations, which are often debt financed, and net interest and debt repayment.

Explicitly identifying the high income surtax 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, including the creation of Chinese industry designed to sell to Americans. Indeed, there would have been any incentive to break unions and bargain down wages if income taxes were still at pre-1981 or pre-1964 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

The final question is the repatriation of profit from overseas subsidiaries, including profits parked in China. Under a consumption tax regime, there would be no separate levy on profit. Value added taxes are already paid in the country where the product is sold and these taxes include both the contributions of labor and capital. For the purposes of businesses, profit should not be taxed again when repatriated, except to the extent that this profit results from value added in the United States. Use of VAT exemptions must not be allowed as a tax avoidance scheme. Products with parts that have been produced or developed in the United States, then sent elsewhere for assembly, must reacquire any obligation to pay that was shed at the border. Not providing for this contingency opens the door for a great deal of abuse.

The source nation of dividend income, meanwhile, must be irrelevant for purposes of collection of the proposed high income and inheritance surtax. The subject of this tax is not the income of the business, which has been shifted to the NBRT for individual filers, but the income of households for personal consumption and savings. The existence of this tax takes into account the decreased likelihood that this income will be spent and therefore taxed under NBRT and VAT regimes and to safeguard savings opportunities for the non-wealthy, who would otherwise be priced out of the market for investments by higher income individuals who, because they have greater opportunities to save, garner greater and greater shares of America’s wealth. The proposed surtax is an attempt to level the playing field so that everyone can invest.

Thank you again for the opportunity to present our comments. We are always available to discuss them further with members, staff and the general public.

Tax Reform Options: Incentives for Charitable Giving

Comments for the Record

United States Senate Committee on Finance

Tax Reform Options: Incentives for Charitable Giving

Tuesday, October 18, 2011, 10:00 AM

215 Dirksen Senate Office Building

By Michael Bindner

Center for Fiscal Equity

Chairman Baucus and Ranking Member Hatch, thank you for the opportunity to address this topics. In our comments, we will describe how our tax plan relates to this issue, discussing the incentives for charitable contributions in the income tax generally and how contributions to charity might work with our proposal for a VAT-like Net Business Receipts Tax (NBRT). This proposal is not the same as the charitable tax credit proposed by Len Burman and by the Bipartisan Policy Center for a charitable tax credit included as part of automatic income tax filing, although conceivable that feature could be included as part of the NBRT..

As you know, the Center for Fiscal Equity has a four part proposal for long term tax and health care reform. The key elements are

• a Value Added Tax (VAT) that everyone pays, except exporters,
• a VAT-like Net Business Receipts Tax (NBRT) that is paid by employers but, because it has offsets for providing health care, education benefits and family support, does not show up on the receipt and is not avoidable at the border,
• a payroll tax to for Old Age and Survivors Insurance (OASI) (unless, of course, we move from an income based contribution to an equal contribution for all seniors), and
• an income and inheritance surtax on high income individuals so that in the short term they are not paying less of a tax burden because they are more likely to save than spend – and thus avoid the VAT and indirect payment of the NBRT.

The amount the income tax impacts charity is inversely proportional to the tax rate. Higher marginal tax rates provide more an incentive to giving than lower marginal tax rates, which is why since the 2001 and 2003 tax cuts, charitable giving is down while need is up because dividend rate cuts make labor savings productivity increases more attractive, therefore increasing the need for charitable services.

Many opponents of governmental charitable action maintain that lower tax rates leave more money for private charitable donations and work toward job creation. Recent experience shows that this is not the case. One of the saddest examples of this was last thanksgiving, where it took media reports of empty food banks with no turkeys to move the public to donate. If conservative beliefs on how low taxes lead to jobs and charitable giving were true, food pantries would have been overflowing, the coffers of charitable institutions would have been full and there would have been no need for such services because everyone would be employed, given how low taxation is on a historic basis.

There is also an allocation problem with private donations. Donor sovereignty does not always put such donations where most agree they do the most good. Food banks go empty while The Heritage Foundation, The Tax Policy Center and efforts by the Bill and Melinda Gates Foundation and Warren Buffett to fund birth control in developing nations (which amounts to population eugenics) get funded. I challenge conservative members to justify that result to their pro-life constituents when making the argument that funders know better than voters.

That being said, our plan does include provisions for a charitable deduction against the income surtax. Because the surtax is graduated with rates ranging from 4% to 28%, the incentive to give to charity will be low for lower income heirs and income earners and higher for those with higher incomes, whose donations will make more of an impact.

Corporate giving will be impacted by our proposal, as the Corporate Income Tax will be replaced by a VAT-like Net Business Receipts Tax (NBRT). We suggest that charitable contributions be limited to a series of credits rather than an open ended deduction that can be maximized to give according to donor preference. Unlike a straight up-VAT, however, some form of giving is still possible. Indeed, providing a vehicle for tax expenditures now distributed through the corporate income tax and personal income tax is the entire reason for proposing both a VAT (which provides tax visibility) and an NBRT.

The expanded refundable Child Tax Credit will replace much of the need for private charity, as it will be paid both to workers and paid participants in adult literacy and education programs, with payments at the same levels. Offsetting the credit with ending the child tax exemption, mortgage interest deduction and property tax deduction allows a federal credit of $520 per month per child. If this is matched, even in part, by a state level credit, the question of the need for private charity to feed people will moot.

Assistance at this level, especially if matched by state governments may very well trigger another baby boom, especially since adding children will add the additional income now added by buying a bigger house. Such a baby boom is the only real long term solution to the demographic problems facing Social Security, Medicare and Medicaid, which are more demographic than fiscal. Fixing that problem in the right way definitely adds value to tax reform.

This is not to say that private charitable organizations can be dispensed with. The experience of using Catholic Charities Family Services in lieu of public adoption services, although not without controversy regarding who can adopt, shows the promise of how charitable organizations can outperform government. This would likely also be true in the area of adult education.

One feature of the NBRT is that it allows employers (either on their own choice or responding to the preferences of their employees) to designate alternative providers without forcing qualified providers to compete in a public procurement process – although maintaining the requirement of accreditation and review is still essential. This is a feature that is impossible with the FairTax or a VAT alone. This feature can also be used, mostly at the local level, to fund public and private charter schools, including religious charter schools, although some jurisdictions could require that such schools allow union organization as a condition of participation (a compromise which would likely reverse resistance the National Education Association).

To extract health care cost savings under the NBRT, allow companies to offer services privately to both employees and retirees in exchange for a substantial tax benefit, provided that services are at least as generous as the current programs. Employers who fund catastrophic care would get an even higher benefit, with the proviso that any care so provided be superior to the care available through Medicaid. Making employers responsible for most costs and for all cost savings allows them to use some market power to get lower rates, but not so much that the free market is destroyed. This could also allow senior citizens in need of full time care to avoid selling off all of their property and becoming objects of public charity in order to get such care.

Enacting the NBRT is probably the most promising way to decrease health care costs from their current upward spiral – as employers who would be financially responsible for this care through taxes would have a real incentive to limit spending in a way that individual taxpayers simply do not have the means or incentive to exercise. While not all employers would participate, those who do would dramatically alter the market. In addition, a kind of beneficiary exchange could be established so that participating employers might trade credits for the funding of former employees who retired elsewhere, so that no one must pay unduly for the medical costs of workers who spent the majority of their careers in the service of other employers.

Conceivably, NBRT offsets could exceed revenue. In this case, employers would receive a VAT credit.

In testimony before the Senate Budget Committee, Lawrence B. Lindsey explored the possibility of including high income taxation as a component of a Net Business Receipts Tax. The tax form could have a line on it to report income to highly paid employees and investors and pay surtaxes on that income.

The Center for Fiscal Equity 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.

Finally, keeping a separate income and inheritance surtax also allows the maintenance of direct charitable giving in the tax code, as well as the ESOP exclusion which facilitates the tax-free sale of companies to their employees.

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.

My letter to the Budget, Revenue and Deficit Committees on corporate tax holidays

I write today to urge the Committee to strongly object to any corporate payroll tax holiday to allow repatriation unless it is offset by an immediate increase in dividend tax rates to their statutory levels. Such tax holidays have never been shown to do much for hiring - they are mostly paid out in dividends.

I can understand the rush to do this now, because dividend rates are going back to normal income levels in 2013. This is exactly why no tax holiday should take place until after 2013, so that this revenue is not lost to the Treasury.

This action would be a temporary provision to fund a temporary action because the 15% rate expires anyway, so there can be no objection that temporary stimulus is being funded by a permanent tax change.

Wealthy individuals are already spending without restraint, they do not need tax benefits to spend more and most corporations are flush with cash, so not further investment is required either. There is no downside for the economy in recouping some of these repatriated dollars through taxes.

Thank you for the opportunity to share these views on this emerging topic.

Tax Reform Options: Incentives for Homeownership

Comments for the Record

United States Senate Committee on Finance

Tax Reform Options: Incentives for Homeownership

Thursday, October 6, 2011, 10:00 AM

215 Dirksen Senate Office Building

By Michael Bindner

Center for Fiscal Equity

Chairman Baucus and Ranking Member Hatch, thank you for the opportunity to address this topic. As ending the Mortgage Interest Deduction seems to be the tax benefit everyone wishes to cut in order to balance the budget, this is a timely topic indeed.

The scheduled witnesses have undoubtedly pointed out that on one side, people took out long term loans in expectation of having this deduction, and therefore limiting it essentially alters the term of their contract. Witnesses on the other side have likely pointed out that this deduction is mostly used when loan balances are high and payments are mostly going to interest, which is not the case later in the loan.

For lower income earners with smaller loan values, or taxpayers with more mature loans, interest may be so low that the standard deduction is more lucrative – unless of course people harvest their equity to pay down other debt or make purchases – however given the state of the economy, I doubt many are advocating that strategy today.

Finally, we sure that someone will mention research that shows the likelihood that no one forgoes a vacation property or upgrades to more luxurious housing because of tax policy, although wealthier homeowners certainly appreciate the tax deduction and may contribute money to keep it. This is a privilege that most borrowers don’t have.

In our conversations with other tax reform advocates, we get the impression that they think that repealing the MID may be the sweet spot in getting tax reform done to cut the deficit and lower rates, as if wealthy tax payers won’t notice their tax bills rising. As people who make more are generally more savvy at about tax policy, we find such a view lacks basic credulity. Taxes must indeed go up for high earners, either through compromise or, when the economy eventually recovers, through the eventual expiration of the 2001 and especially the 2003 rate cuts on capital gains and dividends – which are essentially automatic if no compromise is reached.

We also do not believe that the housing sector will roll over for the expiration of the MID, as is likely obvious from today’s hearings and comments for the record.

The long term problems on the spending side are as important to deal with as the loss of tax revenue from extensions of the Bush/Obama tax cuts, although we believe the latter drives this process. The only reasonable answer to the former problem, however, is to change the demographics.

Life is essentially a Ponzi Scheme, especially as the society ages. This is especially true in modern societies with social welfare systems and market capitalism, but was equally true in ancient times when grandmothers encouraged the birth of grandchildren. Grandma is not stupid – she wants more kids around so she can continue to eat at the family table because kids become workers.

With the dissolution of extended family living, Grandma and now Grandpa rely on both the Social Security, pension and retirement savings systems. All of these require more workers to make things and pay taxes (even when productivity increases) and as importantly more people to buy things – something productivity raises can’t mimic. This is especially true for wealthier taxpayers who live off of dividends. You can’t eat a bond or stock certificate – someone must buy the underlying product.

For our retirement system to thrive, the thing we need most is not better financial schemes, but more children. As it happens, research shows that the biggest cost of growing a family is the cost of improved housing, although not necessarily purchased housing. This is especially true with the first child, but also with the first child of a different sex – particularly in later years.

Using the expiration of the Mortgage Interest Deduction to simply lower tax rates and pay down debt, if it can be accomplished at all, would miss a golden opportunity to instead expand the Child Tax Credit to something more resembling a living wage, especially if it is made refundable. As the committee may remember, this proposal is a key part of our tax reform proposal.

To refresh your memories, the Center for Fiscal Equity has a four part proposal for long term tax and health care reform. The key elements are

• a Value Added Tax (VAT) that everyone pays, except exporters,
• a VAT-like Net Business Receipts Tax (NBRT) that is paid by employers but, because it has offsets for providing health care, education benefits and family support, does not show up on the receipt and is not avoidable at the border,
• a payroll tax to for Old Age and Survivors Insurance (OASI) (unless, of course, we move from an income based contribution to an equal contribution for all seniors), and
• an income and inheritance surtax on high income individuals so that in the short term they are not paying less of a tax burden because they are more likely to save than spend – and thus avoid the VAT and indirect payment of the NBRT.


The expansion of the Child Tax Credit is what makes tax reform worthwhile. If the goal of tax reform is simply more revenue, that can be accomplished by eventual economic recovery and political gridlock through the automatic return to Clinton era tax rates. Funding health care can happen easily with premium increases, slight benefit cuts and eventual increases to the HI payroll tax. Expanding the child tax cut, however, may well solve the aging crisis.

Adding the Child Tax Credit to the employer paid VAT-like Net Business Receipts Tax (NBRT) rather than retaining it under personal income taxes saves families the cost of going to a tax preparer to fully take advantage of the credit and allows the credit to be distributed throughout the year with payroll. In order to make room in payroll for an expanded child tax credit, salaries would be generally decreased, which both adds a stick to the carrot by encouraging families with less children to have more and removes the perverse incentive to fire older workers as they demand more money to feed their families, or simply because they make more due to seniority.

The only tax filing for most families required in such a reform would be for the employer to send each beneficiary a statement of how much tax was paid, which would be shared with the government. The government would then transmit this information to each recipient family with the instruction to notify the IRS if their employer short-changes them. This also helps prevent payments to non-existent payees.

The expansion of the child tax credit to $520 per child per month is paid for by ending the tax exemption for children, the home mortgage interest deduction and the property tax deduction. This is more attractive to the housing industry than the alternative proposal, which is to end or limit the credit and use the proceeds to help bring the budget into primary balance.

Assistance at this level, especially if matched by state governments may very well trigger another baby boom, especially since adding children will add the additional income now added by buying a bigger house. Such a baby boom is the only real long term solution to the demographic problems facing Social Security, Medicare and Medicaid, which are more demographic than fiscal. Fixing that problem in the right way definitely adds value to tax reform.

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.

Improving the Budget Process: Strategies for More Effective Congressional Budgeting

Comments for the Record

Senate Budget Committee

Improving the Budget Process: Strategies for More Effective Congressional Budgeting

608 Dirksen Senate Office Building

October 4, 2011, 9:30 AM

By Michael G. Bindner

Center for Fiscal Equity

Chairman Conrad and Ranking Member Sessions, thank you for the opportunity to submit comments for the record on this issue. These comments were first published on our web page in 2003 and are as equally valid now as they were then.

For most of recent memory, especially in years where large deficits loom, the Congress and the President have been unable to reach consensus on a budget in time for the start of the fiscal year on October first. This is almost scandalous, given the impact of the federal government on the economy. The lives of millions of hardworking public servants and contractors hang in the balance while Congress debates, or more likely stalemates. While it is healthy to debate the nature of government from time to time, holding the nation hostage to stage it is not.

When the government is divided between the parties, budgets are submitted "dead on arrival.” This leads to a series of missed deadlines and a likely impasse that threatens to shut the government down at the beginning of the fiscal year. Often, the impasse leads to the need for an Omnibus Appropriation Act, with its attendant pork barrel spending to assure passage (a practice which further undermines citizen confidence in the Federal Government). The same wasteful programs and tax benefits get funded and the budget crisis goes on. This goes on because each side gains political points for blaming the other, while no one has any stake in lessening their own role.

The federal budget process is broken. It must be replaced with a new budget process that allows for agreement on broad issues and a continuation of government while the details and controversies at the programmatic level are worked out. The solution must include incentives to keep the process moving. To force congressional movement on overall priorities, the administration withholds detailed appropriations proposals until a general solution is passed in both houses of Congress and signed by the President (a Joint Budget Resolution). After this is passed, detailed proposals are submitted and acted upon by the authorization and appropriations committees. A two-year budget process is suggested to assure the process is completed on time.

Phase One: The Joint Budget Resolution
The first phase of the budgetary process is high-level budget enactment. The budget message, revenue estimates and increases, departmental, independent agency and functional spending totals, and deficit projections are included in the Joint Budget Resolution proposal. Until the resolution is enacted the Executive withholds detailed spending estimate or authorizing language. The proposal is submitted to Congress during mid-January, with passage of the Joint Budget Resolution by the July 4th recess.

A Joint Committee on the Budget considers the resolution. The Committee consists of members of the leadership of both houses, various committee chairs and members, and members not assigned to any major authorizing or appropriations committee (who shall be a majority). The Chair alternates between chambers. Such a committee is necessary to expedite action.

After the Committee reports the resolution it is considered in an expedited fashion. If there are differences between the amended versions of the resolution it goes back to the Committee one final time, and acts as a conference committee in this case.

The Executive Branch uses the totals enacted in the Joint Budget Resolution as the totals in its detailed authorizations and appropriations submissions.

Phase Two: Authorization
The second phase of the budgetary process is authorization, which begins after the Joint Budget Resolution is signed, in July of the first session. Most of the authorization process is accomplished before the appropriations process begins. To guarantee this, no appropriations bill is marked up in committee in either house until the authorization bill has secured floor passage in that house, including tax and entitlement adjustments. This occurs by February of the second session. At the start of a new President's term honeymoon authorizations changes are submitted by February, with enactment by September so that they take effect October first.

Authorization legislation addresses changes to current law, revised spending ceilings and floors (which the marked up appropriations bills does not exceed or fall short of subject to a point of order), any new programs or program elimination (the only time these occur), changes to agency regulations, adjustments to any entitlement, and estimates of their effect on the next fiscal period.

The revenue committees examine the progressivity of both taxation and spending to assure that the middle class pays for itself and the upper 20% pay for the benefits they receive plus a lions share of the benefits for the bottom 20% of income earners. Corrections in the tax code are enacted as a result of this review. The revenue committees also examine the level for cost of living adjustments (COLAs) and indexing. COLAs and indexing are adjusted so the public sector neither looses or gains as the result of inflation.

As part of this process, authorizing committees consider major regulations enacted since the last authorization. Doing so avoids the practice of appropriators playing games with the funding of regulatory agencies, since Congress has the opportunity to work its will during the authorization process. Before continuing on to the appropriations phase, I briefly discuss ways in which regulatory power is exercised in such a way as to not appear illegitimate by the vast majority of the public.

Increasing Congressional Review of Regulation
A major theme in modern political life is the popular protest against regulations enacted by unelected bureaucrats. This anti-Washington theme aided the campaigns of many recent administrations, including the current one. Other reforms in the regulatory review process increased regulatory accountability to the President. However, these did little to improve the position of Congress.

On June 30, 1983, the Supreme Court ruled the legislative veto unconstitutional in an immigration case, In re Chada. Since that time a Joint Resolution of Disapproval legislative veto has been enacted as a general case. Several other legislative vetoes have also been acted into law. However, many of these cannot survive the standards imposed by the Chada decision. Therefore, Congressional control of agency regulation remains an open question.

To regain control of regulations, authorization committees review the body of regulations under their purview during consideration of the President’s budget. The President or Independent Agencies submit any changes to their major regulations (enacted since their last authorization) as an appendix to their authorization proposals. If the authorizing committees approve of the changes they do nothing. However, if they are unsatisfied with the changes, or wish to make changes of their own they can at this juncture. These changes are made one of two ways. The first way is to write the change into law, which restricts subsequent action. If circumstances change the agency then seeks legislative relief or waits until the next authorization cycle. This option limits the ability of agencies to deal with emergencies, making it undesirable. The second way is to change agency regulation by law, allowing for further change as circumstance changes. This almost superficial difference preserves flexibility in the regulatory process, making it desirable.

Enactment of this proposal firmly places regulatory initiative with the Congress. This approach gives the people say in the regulatory process through Congress, strengthening representative government. In doing so it helps the less well organized (who know how to reach their Congressman, but not the administrative agency). The regulatory review provisions have two more advantages over the status quo. First, they bring the regulatory review process into sharper view, allowing for more involved citizen input. Second, they avoid the constitutional pitfalls of the legislative veto.

Phase Three: Appropriations
The third phase of the budgetary process is appropriations. The Executive Branch begins preparing its detailed appropriation submissions after passage of the Joint Budget Resolution in July of the previous year. It modifies its targets when Authorization legislation is marked up. The Appropriations submissions clear OMB and go to the Hill by March 15th of the second session. The submissions for each program are between the ceiling and floor listed in the authorization legislation. The total for the agency or department matches the total found in the Joint Budget Resolution. Agency submissions reflect program financial performance. Agency personnel defend the submission.

Appropriations sub-committees do not mark up legislation until after the authorization has cleared the full chamber. The full Appropriations Committees reports by June 15. If the total for an appropriations bill exceeds the total specified in the Joint Resolution the bill must clear the Joint Budget Committee before going to the floor. Legislation gets to the President's desk by Labor Day.

If an appropriations bill is not enacted prior to the start of the fiscal period (October 1) the current distribution of spending within current law is maintained, minus programs cancelled in the authorization phase, at the total set in the Joint Budget Resolution. This prevents the government from stopping at the end of the fiscal year.

Enactment of this proposal restores discipline to the budget process. Every actor in the process has specific responsibilities and incentives to meet them. Each actor maintains his share in the process, but not more than his share. The Executive Branch is forced to offer realistic proposals. The Legislative Branch meets its deadlines. The Federal Government then stops arguing about the budget and gets on with the business of governing.

There is support for these propositions in the academic and professional literature. Thomas Lynch of Florida Atlantic University also advocates a two-step budget process in "Federal Budget Reform," beginning with passage of a Joint Budget Resolution, which sets overall spending priorities. After this resolution passes agencies submit their requests, which are considered in detailed budget and bills. The strength of this approach is that it forces Congress to decide on overall priorities before they can begin to consider their local interests. Rudolph Penner and Alan Abramson, in their landmark book Broken Purse Strings, support the establishment of a Joint Budget Committee (echoing Senator Pete Domenici), a Joint Budget Resolution and multi-year budgeting.

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.