My recommendations to the Joint Select Committtee on mark ups

Each of the CoChairs should set out a Chairman's mark, which should be scored and which should add up the the full 4 trillion dollars and include cuts already agreed to. It should focus on both spending cuts and permanent tax provisions to replace those cuts which expire at the end of next year.


Both scored versions should then be organized along the same lines and then they can hold a public meeting and go through each line item, with public voting, as if they were in conference committee. Any option agreed to with 7 votes is in, with similar items with different amounts negotiated to split the difference. Any item that can't get six votes is dropped. At the end, the final package is voted on. If it gets seven, it is scored and sent to the floor.

In other words, they should do this like any conference committee markup. Details should be punted to the appropriations and revenue committees as necessary, to make a deal more likely, with hard deadlines included for expedited passage in each house and an automatic conference.
Whether this goes into overtime depends on the political courage of the GOP and a calculation on whether it is better to be seen solving problems or preventing tax increases that are inevitable without compromise. show more show less

Hearing on the International Tax Reform Discussion Draft

Comments for the Record

House Ways and Means Committee

Subcommittee on Select Revenue Measures

Hearing on the International Tax Reform Discussion Draft

November 17, 2011, 10:00AM

1100 Longworth House Office Building

By Michael G. Bindner

Center for Fiscal Equity

Chairman Tiberi and Ranking Member Neal, thank you for the opportunity to submit comments for the record on the discussion draft. We will leave it to others to critique the specific provisions of the discussion draft, as there are foundational questions that must first be addressed.

We believe that a reform of this magnitude should be part of a more comprehensive tax reform program. Recent proposals to cut corporate taxes in the short term, in advance of any reform of personal income taxes or the expiration of favorable rates for this income seem to us to be an attempt to cash in for the short term gain of our wealthiest citizens at the expense of everyone else. Coordinating reform so that any revenue losses due to international rules changes are offset by returning personal dividend taxation to normal income rates will allay these suspicions.

Many nations do not tax repatriated income at all; however these nations often also have consumption tax regimes. Under a consumption tax regime, there would be no separate levy on profit. Value added taxes (VAT) 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.

Let us now turn to the question of comprehensive tax reform. 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.

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

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.

Improving Regulatory Performance: Lessons from the United Kingdom

Comments for the Record

Senate Budget Committee

Improving Regulatory Performance:

Lessons from the United Kingdom

608 Dirksen Senate Office Building

November 16, 2:30 PM

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 to some extent repeat recommendations included in our testimony on the budget process from October, but bear repeating in this case.

In looking at regulation in the United States, it is not hard to find resistance to the very concept of regulation.  One would think with this amount of resistance, the party sourcing most of it would simply end it all when in power – yet it has not.  This demands exploration.

There are two main objections to regulation n the U.S.A.  The first is that it squelches innovation, especially innovation by small and emerging businesses.  This may or may not be true. Whether it is or not depends on how all encompassing the regulatory authority behind the particular regulation is and how concentrated the industry is it exists in.  Small businesses find it impossible to compete in the automotive market dominated by the Big Three U.S. automakers and the established international producers, many of whom actually produce more of their product within the U.S. than the domestic manufacturers. 

This objection has some truth in it – and it explains why regulation remains – because the established producers use regulation to protect their market share against competition.  Indeed, research on regulation shows that regulatory agencies become stable when captured by the major firms they regulate, with scientific experts moving back and forth between government and industry and a definite bias towards established players.  As these established players are often major donors to both parties, it is unlikely that this form of regulation is going anywhere fast.

Government and industry are more tightly intertwined in the United Kingdom than they are in the United States, so it is likely improvements come from better training of experts rather than any dismantling of partnerships between government and industry.

The second major objection is the “unelected bureaucrat” issue.  This objection is a bit of a canard, because in the popular imagination, a bureaucrat is the clerk at the DMV who had a short temper due to the long lines she had to face that day.  These aren’t the kind of bureaucrats who make regulatory policy, however.  While there certainly are entrenched civil servants who work on regulatory efforts, they are done under the guidance of both Congress and political appointees in the President’s party – who are often from the advocacy sector and come armed with an agenda that may or may not be shared by the President.  Often, these appointees are under-trained for the jobs they hold – which is why initiatives to train civil servants in the Senior Executive Service are often not adequate to improve agency leadership – as the wrong people are being trained.

A bigger bang for the buck would come from training and pre-certifying political appointees, giving them the same training SES members get on budgeting, personnel and policy, with ethics pre-screening as well.  Letting each major political party develop a cadre of such Senior Political Servants, with the help of the U.S. Government, would allow new administrations to hit the ground running.  SPS members should sail through the appointment and confirmation process – assuming they are required to go through the process at all.

Often, the complications to confirmation occur as a way to influence regulatory policy.  They are seen as necessary because Congress often feels shut out from the regulations they mandate.  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.

These issues don’t exist with the United Kingdom.  There is no separation between Her Majesty’s Government and the majority in Parliament.  They are one and the same, so accountability is not an issue.  Ministers are also groomed more effectively in the British process than in the American.  While viewing the BBC situation comedy “Yes, Minister” shows that there are still issues that the civil service must deal with in terms of the competence of political management, they are not as extreme as in the U.S. system where political appointees often return to private life, industry or advocacy just as they are finally house-broken.

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.

Hearing: Small Business Health Insurance Tax Credit

Comments for the Record

House Committee on Ways and Means

Subcommittee on Oversight

Hearing: Small Business Health Insurance Tax Credit

November 15, 2011, 10:30 AM

by Michael G. Bindner

The Center for Fiscal Equity

Chairman Boustany and Ranking Member Lewis, thank you for the opportunity to submit my comments on this topic. We will leave reporting on the effects of this program to the Administration witnesses and will confine our testimony to alternative ways to that small businesses may offer health care more effectively in the future, although we will first offer our assessment of the possibilities of reform under the Affordable Care and Patient Protection Act.

The Affordable Care Act works toward increasing funds for Medicaid providers, which is necessary to get people out of emergency rooms. The same act, however, counted on assuming that Medicare provider cuts would be implemented – a heroic assumption – in order to pass according to budget rules. Now that the Act is passed, however, the fiction that current law will be maintained can be dispensed with. Parity between Medicare and Medicaid is desirable, although without mandatory sick leave, it will not keep poor people from having to use emergency room care, limiting the likely effectiveness of the Act for the purpose of decreasing costs and keeping premiums low for small business.

More dangerous to the success of the Act, however, is the possibility of the failure of private insurance generally. The key issue for the future of health care consolidation is the impact of pre-existing condition reforms on the market for health insurance. Mandates under the Affordable Care Act (ACA) may be inadequate to keep people from dropping insurance - and will certainly not work if the mandate is rejected altogether for constitutional reasons.

If people start dropping insurance until they get sick – which is rational given the weakness of mandates – then private health insurance will require a bailout into an effective single payer system. The only way to stop this from happening is to enact a subsidized public option for those with pre-existing conditions while repealing mandates and pre-existing condition reforms.

One option is single-payer catastrophic insurance with health savings accounts. This would not work as advertised, as health care is not a normal good. People will obtain health care upon doctor recommendations, regardless of their ability to pay. Providers will then shoulder the burden of waiting for health savings account balances to accumulate – further encouraging provider consolidation. Existing trends toward provider consolidation will exacerbate these problems, because patients will lack options once they are in a network, giving funders little option other than paying up as demanded.

Shifting to more public funding of health care in response to future events is neither good nor bad. Rather, the success of such funding depends upon its adequacy and its impact on the quality of care – with inadequate funding and quality being related. For example, Medicare provider cuts under current law have been suspended for over a decade, the consequence of which is adequate care. By way of comparison, Medicaid provider cuts have been strictly enforced, which has caused most providers to no longer see Medicaid patients, driving them to hospital emergency rooms and free clinics with long waiting periods to get care.

Ultimately, fixing health care reform will require more funding, probably some kind of employer payroll or net business receipts tax – which would also fund the shortfall in Medicare and Medicaid (and take over most of their public revenue funding). We will now move to an analysis of funding options and their impact on patient care and cost control.

The committee well understands the ins and outs of increasing the payroll tax, so I will confine my remarks to a fuller explanation of Net Business Receipts Taxes (NBRT). Its base is similar to a Value Added Tax (VAT), but not identical.

Unlike a VAT, an 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 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).

This option would be particularly attractive to small businesses. It would essentially broaden the tax credit in the ACA. The current tax regime does not serve to encourage use of the Small Business Tax Credit, which in any case should be merged with the health insurance exclusion as part of an NBRT collected on all businesses, regardless of filing status.

The key to utilization is to increase the tax rate enough to encourage use and requiring such tax benefits for health care and our proposed expanded and refundable Child Tax Credit before any other exclusion are taken, including any zero rating of exports (which is why zero rating is not recommended for this tax).

The NBRT can provide an incentive for cost savings if we allow employers to offer services privately to both employees and retirees in exchange for a substantial tax benefit, either by providing insurance or hiring health care workers directly and building their own facilities, although we expect that only larger businesses will go to those lengths. Employers who fund catastrophic care or operate nursing care facilities 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 no so much that the free market is destroyed.

This proposal is probably the most promising way to arrest 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.

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 Center calculates an NBRT rate of 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.

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.

Economic Effects on Fiscal Policy Choices

Comments for the Record

Senate Budget Committee

Economic Effects of Fiscal Policy Choices

608 Dirksen Senate Office Building

November 15, 2011, 10:00 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.  There are a variety of ways to approach this topic.

One way is to examine how tax rates affect economic incentives.  In making such analysis, certain questions are helpful, for example:

• What is the impact of defense contracting versus Medicare provider payments versus the Child Tax Credit versus lower dividend tax rates? 
• Do lower tax rates on the wealthy cause growth or do they provide an incentive to firms to pursue productivity gains, including off-shoring jobs, union busting and holding wages in line?
• What is the impact of these policies on the middle class? 
• What is the impact of these policies on inflation? 
• How do tax policies relate to the creation of asset bubbles, especially when capital gains taxes are cut, as they were in 1997, when the Technology Boom was fueled, only to be followed by the Tech Bubble popping and the 2001 recession? 
• On all of these models, is there a lag effect between outlays of various types and their full impact on the economy? 
• How does each type of spending effect consumption, savings and investment? 
• What are the secondary effects as households and firms then spend the money they receive, including the effect on federal and state revenues? 
• Is aerospace procurement more likely to stimulate spending the, for example, a tax cut to aerospace executives? 
• How does each affect investment in both plant and equipment and in the secondary markets?

The second is from the point of view of “dynamic scoring.”  We advise advocates of dynamic scoring to be careful what they wish for, as recent economic evidence tends to show that the middle class did not do so well under the Bush Tax Cuts, with the likely cause of this being that low dividend rates gave incentives to CEOs to increase dividend payouts and their own bonuses by increasing productivity at great cost to the labor force in terms of outsourced jobs, lower pay, union busting and automation, which in turn lowers economic growth after a certain point or makes it dependent on borrowing from our trading partners.  While such productivity improvements, which date back to 1981, helped break the back of inflation, they created a huge wealth gap.  Including such results in a dynamic scoring on tax policy may have provided better policy, but advocates for lower taxes would not like it.

The third is from the point of view of macroeconomics.  Please find our analysis of these effects over the past 60 years.

(Please see http://fiscalequity.blogspot.com/2011/09/economic-models-available-to-joint.html for this section of my comments, which include graphics files).

Assuming that projections in the President’s budget are accurate for 2011, it is possible to compute an estimate for FY2012 growth using FY2011 data and the current model.  If the 2011 growth is estimated using the model rather than Administration projections, growth will be lower by half a percentage point.  Using the model, 2012 growth based on current fiscal year spending is projected at 3.0%, with more recent data indicating a rate of 1.9%, provided that spending is not cut too much.  In this model, lower spending results in a more anemic recover.  Cutting the budget too aggressively could result in disaster, however allowing the Clinton tax rates to expire may allow the economy to return to the curves experienced in the early 1960s or the 1990s.

Our comments raise serious issues that must be dealt with in determining fiscal policy in the near term.  Further adherence to current tax policy may lock us into a model where unsustainable debt is necessary to sustain the economy.  Finding a way out of this debt by reverting to a more rational tax policy, based on these data, is essential.

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.

Unemployment Insurance: The Path Back to Work

Comments for the Record

United States Senate Committee on Finance

Unemployment Insurance: The Path Back to Work

Tuesday, November 8, 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, which contains just a hint of irony. More ironic is the fact that, because the Center for Fiscal Equity does not benefit any particular industry, it is unfunded. Our ability to comment on these and other hearings in the past several months is only possible due to my ability to draw Unemployment Insurance. I have been working very hard, but without pay.

There are those on the conservative side of the intelligentsia who will likely offer the opinion that Unemployment Insurance allows people to avoid going back to paid work and that continuing to extend benefits simply delays the day when they must seriously look for the first available job.

These are answered by advocates for continuing to pay benefits, who defend the freedom the program offers to not seek the first available job, so that workers are more likely to find a job that is a match to their skill sets. Additionally, when more qualified workers can be more selective, less qualified workers are able to take the lesser skilled jobs that others are able to take a pass on because they can survive on benefits. I tend to agree with this analysis.

Most economists will also point out that payment of benefits allows those laid off to continue to spend at least some money, stopping a bad economy from getting much worse – especially when there are no jobs to be had by anyone, skilled or unskilled. This is likely the case with the current economy, at least until recently.

An issue undoubtedly facing this committee is the funding of extended unemployment benefits, as well as the possibility of benefits to the 99ers who do not qualify for extended aid and must now rely on family members, the ability to retire early or other social welfare benefits, such as the Supplemental Nutrition Assistance Program, which serves as the aid of last resort. Sadly, in an effort to give welfare reform teeth, SNAP levels are way below what is required for an individual to eat for a month.

Traditionally, extended benefits were financed without offsets. This is entirely appropriate, because UI is funded by a separate tax and raising this tax generally during an economic downturn would likely make the downturn worse. Cuts to items outside the UI trust fund are thus inappropriate and should not be suggested or required in our opinion. If funding cannot be debt financed, it must come from some kind of revenue increase. It is disappointing that the defenders of the program in Congress have not, to date, made this point and called their bluff.

It is troubling that while many families are still struggling under joblessness, uncertainty as to their job security or prospect for higher incomes and in many cases mortgages that are greater than their homes are worth, many of our largest companies are flush with cash and are quite unwilling to take the risk of “paying forward” the recovery by hiring more staff or giving existing staff substantial wage increases. What is even more troubling is that it is likely that many of these firms have these record cash accumulations as the result of austerity measures. While some firms most likely conducted layoffs in order to simply survive, others did so to maintain or increase profitability through cutbacks, outsourcing or automation – or simply limiting wage increases. Shareholders and executives are often rewarded for these actions, even though such actions on the whole damage potential revenue by limiting the customer base.

Henry Ford increased the wages of his workforce so that they could afford his car and was rewarded with profitability. If more firms were as smart as Mr. Ford, we would be out of this time of austerity.

The Government is not without options in this regard and now is the time to employ one of them. While companies that were struggling to get by, or who have closed, cannot afford to pay an unemployment surtax to fund their employees who require extended unemployment, there are those companies who certainly can. Therefore, in order to fund the next round of extended unemployment benefits, such a surtax should be levied and it should be high enough to cover not only those employees who have been laid off from that firm, they should be high enough to cover all such beneficiaries. Enacting such a levy will provide companies who are sitting on large cash balances with a strong incentive to rehire staff, so Unemployment Insurance really would be the way back to work.

The secondary effects of this are also significant. Newly rehired workers will spend more while those who have not been rehired will at least be able to maintain current spending. In both cases, the economy will be stimulated enough so that many firms that were struggling will have higher sales, as well as those firms which rehired former employees to avoid the higher tax. This virtuous cycle will continue to accelerate until the economy has righted itself.

There are those who would criticize this proposal as penalizing the profitable. They have no leg to stand on when these profits came at the cost of human suffering. Anyone who makes such an argument should be ashamed of themselves and deserve public scorn.

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.

Hearing - Overview of Previous Debt Proposals

Comments for the Record

Joint Select Committee on Deficit Reduction

Hearing - Overview of Previous Debt Proposals

Tuesday, November 1, 2011, 1:30 PM

1100 Longworth House Office Building

By Michael Bindner

Center for Fiscal Equity

Co-Chairs Murray and Hensarling, thank you for the opportunity to address this topic. Our comments for the record compare the two subject proposals with 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.

As we believe that the Joint Select Committee is the successor to the Fiscal Commission, we will organize these comments in the order presented in the Chairmen’s Draft, followed by the proposals by the Bipartisan Policy Center and our proposals.

Overall, the Fiscal Commission seeks to cap revenue at or below 21% of GDP, with spending capped at 22% and then 21% of GDP. The Bipartisan Policy Center seeks to reduce revenue to 23% of GDP, with revenues at 21.4%.

The Center for Fiscal Equity has no such targets other than balancing the budget and reducing the debt. We do this primarily by raising revenue but allowing offsets for the privatization of government functions, leaving the ultimate size of government to the political process and taxpayers themselves.

Recommendation One by the Fiscal Commission are strict military and discretionary spending caps, with points of order against excess spending and sequestrations if final appropriations are above the cap. Many of the proposed cuts come from a long series of GAO recommendations, although many of the defense cuts are for overseas bases. Caps start with a rollback of FY2012 spending to 2010 levels, with 1% reductions in budget authority in each year from FY2012 through FY2015 and indexing budget authority to inflation after that.

The Bipartisan Policy Center freezes Domestic Discretionary Spending for four years and Defense Spending for five, with growth of each at GDP after that, with statutory spending caps and sequestration to enforce these caps. The BPC also proposes a 6.5% national sales tax to use for deficit reduction.

Both the Fiscal Commission (Recommendation Four) and the BPC propose a Chained CPI linking inflation methodologies for revenue, spending and entitlements and cuts in mandatory agricultural programs and civil service retirement , with the Fiscal Commission also reforming military retirement n the future, the Universal Services Fund and student loans and the BPC adjusting fees for aviation security, flood insurance, and the PBGC,.

To control discretionary spending, the Center for Fiscal Equity recommends

• regional appropriations based on regional VAT revenue,
• a 10.9% regional VAT and a 2.4% national VAT
• regional discretionary spending for civil and military purposes capped at regional VAT collections,
• an eventual constitutional amendment authorizing a regional VAT rate, which would be adjusted to match expenditure rather than adjusting expenditure to match revenue.

The vast majority of government functions, including domestic basing of non-strategic military assets, infrastructure spending on transportation, aviation, water and sewer grants, agricultural programs, non-entitlement educational and development programs, and generally everything that can be regionalized will be funded by regional value added taxes, with spending in each region controlled by the amount of VAT revenue raised in that region.

Our VAT is higher than the BPC rate because we do not rely on congressional spending caps to enforce budget discipline. Instead, we expect to both move government activities between regions to align spending and taxing more closely, with regions eventually having the autonomy to set their own VAT rates to fund the levels of spending they prefer, giving regions an incentive to cut spending in order to be able to further cut taxes.

The national VAT will be decreased as agencies funded through it, such as the NIH, the FDA, certain regulatory functions of the EPA and NHTSA, the Wage and Hour Division and OSHA, the Civil Rights Division of DOJ, the EEOC, the Comptroller of the Currency, the Census Bureau, NIST, NASA, the Bureau of Economic Analysis and the Bureau of Labor Statistics, the Patent and Trademark Office, the National Parks, the Bureau of Engraving and Printing, and certain Homeland Security functions are instead funded by offsetting revenue sources such as seniorage, licenses to exploit government sponsored research, fees, fines , customs duties, tariffs and penalties.

In general, we favor fully funding government with taxes and then relying on citizens to call for spending cuts which will be followed by VAT cuts when spending cuts are achieved. Research on attempts to “starve the beast” by cutting revenue have shown that this approach does not work. This makes a great deal of sense, because if you give people any commodity more cheaply, including government, they will demand more of it. The only way to fiscal sanity, therefore, is to first raise taxes and then let the political process work to demand specific cuts or restrict the demand for future spending.

Recommendation Two of the Fiscal Commission is tax reform. The Chairmen initially recommended three options for tax reform. The first has four scenarios –

• one with all tax expenditures stripped out and a $30,000 standard deduction for couples, one with only the child tax credit/EITC retained with higher tax rates,
• one with the tax benefits for the poor retained plus
• certain tax benefits for home mortgages, health insurance and retirement benefits and a territorial tax system for business taxes retained at 80% with higher rates and
• one with 100% of those benefits with even higher rates of 13% for the lowest bracket, 21% for the middle and 28% for the highest and corporate rates.

The other two options are Wyden-Gregg and letting the tax writing committees make reforms with an automatic tax reform trigger should they fail to act. The Commission also raises the gas tax.

The Bipartisan Policy Center proposes, in addition to its Deficit Reduction Sales Tax, rate cutting and base broadening, with automatic filing at the lower 15% tax rate and a 27% rate for higher income levels (in essence a 12% surtax) and a corporate tax rate of 27%. The Mortgage Interest Deduction and charitable contributions credits would be replaced with refundable credits capped at 15% for homeowners and donors and simplified distribution of tax benefits to families which do not require tax filing. They also propose an payroll tax holiday for an entire fiscal year, which evolved into the partial holiday now in effect, which the Administration proposed to extend another year and expand.

Recommendation Three for the Fiscal Commission is the control of health care costs and pays for the Doc Fix permanently by paying doctors, health providers and drug companies less, increasing cost-sharing in Medicare and enacting malpractice liability reform by capping legal costs and capping non-economic and punitive damages, strengthening the IPAB and evaluating cost growth on a long term basis, with the requirement to suggest future cost reductions if costs are not controlled in the long term.

The Bipartisan Policy Committee would cap and reduce the health insurance exclusion on employer taxes, bargain for cheaper drugs for Medicare Part D, increase Part B premiums over time to 35%, modernize payment plans and bundle post acute care. In the long term, they would shift Medicare to a premium support program, limiting the growth of per beneficiary costs by .7% of GDP under current projections. Seniors could go with private insurance or Medicare, but with higher Medicare premiums if costs continue to rise. Medicaid would be shifted to managed care and require spending cuts of 1% of GDP by allocating services between federal and state governments. They also would reform malpractice laws with damage caps and would introduce innovations such as alternative dispute resolution. They would also reform the Doc Fix and would add an excise tax on naturally sweetened drinks.

The Center for Fiscal Equity’s tax and entitlement programs have a variety of similarities, in terms of top rates, and quite a few differences. Instead of capping the mortgage interest deduction, we eliminate it in favor of a larger refundable Child Tax Credit, which is taken as an offset to a VAT-like Net Business Receipts Tax, which replaces low rate income taxation, the disability insurance and hospital insurance taxes, taxation of business income under personal income taxes and the corporate income tax.

Rather than relying on universal personal income taxation to convey a sense of solidarity in paying for government services, the Center proposes a receipt visible VAT to do so, with the rate set at twice what the BPC proposes – however unlike the BPC and Fiscal Commission, the Center removes all visible income taxation from most households. Not only are families not required to file, but income taxes above the VAT level will be removed from the paycheck entirely, which will lower gross pay as employers assume this tax liability – although in the transition, net pay will be increased by the VAT rate so that the VAT is not a burden. We do not rely on the market to lower these rates, but instead propose adjusting withholding tables and Social Security benefits for this transition, allowing for a moderate increase in prices. Minimum wages should also be increased so that no one is paid primarily through the Child Tax Credit.

Health care reforms would not be driven by top down demands for cost savings. Instead, all health care entitlements, educational entitlements, refundable charitable contribution credits, and support for mental health care (in lieu of corrections) would be funded by the NBRT. Cost control comes through allowing employers to offer alternative insurance or direct health services to employees and retirees if these services are both lower cost and better quality. The more costs go up on the public side, the more the NBRT will go up. If coverage for retirees or direct services can be provided for less costs, they will be – but under no circumstances will beneficiaries receive inferior care, nor will providers bear the brunt of cost cutting.

As long as it offers a fair rate, private insurance will survive. If it does not, employers will self insure by paying doctors and paying for access to facilities and specialists without use of third party payment. In such instances, malpractice suits will be replaced by employee disciplinary procedures and the employer will make malpractice victims whole rather than having the matter heard in court.

Employers will also get tax credits for contributions to charities, elementary and secondary education by non-governmental providers, college education for new employees and employees in need of retraining and contributions to adult literacy providers, which will include covering the Child Tax Credit and health costs of program participants.

There would be an income surtax, but it will be increased above the 12% level suggested by the BPC so as to offset the loss of income to the NBRT and VAT at higher income levels, as wealthier individuals do not spend their entire income. In order to maintain period progressivity, a higher rate is necessary.

The standard income tax deduction for families would be $100,000 (equivalent to $150,000 before Business Income Tax salary adjustment). Unlike the BPC and Fiscal Commission recommendations, graduated rates will be maintained, due mostly to the fact that the top rate is 27% rather than the essentially 12% rate BPC proposes.

Income taxes would fund net interest, debt retirement and overseas diplomatic and security operations and naval sea deployments. The BPC proposes that the income tax fund current operations while their DRST cover deficit reduction. We take the opposite tack, funding current operations with the VAT and making it a broad based tax while confining payment of the tax to not only lower the deficit but reduce the debt to wealthier families. By identifying this tax with debt reduction and sun setting it when overseas deployments are ended and the debt is paid, wealthier taxpayers have an incentive to retire the debt more quickly so that it does not become a liability for their children.

The Center ignores the gas tax, but agrees that a higher tax is a good idea.

The Fiscal Commission’s last recommendation is on Social Security, which may put it outside of the Committee’s agenda. It raises the retirement age but sets an income floor for low wage workers and increases the amount of income subject to taxation to 90%. It also adjusts bend points to reduce benefits for higher wage workers and how inflation is calculated, adopting a Chained CPI for tax indexing, military, federal and FICA retirement. The subject of personal accounts does not come up.

The Bipartisan Policy Center’s proposals cover much the same ground as those of the Fiscal Commission, including changing bend points, increasing the income cap and adopting chained CPI.

The Center for Fiscal Equity concurs with raising the income cap. In order to offset the loss of gross income due to shifting most taxation to consumption, as well as shifting personal income to the expanded child tax credit, our plan raises rates to 6.5% of net pay to collect approximately the same amount from most earners.

We recommend an equal employer contribution based on the average contribution, so that bend points are not necessary - provided that balances are recalculated based on a uniform employer contribution rather than a match to individual income.

We did not address the inflation question in our submission to the Fiscal Commission. In later testimony, we opposed chained CPI because of the probably need to increase premiums to capture much more of the cost of Medicare Parts B and D, with higher annual increases that make restricting benefit increases to a lower inflation rate inadvisable, unless of course health care costs are given great weight in calculating inflation.

We also left open the possibility of personal retirement accounts provided that the following conditions are met:

• the income cap on contributions is removed rather than simply increased,
• the retirement accounts are invested not in Wall Street, but in insured employer voting stock with union or professional association proxy voting of shares, and
• the insurance fund serving as the fund used by non-stock employees for their primary accounts (rather than Wall Street).

Note that with personal accounts, there is no need to specify retirement ages - people retire when their balances are high enough for dividends to replace their wage income and account for growth to offset inflation.

We thank the Joint Select Committee for the opportunity to submit these comments and would welcome any questions from members or staff, as well as the opportunity to present these remarks to the Committee in person.