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.