Hearing on the President’s 2012 Trade Agenda

Comments for the Record

 U.S. House Ways and Means/
U.S. Senate Committee on Finance

 Hearing on President Obama’s Trade Policy Agenda
with U.S. Trade Representative Ron Kirk

 and a Second Panel on the Future of U.S. Trade Negotiations/

Hearing on the President’s 2012 Trade Agenda

Wednesday, February 29/March 7, 2012, 10:00AM

 By Michael G. Bindner

Center for Fiscal Equity

Chairman Camp/Baucus and Ranking Member Levin/Hatch, thank you for the opportunity to submit comments for the record on this issue. We will leave it to the Administration witness to discuss their plans and will instead concentrate on 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 and includes the employer contribution to OASI, but, because it has offsets for providing health care, personal retirement accounts, education benefits and family support, does not show up on the receipt and is not avoidable at the border,
• an employee payroll tax to for Old Age and Survivors Insurance (OASI) 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. 

FY2013 Defense Budget

Comments for the Record

United States Senate Committee on Budget

The President’s Fiscal Year 2013 Budget Request for the U.S. Department of Defense

Tuesday, February 28, 2012, 10:00 AM

215 Dirksen Senate Office Building

By Michael Bindner

Center for Fiscal Equity

Chairman Conrad and Ranking Member Sessions, thank you for the opportunity to address this topic. As always, our remarks on the Defense Budget. As always, our comments are predicated on our proposals for tax and budget reform, which has the following four elements:
• A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13.
• Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending.
• Employee contributions to Old Age and Survivors Insurance (OASI)
• A VAT-like Net Business Receipts Tax (NBRT) to fund entitlement spending.

One option for funding discretionary and entitlement spending is to split it along regional lines, reorganizing the current structure, which now varies between agencies, the federal courts and the Federal Reserve System, into seven regions of roughly equal electoral voting strength, with management by a regional Vice President and a regional legislative caucus.

Each regional caucus would pass discretionary and entitlement budgets based on regional VAT and NBRT collections with a requirement that budgets be balanced. This would lead to spending cuts or transferred operations to even out spending between regions.

In order to adjust tax rates regionally, a constitutional amendment is required, as excise taxes, and the VAT is considered an excise, must be uniform under current constitutional language. Creation of regional Vice Presidents and caucuses, however, can occur in law, although they could also be constitutionalized as well. A constitutional amendment would be required, however, to allow the Electoral College in each region to select the regional Vice President when that individual is not of the same party of the President.

Spending that is national in scope, such as overseas military deployments, naval sea operations and strategic nuclear spending, would be funded by the Income Surtax, while domestic national spending, such as the National Institutes of Health, would be funded by a national VAT.

In our proposal, the military services would also reorganize along regional lines, with an Air Wing and Army for each region. Naval base functions would be regionally funded and led as well. Deployed forces would be under separate command. Product commands would have regional and national elements. Supply and some logistics would be regional, while major weapon system RDT&E, Procurement and major Logistic overhauls would be nationally led, with budgets allocated to the using region or activity. Nuclear weapons systems procurement would remain national and would be commanded on a national basis. No regional Vice President will control nuclear weapons. National command authorities will also be nationally funded. The National Nuclear Security Administration in the Department of Energy will also be nationally funded.

The purpose of regionalization, especially if a regional VAT Amendment is ratified, is to bring funding closer to the taxpayer and thus cut down on unnecessary spending. If someone else is paying for it, local members of Congress fight hard for increased local defense spending. This will not be the case if doing so will result in a higher receipt visible value added tax paid regionally.

Costs for the Veterans Administration and for military retirement will be funded through the VAT, the NBRT and the income surtax. Non-entitlement costs will be VAT funded. Entitlements for retirees and veterans, including normal retirement pay, will be funded through the NBRT – especially if a personal retirement account system holding shares in the new employer replaces current pension, while disability retirement and health care for service in combat will be funded by the income surtax.

No regional spending breakdowns are provided with our comments, as this information is not available from public sources in the detail required to do so within the parameters we have laid out, although it is not impossible for the Department of Defense and the Department of Veterans Affairs to calculate such figures. We recommend that you ask them for a budgetary breakdown along these lines, as it would be most illustrative as you consider how forces are deployed within the United States and overseas.

We expect that during this time of war, the income surtax as currently estimated will not be adequate to fund all overseas deployments, which will necessitate continued deficit financing. Making this funding explicit, however, will serve as a good argument for increased tax rates – especially as the income surtax will also fund the payment of net interest and the eventual repayment of war debt.

Our approach to defense budgeting also will be helpful in rethinking the extent to which American forces are deployed world-wide. Such an analysis will likely indicate that current levels are unsustainable without increased contributions from host nations for not only facilities, but also to reimburse weapons system, personnel and eventual retirement costs.

While bringing funding closer to home will undoubtedly restrict what can only be regarded as out of control cost growth in Department of Defense, the cutting of too many jobs in the defense sector during what is arguable an economic Depression is not wise either. We recommend that the appropriation for the National Aeronautics and Space Administration be moved to the defense lines and that funding for manned space flight and space exploration be increased at the expense of defense research and procurement.

A significant increase in civilian space exploration is likely just what the economy needs and will impact both the aerospace and nuclear industries, as off-world colonies will undoubtedly require nuclear power if they are to be constructed on any reasonable scale, particularly lunar colonies which will face 15 day dark periods. Initially, these activities will be funded by a nationally based VAT, however as private space infrastructure grows, funding can be transitioned from direct support to loan guarantees for private space operations as citizen access to space increases. Given the risks, however, some degree of direct funding is currently essential to quickly ramp up space infrastructure and thus lower the cost.

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.

FY 2013 Budget for HHS/Health and Retirement Security Spending

Comments for the Record

The President’s Fiscal Year 2013 for HHS/

Health and Retirement Security Spending

By Michael G. Bindner

Center for Fiscal Equity

 

Chairmen Ryan, Conrad, Camp and Baucus and Ranking Members Van Hollen, Sessions, Levin and Hatch, thank you for the opportunity to submit these comments for the record to the House and Senate Budget Committees, the House Ways and Means Committee and the Senate Finance Committee. The beginning of the budget debate for a new year brings with it the opportunity to rethink proposals. The Center for Fiscal Equity is using this opportunity to change our proposed fix for Social Security and Health Care. As always, our proposals are in the context of our basic proposals for tax and budget reform, which are as follows:

• A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure very American pays something.
• Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year.
• Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.
• A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support, health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.

 

Discretionary activities of the Department of Health and Human Services would be funded by the VAT. While some of our VAT proposals call for regional breakdowns of taxing and spending, they do not for this department. While some activities, such as the Centers for Disease Control, exist outside the Washington, DC metro area, even these are site specific rather than spread out on a nation-wide basis to serve the public at large. While some government activities benefit from national and regional distribution, health research will not.

 

The one reform that might eventually be considered in this area is to more explicitly link government funded research with ownership of the results, so that the Department might fund some of their operations with license agreements for some of the resulting research, enabling an expanded research agenda without demanding a higher budget allocation.

 

Of course, regionalization is possible if the Uniformed Public Health Service is put into the role of seeing more patients, particularly elderly patients and lower income patients who are less than well served by cost containment strategies limiting doctor fees. Medicaid is notoriously bad because so few doctors accept these patients due to the lower compensation levels, although we are encouraged the health care reform is attempting to reduce that trend. Medicare will head down that road shortly if something is not done about the Doc Fix. It may become inevitable that we expand the UPHS in order to treat patients who may no longer be able to find any other medical care. If that were to happen, such care could be organized regionally and funded with regionally based taxes, such as a VAT.

 

The other possible area of cost savings has to do with care, now provided for free, on the NIH campus. While patients without insurance should be able to continue to receive free care, patients with insurance likely could be required to make some type of payment for care and hospitalization, thus allowing an expansion of care, greater assistance to patients who still face financial hardship in association with their illnesses and a restoration of some care that has been discontinued due to budget cuts to NIH.

 

The bulk of our comments have to do with health and retirement security.

 

One of the most oft-cited reforms for dealing with the long term deficit in Social Security is increasing the income cap to cover more income while increasing bend points in the calculation of benefits, the taxability of Social Security benefits or even means testing all benefits, in order to actually increase revenue rather than simply making the program more generous to higher income earners. Lowering the income cap on employee contributions, while eliminating it from employer contributions and crediting the employer contribution equally removes the need for any kind of bend points at all, while the increased floor for filing the income surtax effectively removes this income from taxation. Means testing all payments is not advisable given the movement of retirement income to defined contribution programs, which may collapse with the stock market – making some basic benefit essential to everyone.

 

Moving the majority of Old Age and Survivors Tax collection to a consumption tax, such as the NBRT, effectively expands the tax base to collect both wage and non-wage income while removing the cap from that income. This allows for a lower tax rate than would otherwise be possible while also increasing the basic benefit so that Medicare Part B and Part D premiums may also be increased without decreasing the income to beneficiaries. Increasing these premiums essentially solves their long term financial problems while allowing repeal of the Doc Fix.

 

If personal accounts are added to the system, a higher rate could be collected, however recent economic history shows that such investments are better made in insured employer voting stock rather than in unaccountable index funds, which give the Wall Street Quants too much power over the economy while further insulating ownership from management. Too much separation gives CEOs a free hand to divert income from shareholders to their own compensation through cronyism in compensation committees, as well as giving them an incentive to cut labor costs more than the economy can sustain for consumption in order to realize even greater bonuses.

 

Employee-ownership ends the incentive to enact job-killing tax cuts on dividends and capital gains, which leads to an unsustainable demand for credit and money supply growth and eventually to economic collapse similar to the one most recently experienced.

 

The NBRT 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.

 

A key provision of our proposal is consolidation of existing child and household benefits, including the Mortgage Interest and Property Tax Deductions, into a single refundable Child Tax Credit of at least $500 per month, per child, payable with wages and credited against the NBRT rather than individual taxes. 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 NBRT should fund services to families, including education at all levels, mental health care, disability benefits, Temporary Aid to Needy Families, Supplemental Nutrition Assistance, Medicare and Medicaid. Such a shift would radically reduce the budget needs of HHS, while improving services to vulnerable populations.

 

The NBRT could also be used to shift governmental spending from public agencies to private providers without any involvement by the government – especially if the several states adopted an identical tax structure. Either employers as donors or workers as recipients could designate that revenues that would otherwise be collected for public schools would instead fund the public or private school of their choice. Private mental health providers could be preferred on the same basis over public mental health institutions. This is a feature that is impossible with the FairTax or a VAT alone.

 

To extract 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. Increasing Part B and Part D premiums also makes it more likely that an employer-based system will be supported by retirees.

 

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.

 

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. These calculations are, of course, subject to change based on better models.

 

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.

Comments for the Record on the FY2013 President's Budget

Comments for the Record

Fiscal Year 2013 Budget Proposals

By Michael G. Bindner

Center for Fiscal Equity

  

Chairmen Ryan, Conrad, Camp and Baucus and Ranking Members Van Hollen, Sessions, Levin and Hatch, thank you for the opportunity to submit these comments for the record to the House and Senate Budget Committees, the House Ways and Means Committee and the Senate Finance Committee. The beginning of the budget debate for a new year brings with it the opportunity to rethink proposals. The Center for Fiscal Equity is using this opportunity to change our proposed fix for Social Security, which we will address in due course in our comments, which outline how Congress can respond to the President’s Budget submission. Congress has four options in pursuing fiscal policy this year. It can do nothing, it can play small, it can play medium or it can go big. Our comments will address each possibility.

Doing nothing is a possible solution to almost every issue. At the end of the calendar year, the tax cuts of 2001, 2003 and 2010 expire automatically, as do the recently extended payroll tax cut, extended unemployment insurance benefits and the suspension of the “Doc Fix” for doctors serving Medicare patients. Allowing these provisions to expire essentially solves the nation’s fiscal problems in the long term.

If the economy is more robust in December than current forecasts suggest, which is possible if ambitious solutions are pursued by the Federal Reserve on the underwater mortgage issue, this may be the most realistic option – although in our view it would be a lost opportunity for long term reform. This is not likely, however, as richest Americans (including doctors) who by and large fund the anti-tax movement, would be the hardest hit should permanent law come back into force, and would become the loudest voices for compromise to avoid this.

On the expenditure side, the Budget Control Act of 2011 contains within it spending caps which effectively serve as budget allocations for the purpose of enacting appropriations – making a concurrent budget resolution entirely unnecessary for the upcoming fiscal year. Voices who continue to claim that the Senate has not enacted a budget in 1000 days should be silent and if they continue to make this claim, held up to public ridicule because they should know better.

If the law included automatic enactment of the current service budget within these allocations, as we have suggested, then the only action required for this fiscal year would be extension of the debt limit, although some analysts, among them Bruce Bartlett, have suggested that the limit itself is unconstitutional and could be dispensed with, either in law or by Administration decree. Automatic enactment of the budget and dispensing with the debt limit would spur the Congress to enact timely compromise, which would end the impulse to gridlock.

There are two ways that Congress and the Administration can play small ball. Sadly, this is the most likely scenario given the state of the national economy. The most likely way is to delay action until after the election and, as a package, extend the debt limit through December 2013 in exchange for extending the expiring income, payroll, unemployment and medical payment provisions for an equal period of time, accepting the temporary pain of one year of sequestration.

A slightly more ambitious version of this scenario, which leaves less to chance as far as the impact of the election (as a lame duck President has no interest in any compromise at all) is to extend the debt limit, doc fix suspension, the payroll tax cut, extended unemployment and tax rates for middle class and wealthy taxpayers through July 2013 in exchange for making certain tax cuts for lower income Americans permanent, including the 10% tax rate and expanded Child Tax Credit – offsetting some or all of the spending cuts that have already been agreed to. This allows discourse on tax reform without holding our most vulnerable citizens hostage.

Should the President indicate that he is likely to let gridlock rule the day, a medium ball solution is more likely as opposition to a balanced solution evaporates as the likelihood of automatic tax cuts increases. The balanced solution is some combination of the cuts and tax reforms supported by the majority of the Fiscal Commission, also known as Bowles-Simpson, and the proposals of the Bipartisan Policy Center, also known as Rivlin-Domenici. Many of these proposals are similar and where they coincide seems like a fruitful place to start drafting legislation. Using the congressional budget process to begin enacting these provisions could occur in regular order, with the Department of the Treasury playing a supporting role in writing tax reform language.

The large ball game would be to actually balance the budget and enact radical reform in entitlement revenue and spending provisions, a shift from income taxes for most filers to consumption taxes and higher tax rates on those most ability to pay. The Center for Fiscal Equity proposes a large ball solution with four major provisions:

• A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure very American pays something.
• Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates between 5% and 25% in either 5% or 10% increments. Heirs would also pay taxes on distributions from estates, but not the assets themselves, with distributions from sales to a qualified ESOP continuing to be exempt.
• Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.
• A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support, health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.

We have no proposals regarding environmental taxes, customs duties, excise taxes and other offsetting expenses, although increasing these taxes would result in a lower VAT. American competitiveness is enhanced by enacting a VAT, as exporters can shed some of the burden of taxation that is now carried as a hidden export tax in the cost of their products. The NBRT will also be zero rated at the border to the extent that it is not offset by deductions and credits for health care, family support and the private delivery of governmental services.

Some oppose VATs because they see it as a money machine, however this depends on whether they are visible or not. A receipt visible VAT is as susceptible to public pressure to reduce spending as the FairTax is designed to be, however unlike the FairTax, it is harder to game. Avoiding lawful taxes by gaming the system should not be considered a conservative principle, unless conservatism is in defense of entrenched corporate interests who have the money to game the tax code.

Our VAT rate estimates are designed to fully fund non-entitlement domestic spending not otherwise offset with dedicated revenues. This makes the burden of funding government very explicit to all taxpayers. Nothing else will reduce the demand for such spending, save perceived demands from bondholders to do so – a demand that does not seem evident given their continued purchase of U.S. Treasury Notes.

Value Added Taxes can be seen as regressive because wealthier people consume less, however when used in concert with a high-income personal income tax and with some form of tax benefit to families, as we suggest as part of the NBRT, this is not the case.

The shift from an income tax based system to a primarily consumption based system will dramatically decrease participation in the personal income tax system to only the top 20% of households in terms of income. Currently, only roughly half of households pay income taxes, which is by design, as the decision has been made to favor tax policy to redistribute income over the use of direct subsidies, which have the stink of welfare. This is entirely appropriate as a way to make work pay for families, as living wage requirements without such a tax subsidy could not be sustained by small employers.

The income surtax is earmarked for overseas military, naval sea and international spending because this spending is most often deficit financed in times of war. Earmarking repayment of trust funds for Social Security and Medicare, acknowledges the fact that the buildup of these trust funds was accomplished in order to fund the spending boom of the 1980s without reversing the tax cuts which largely benefited high income households.

Earmarking debt repayment and net interest in this way also makes explicit the fact that the ability to borrow is tied to the ability to tax income, primarily personal income. The personal or household liability for repayment of that debt is therefore a function of each household’s personal income tax liability. Even under current tax law, most households that actually pay income taxes barely cover the services they receive from the government in terms of national defense and general government services. It is only the higher income households which are truly liable for repayment of the national debt, both governmental and public.

If the debt is to ever be paid back rather than simply monetized, both domestically and internationally (a situation that is less sustainable with time), the only way to do so without decreasing economic growth is to tax higher income earners more explicitly and at higher rates than under current policy, or even current law.
The decrease in economic class mobility experienced in recent decades, due to the collapse of the union movement and the rapid growth in the cost of higher education, means that the burden of this repayment does not fall on everyone in the next generation, but most likely on those who are living in high income households now.

Let us emphasize the point that when the donors who take their cues from Americans for Tax Reform bundle their contributions in support of the No Tax Pledge, they are effectively burdening their own children with future debt, rather than the entire populace. Unless that fact is explicitly acknowledged, gridlock over raising adequate revenue will continue.

Unlike other proposals, a graduated rate for the income surtax is suggested, as at the lower levels the burden of a higher tax rate would be more pronounced. More rates make the burden of higher rates easier to bear, while actually providing progressivity to the system rather than simply offsetting the reduced tax burden due to lower consumption and the capping of the payroll tax for Old Age and Survivors Insurance.

One of the most oft-cited reforms for dealing with the long term deficit in Social Security is increasing the income cap to cover more income while increasing bend points in the calculation of benefits, the taxability of Social Security benefits or even means testing all benefits, in order to actually increase revenue rather than simply making the program more generous to higher income earners. Lowering the income cap on employee contributions, while eliminating it from employer contributions and crediting the employer contribution equally removes the need for any kind of bend points at all, while the increased floor for filing the income surtax effectively removes this income from taxation. Means testing all payments is not advisable given the movement of retirement income to defined contribution programs, which may collapse with the stock market – making some basic benefit essential to everyone.

Moving the majority of Old Age and Survivors Tax collection to a consumption tax, such as the NBRT, effectively expands the tax base to collect both wage and non-wage income while removing the cap from that income. This allows for a lower tax rate than would otherwise be possible while also increasing the basic benefit so that Medicare Part B and Part D premiums may also be increased without decreasing the income to beneficiaries.

If personal accounts are added to the system, a higher rate could be collected, however recent economic history shows that such investments are better made in insured employer voting stock rather than in unaccountable index funds, which give the Wall Street Quants too much power over the economy while further insulating ownership from management. Too much separation gives CEOs a free hand to divert income from shareholders to their own compensation through cronyism in compensation committees, as well as giving them an incentive to cut labor costs more than the economy can sustain for purposes of consumption in order to realize even greater bonuses. Employee-ownership ends the incentive to enact job-killing tax cuts on dividends and capital gains, which leads to an unsustainable demand for credit and money supply growth and eventually to economic collapse similar to the one most recently experienced.

The NBRT 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.
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 NBRT should fund services to families, including education at all levels, mental health care, disability benefits, Temporary Aid to Needy Families, Supplemental Nutrition Assistance, Medicare and Medicaid. If society acts compassionately to prisoners and shifts from punishment to treatment for mentally ill and addicted offenders, funding for these services would be from the NBRT rather than the VAT.

The NBRT could also be used to shift governmental spending from public agencies to private providers without any involvement by the government – especially if the several states adopted an identical tax structure. Either employers as donors or workers as recipients could designate that revenues that would otherwise be collected for public schools would instead fund the public or private school of their choice. Private mental health providers could be preferred on the same basis over public mental health institutions. This is a feature that is impossible with the FairTax or a VAT alone.

To extract 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. Increasing Part B and Part D premiums also makes it more likely that an employer-based system will be supported by retirees.

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.

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. These calculations are, of course, subject to change based on better models.

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 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.

Dr. Lindsey also stated that the NBRT could be border adjustable. We agree that this is the case only to the extent that it is not a vehicle for the offsets described above, such as the child tax credit, employer sponsored health care for workers and retirees, state-level offsets for directly providing social services and personal retirement accounts. Any taxation in excess of these offsets could be made border adjustable and doing so allows the expansion of this tax to imports to the same extent as they are taxed under the VAT. Ideally, however, the NBRT will not be collected if all employers use all possible offsets and transition completely to employee ownership and employer provision of social, health and educational services.

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 Interaction of Tax and Financial Accounting on Tax Reform

Comments for the Record

House Committee on Ways and Means

Hearing on the Interaction of Tax and Financial Accounting on Tax Reform

Wednesday, February 8, 2012, 10:00 AM

By Michael G. Bindner

Center for Fiscal Equity

 

Chairman Camp and Ranking Member Levin, thank you for the opportunity to submit these comments for the record to the House Ways and Means Committee. Our comments are in the context of our tax reform plan, which has the following four elements:

• A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure very American pays something.
• Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates between 5% and 25% in either 5% or 10% increments. Heirs would also pay taxes on distributions from estates, but not the assets themselves, with distributions from sales to a qualified ESOP continuing to be exempt
• Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.
• A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support, health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.

We have no proposals regarding environmental taxes, customs duties, excise taxes and other offsetting expenses, although increasing these taxes would result in a lower VAT. As we have no proposals in these areas, we will ignore the financial accounting implications of these taxes.

The impact of VAT adoption on financial accounting is well documented, with a wealth of working models in every other OECD nation to draw upon. The complexity of any financial accounting depends on the complexity of the VAT itself. Broader based taxes require simpler accounting structures and will be generally more stable, with exceptions yielding complexity in reporting and accounting and inviting more complexity as entrenched interests demand more benefits to further game the system.

Accounting for Employee-paid Old Age and Survivors Insurance will be no more complicated than current law, while accounting for the income surtax will be greatly simplified. The only complexity will be accounting for sales to a qualified ESOP, which will continue to be tax exempt. If surtax rates remain stable, the only source of complexity will be annual adjustments for inflation.

American competitiveness is enhanced by enacting a VAT, as exporters can shed some of the burden of taxation that is now carried as a hidden export tax in the cost of their products. Accounting systems in a VAT system will also have to account for zero rating at the border and the treatment of imports as entirely taxable to the importer. The NBRT will also be zero rated at the border to the extent that it is not offset by deductions and credits for health care, family support and the private delivery of governmental services. As it is similar to a VAT, it will begin with the same base, but will require additional accounting structures to take into account the exclusions which make it more like an income tax and less like a VAT. These exclusions are the reason for a separate tax.

Accounting for a continued health insurance exemption is well developed. Accounting for services to retirees will be more complicated. While purchases for health care would be VAT and NBRT exempt, base medical wage costs would also be exempt for NBRT purposes, but not necessarily for the VAT, unless these services are contracted, in which case VAT would be collected by the vendor and the NBRT would be embedded in their costs. NBRT offsets for employer provision of social and educational services will follow similar rules, although services provided by non-profits will be VAT exempt, although the NBRT will still be embedded in any contribution.

Establishment of personal accounts as an offset for Old Age and Survivors Insurance will require complex accounting rules, however the benefit of such accounts is that the majority of these funds will be invested with the employer and accounting rules should be only slightly more complex than those required to deal with non-employee investors, although procedures to avoid older retirees spending down all of their assets and the creation of annuities for non-employee widows will add complexity.

Consolidation of the child tax exemption, the child tax credit and the EITC, while making them refundable, will aid both taxpayers and employee companies, who will simply report credits paid to each employee with their tax filing, with a copy to each employee, so that the government may also send a copy which employees can compare to verify honest employer reporting and payment. This should be no more complex than current accounting to process W-2 and 1099 forms.

Conceivably, NBRT offsets could exceed revenue. In this case, employers would receive a VAT credit. The accounting system must be able to capture this event when it occurs. It must also be able to adjust changes to NBRT and VAT rates and for Child Tax Credit adjustments for inflation, as well as expansions used for counter-cycle stimulus.

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 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. Relying on a separate personal income surtax for higher income individuals also reduces complexity for employers, who would not have to include systems to calculate surtaxes on higher income employees and dividend payees internally.

Our proposal seeks to bring long term stability to the tax debate, including consensus on who pays the income surtax and by how much. As the invited witnesses stated, stable tax policy is the best way to help firms minimize complexity in accounting for tax reform (although once the national debt is entirely paid off and overseas military commitments either ended or entirely funded by host countries, provisions to collect funds for the income surtax can be suspended when the surtax sunsets.

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.

Assessing Inequality, Mobility, and Opportunity

Comments for the Record

United States Senate Committee on the_Budget

Assessing Inequality, Mobility, and Opportunity

Thursday, February 9, 2012, 10:00 AM

215 Dirksen Senate Office Building

By Michael Bindner

Center for Fiscal Equity

Chairman Conrad and Ranking Member Sessions, thank you for the opportunity to address this topic. As always, our remarks will be in the context of our proposals for tax and welfare reform.

As the invited witnesses amply noted, recent decades have seen marked increases in inequality. We have noticed that most productivity gains have gone not to the more productive workers, but to business owners and managers who extracted these gains, sometimes through closing American factories. Fiscal policy has aided these developments by lowering tax rates on dividends and capital gains, thus providing incentives to trim labor costs.

The Center for Fiscal Equity believes that lower dividend, capital gains and marginal income taxes for the wealthy actually destroys more jobs than they create. This occurs for a very simple reason – management and owners who receive lower tax rates have more an incentive to extract productivity gains from the work force through benefit cuts, lower wages, sending jobs offshore or automating work. As taxes on management and owners go down, the marginal incentives for cost cutting go up. As taxes go up, the marginal benefit for such savings go down. It is no accident that the middle class began losing ground when taxes were cut during the Reagan and recent Bush Administrations, both of which saw huge tax cuts. Keeping these taxes low is also part of why we are experiencing a jobless recovery now.

As long as management and ownership benefit personally from cutting jobs, they will continue to do so. Tax reform must reverse these perverse incentives.

In order to preserve vertical equity in a given tax year in a consumption tax environment, some form of progressive income and inheritance taxation is essential, otherwise the debt crisis cannot be avoided as consumption taxes will never be adequate to replace the lost revenue.

The Center suggests retaining surtaxes on high income earners and heirs. These would replace the Inheritance or Death Tax by instead taxing only cash or in-kind distributions from inheritances but not asset transfers, with distributions remaining tax free they are the result of a sale to a qualified Employee Stock Ownership Plan.

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 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.

Identifying deficit reduction with income and inheritance surtaxes recognizes that attempting to reduce the debt through either higher taxes on or lower benefits to lower income individuals will have a contracting effect on consumer spending, but no such effect when progressive income taxes are used. Indeed, if progressive income taxes lead to debt reduction and lower interest costs, economic growth will occur as a consequence.

Using this tax to fund deficit reduction explicitly shows which economic strata owe the national debt. Only income taxes have the ability to back the national debt with any efficiency. Payroll taxes are designed to create obligation rather than being useful for discharging them. Other taxes are transaction based or obligations to fictitious individuals. Only the personal income tax burden is potentially allocable and only taxes on dividends, capital gains and inheritance are unavoidable in the long run because the income is unavoidable, unlike income from wages.

Even without progressive rate structures, using an income tax to pay the national debt firmly shows that attempts to cut income taxes on the wealthiest taxpayers do not burden the next generation at large. Instead, they burden only those children who will have the ability to pay high income taxes. In an increasingly stratified society, this means that those who demand tax cuts for the wealthy are burdening the children of the top 20% of earners, as well as their children, with the obligation to repay these cuts. That realization should have a healthy impact on the debate on raising income taxes.

A second tax impact on inequality is declining value of the child tax deduction and the various tax credits to support low wage earners, families with children and children in daycare, as well as the need by most taxpayers to utilize professional tax preparers to utilize these credits, often with the inducement to get a refund anticipation loan at higher interest than they can afford, except for the fact that many consider this to be found money rather than an earned entitlement.

While the child tax exemption is now indexed to inflation, this has not always been the case, with the value of this deduction, when adjusted for inflation, now worth way below its buying power in the days of large baby boom families. The dependent tax credit does not fully fund the cost of daycare, forcing many to rely on subsidies. While the Child Tax Credit was temporarily doubled in 2001, it has not been adjusted for inflation since and is due to expire at the end of this year. These tax benefits have been inadequate to both guarantee some basic level of equality for families, have certainly not made up for declining social welfare subsidies to needy families (Temporary Aid to Need Families (TANF) and Supplemental Nutrition Assistance (SNAP)) and have not helped counteract the aging of society.

In the long term, the explosion of the public 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.

Administration of an expanded child tax credit is an important issue as well. If administered within the context of personal income taxes, filers will continue to need the services of professional (and sometimes very-unprofessional) tax preparation services, which are often tied to predatory refund anticipation schemes because such credits are often seen as found money.

It would be preferable to instead tie this credit to an employer-based Net Business Receipts Tax (NBRT). Such a tax would be similar to a Value Added Tax (VAT), but would not appear on the customer receipt because it would have offsets for both the child credit and employer-provided health insurance (or direct services) for employees and possibly for retirees as well. As importantly, attaching this tax to the employer provides an incentive to adjust base pay downward for non-parents and parents whose children have left the nest – providing an incentive to have children for younger workers and providing an incentive to keep older workers on board, rather than replacing them with younger workers.

A separate VAT would also be established to fund discretionary spending occurring in the United States (both military and civil). This tax would make everyone conscious of supporting the operation of government and provide a direct incentive to save costs, because it could be made visible on the receipt at every level, including retail.

Both the NBRT and VAT would, as consumption taxes, burden both labor costs and profit. Enactment of both taxes would allow repeal of separate corporate income taxation, business income tax collection under personal income taxes, the hospital insurance and disability insurance payroll taxes and low rate personal income taxes on everyone, including higher income individuals.

In other OECD countries, all of whom have consumption taxes, capital gains taxes can be lower, since a portion of the taxation of capital already occurs as part of the VAT. The logic to enact lower capital gains and dividend taxes outside of a consumption tax environment is not as strong. These countries also have subsidies for families, however they don’t have wage penalties for not having families, as we have suggested above – which is why their populations continue to decline.

The end of welfare in the 1990s has also increased inequality. While some have been undoubtedly helped leave welfare dependency, a great many clients left the rolls, not because they did not need support but because they were not good candidates for work. SNAP benefits were also reduced so that people could not game the system, which has forced those who were not attempting to do so into a worse condition when they needed help the most than if no changes had been made in the program.

The work opportunities available to most TANF participants can easily be described as low wage work and, without significant resources in human development, are likely dead-end jobs. Such jobs often receive tax subsidies, such as the Earned Income Tax Credit and the recently expired Making Work Pay tax credit. One must look askance at any programs which transfer the responsibility for providing adequate wages from the employer and the consumer to the taxpayer.

The recently expired Making Work Pay tax credit subsidized low wage labor where the preferred option would be a higher minimum wage, forcing employers and ultimately consumers to pay for the services they receive. Minimum wage laws are necessary because they level the playing field so that employers cannot initiate a “race to the bottom” by allowing workers to compete against each other to offer ever lower wages, often leaving families in the impossible position of having to bid well below what would otherwise be a reasonable standard of living in order to survive.

Increases to minimum wages and benefits, such as mandatory sick leave are, by far, the best incentive to get people to work. Mandatory sick leave would also help the prospects of health care reform, as parents would no longer be forced to resort to emergency room care because the doctor’s office is closed during working hours, thus decreasing costs for all.

One major obstacle in getting TANF recipients into the working world is the quality of skills they bring to the table. Indeed, a recent survey of the vocabulary of TANF recipients in public housing puts it below the level of the average seven year old. Not seventh grader, seven year old.

State based efforts to move TANF participants to a level of basic – or even advanced literacy – should be applauded. Indeed, provisions to not only provide remedial education to all who require it should be a mandatory part of TANF reform, not just in states that chose to.

Literacy training must also be provided to fathers if required. Indeed, to facilitate this, the restriction on benefits to intact families must be abolished. Furthermore, compensation for this training should be as rewarding as work, so participation should be compensated at the minimum wage.

In addition to the wage, participants should also receive the same Child Tax Credit as those who work, as well as the same level of health insurance, which could be offered to them 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.

Program participants must be treated as adults. If they are, they can be expected to behave as such. All too often, the fiscal, welfare and immigration policy of the United States seems designed to provide a pool of low wage workers for the food service industry – from the field to the fast food counter. While these jobs may provide some degree of upward mobility, at times they are akin to slavery.

In the 21st Century, we can do better than that. If some products cannot be produced without what amounts to subsistence wages, than perhaps those products should not be produced at all, either at home or abroad. It should not, indeed it must not, be the policy of the United States Government to shield consumers from paying decent wages to those who feed us.

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.

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 Outlook for U.S. Monetary and Fiscal Policy

Comments for the Record

U.S. Senate

Committee on the Budget

The Outlook for U.S. Monetary and Fiscal Policy

608 Dirksen Senate Office Building

February 7, 2012, 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. Our comments address three issues: tax policy, the housing crisis and the economic model described in our comments from February 1, 2012. Please feel free to share these comments with the Federal Reserve so that they may react to them.

The first determinate of our economy will be what happens to the capital gains and dividend tax special rates. We believe that rates this low give investors and management too great an incentive to cut labor costs – so that instead of being job creating tax rates, they are actually job killing tax rates, which in part explains why the recession has continued, with layoffs proceeding whenever doing so increases profit margins.

This phenomenon is short lived, however. As the Tax Policy Center has previously reported, Capital Gains special rates not only return to 20% on January 1 of next year, but the Pease provisions and health insurance payroll tax as part of health care reform bring the taxation on capital gains to 25%. Dividends will be taxed as normal income, with Hospital Insurance provisions applying to this income as well over $250,000.

Unless there is more compromise in the next year than there was in the last, tax rate increases on capital will automatically end incentives to cut labor costs, taking profits at the expense of workers. We suspect that any compromise that is negotiated, possibly as part of a deal to cut corporate income tax rates and declare a tax repatriation holiday, will include an early increase of dividend and capital gains rates, but not an extension of them, given the Executive’s superior bargaining position and fears by investors that no deal means a tax increase.

The second determinate of economic growth, and the one that the Federal Reserve has the most say in, is the response to the housing crisis. While a recession was certainly part of the recent financial crisis, by far the biggest component is the decline in asset prices below the level at which they are financed. These prices are still depressed, which is why the current economy, despite the recovery, qualifies as a full-blown Depression. Fiscal policy is not enough to ease these conditions. The root cause, the existence of a large number of underwater mortgages, must be addressed.

Our sources indicate that the first round of quantitative easing included mortgage modification for some borrowers in terms of balance reduction, although this was not publicized, and that this is also a likely feature of the current round of quantitative easing where the Federal Reserve is buying Mortgage Backed Securities.

We urge the Federal Reserve to not only keep going with this policy (or include balance reduction by servicers if it is not already doing so), but to increase it by buying the under-water portfolio of Freddie Mac and Fannie Mae in its entirety, at least for borrowers who are still in their homes. Other government held mortgages, including VA, FHA and state housing authority mortgages could also be purchased and modified to increase the impact of this correction.

There are concerns that this correction would hurt irresponsible borrowers. This concern is overblown, as most irresponsible borrowers have already lost their homes. The remaining under-water borrowers are simply victims of bad timing and are no more culpable than economic forecasters who also should have noted that the housing market was unsustainable. Helping these borrowers will provide those in danger of losing their homes to keep them, while allowing others who can afford their mortgage payments to sell their current homes at market value and upgrade to larger homes in keeping with their ability to pay, without the incentive to walk away from properties that may never again rise in value above the amount of the purchase price. As importantly, this new round of home sales will reverse the decline in home prices, thus benefiting the entire housing market, including borrowers with mortgages held in the commercial markets.

The third determinate is the overall impact of government borrowing on economic growth. Center for Fiscal Equity models how deficit financing affects economic growth rates in the aggregate, which we call the financial margin, where the financial margin is the deficit/surplus added to outlays for net interest, all expressed as a percentage of Gross Domestic Product (GDP) and regressed onto growth in real GDP in the next year, removing inflation from the analysis.

We will briefly repeat the data and results, limiting our dataset to 1991 and beyond..

(Please see http://fiscalequity.blogspot.com/2011/09/economic-models-available-to-joint.html  for data tables and graphics relating to this analysis).


When George H.W. Bush and Bill Clinton raised taxes and controlled spending, more growth resulted, with 0.33% of growth resulting from each additional percentage of debt reduction, in a model that explains 72 percent of the variation, with a base growth rate of 3.4%.

The curve changes to negative once fiscal policy changed direction. In a model that explains 57% of the variation and a base growth rate of 2.4%, achieving a 1% growth rate requires an additional 0.27 percent of GDP loss in the financial margin – meaning the anemic growth of the last decade was fueled by deficits.

We believe that a Keynesian relationship explains these findings. When fiscal policy in the aggregate takes more money out of the bond markets after taxes have been cut, the running of deficits (net of interest payments) reduces savings and increases consumption by both the government and households.

When budget balancing using tax increases aimed at lower wage workers occurs, such as an increase in the payroll tax or “sin taxes” or through cuts to spending, such as Gramm-Rudman-Hollings, and deficits are smaller compared to net interest, the economy contracts as the savings sector on average increases at the expense of both government and household spending.

When budget balancing occurs because of higher marginal tax rates, however, money is removed from the savings sector in comparison to the consumption sector, making more credit available as well as higher government and household consumption.

This is essentially what happened when Presidents Bush and Clinton raised taxes in the 90s. Even though the budget neared and achieved balance, consumption continued in both the government and household sectors, although there were cuts, both absolute and programmatic, in the defense sector, while credit was widely available.

When capital gains tax rates were cut in 1997, however, the savings sector received a greater share of output, resulting in an investment boom which we now know exceeded the availability of high value investment opportunities, driving up both asset prices and allowing junk investments to enter the market, which could not provide adequate returns in most cases, causing the 2001 recession. The tax cuts of 2001 and 2003 reduced revenue and increased deficits to record levels in the post-war era, with further asset inflation leading to the current economic depression, especially in the housing market.

This brings us to the current economic situation. The Great Recession as obviously shifted the Financial Margin curve. While the current curve has few data points, these observations are consistent with both theory and economic data in the post-war era.

Based on FY2011 budgetary results, we estimate FY2012 growth to be 1.6%. . In this model, lower spending results in a more anemic recovery. 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 again for the opportunity to present our comments. We are always available to members, staff and the general public to discuss these issues.

The State of the U.S. Economy

Comments for the Record

U.S. House of Representatives

Committee on the Budget

The State of the U.S. Economy

210 Cannon House Office Building

February 2, 2012, 10:00 AM

By Michael G. Bindner

Center for Fiscal Equity

Chairman Ryan and Ranking Member Van Hollen, thank you for the opportunity to submit comments for the record on this issue. Our comments address three issues: tax policy, the housing crisis and the economic model described in our comments from February 1, 2012. Please feel free to share these comments with the Federal Reserve so that they may react to them.

The first determinate of our economy will be what happens to the capital gains and dividend tax special rates. We believe that rates this low give investors and management too great an incentive to cut labor costs – so that instead of being job creating tax rates, they are actually job killing tax rates, which in part explains why the recession has continued, with layoffs proceeding whenever doing so increases profit margins.

This phenomenon is short lived, however. As the Tax Policy Center has previously reported, Capital Gains special rates not only return to 20% on January 1 of next year, but the Pease provisions and health insurance payroll tax as part of health care reform bring the taxation on capital gains to 25%. Dividends will be taxed as normal income, with Hospital Insurance provisions applying to this income as well over $250,000.

Unless there is more compromise in the next year than there was in the last, tax rate increases on capital will automatically end incentives to cut labor costs, taking profits at the expense of workers. We suspect that any compromise that is negotiated, possibly as part of a deal to cut corporate income tax rates and declare a tax repatriation holiday, will include an early increase of dividend and capital gains rates, but not an extension of them, given the Executive’s superior bargaining position and fears by investors that no deal means a tax increase.

The second determinate of economic growth, and the one that the Federal Reserve has the most say in, is the response to the housing crisis. While a recession was certainly part of the recent financial crisis, by far the biggest component is the decline in asset prices below the level at which they are financed. These prices are still depressed, which is why the current economy, despite the recovery, qualifies as a full-blown Depression. Fiscal policy is not enough to ease these conditions. The root cause, the existence of a large number of underwater mortgages, must be addressed.

Our sources indicate that the first round of quantitative easing included mortgage modification for some borrowers in terms of balance reduction, although this was not publicized, and that this is also a likely feature of the current round of quantitative easing where the Federal Reserve is buying Mortgage Backed Securities.

We urge the Federal Reserve to not only keep going with this policy (or include balance reduction by servicers if it is not already doing so), but to increase it by buying the under-water portfolio of Freddie Mac and Fannie Mae in its entirety, at least for borrowers who are still in their homes. Other government held mortgages, including VA, FHA and state housing authority mortgages could also be purchased and modified to increase the impact of this correction.

There are concerns that this correction would hurt irresponsible borrowers. This concern is overblown, as most irresponsible borrowers have already lost their homes. The remaining under-water borrowers are simply victims of bad timing and are no more culpable than economic forecasters who also should have noted that the housing market was unsustainable. Helping these borrowers will provide those in danger of losing their homes to keep them, while allowing others who can afford their mortgage payments to sell their current homes at market value and upgrade to larger homes in keeping with their ability to pay, without the incentive to walk away from properties that may never again rise in value above the amount of the purchase price. As importantly, this new round of home sales will reverse the decline in home prices, thus benefiting the entire housing market, including borrowers with mortgages held in the commercial markets.

The third determinate is the overall impact of government borrowing on economic growth. Center for Fiscal Equity models how deficit financing affects economic growth rates in the aggregate, which we call the financial margin, where the financial margin is the deficit/surplus added to outlays for net interest, all expressed as a percentage of Gross Domestic Product (GDP) and regressed onto growth in real GDP in the next year, removing inflation from the analysis.

We will briefly repeat the data and results, limiting our dataset to 1991 and beyond..

Please see http://fiscalequity.blogspot.com/2011/09/economic-models-available-to-joint.html  which include data tables and graphics included with these comments).

When George H.W. Bush and Bill Clinton raised taxes and controlled spending, more growth resulted, with 0.33% of growth resulting from each additional percentage of debt reduction, in a model that explains 72 percent of the variation, with a base growth rate of 3.4%.

The curve changes to negative once fiscal policy changed direction. In a model that explains 57% of the variation and a base growth rate of 2.4%, achieving a 1% growth rate requires an additional 0.27 percent of GDP loss in the financial margin – meaning the anemic growth of the last decade was fueled by deficits.

We believe that a Keynesian relationship explains these findings. When fiscal policy in the aggregate takes more money out of the bond markets after taxes have been cut, the running of deficits (net of interest payments) reduces savings and increases consumption by both the government and households.

When budget balancing using tax increases aimed at lower wage workers occurs, such as an increase in the payroll tax or “sin taxes” or through cuts to spending, such as Gramm-Rudman-Hollings, and deficits are smaller compared to net interest, the economy contracts as the savings sector on average increases at the expense of both government and household spending.

When budget balancing occurs because of higher marginal tax rates, however, money is removed from the savings sector in comparison to the consumption sector, making more credit available as well as higher government and household consumption.

This is essentially what happened when Presidents Bush and Clinton raised taxes in the 90s. Even though the budget neared and achieved balance, consumption continued in both the government and household sectors, although there were cuts, both absolute and programmatic, in the defense sector, while credit was widely available.

When capital gains tax rates were cut in 1997, however, the savings sector received a greater share of output, resulting in an investment boom which we now know exceeded the availability of high value investment opportunities, driving up both asset prices and allowing junk investments to enter the market, which could not provide adequate returns in most cases, causing the 2001 recession. The tax cuts of 2001 and 2003 reduced revenue and increased deficits to record levels in the post-war era, with further asset inflation leading to the current economic depression, especially in the housing market.

This brings us to the current economic situation. The Great Recession as obviously shifted the Financial Margin curve. While the current curve has few data points, these observations are consistent with both theory and economic data in the post-war era.

Based on FY2011 budgetary results, we estimate FY2012 growth to be 1.6%. . In this model, lower spending results in a more anemic recovery. 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 again for the opportunity to present our comments. We are always available to members, staff and the general public to discuss these issues.