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.