Education Incentives and Tax Reform

Comments for the Record

United States Senate

Committee on Finance

Education Incentives and Tax Reform

Wednesday, July 25, 2012, 10:00 AM

215 Dirksen Senate Office Building

 

By Michael Bindner

Center for Fiscal Equity

 

 
Chairman Baucus and Minority Leader Hatch, thank you for the opportunity to address this topic. As always, our comments will be in the context of our four part proposal for tax reform, which is 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.

 

To a large extent, our comments will mirror those of two weeks ago on how tax reform affects the ability of young people to realize the American Dream, since it is largely through education that this occurs.

 

Our proposal shifts education tax incentives from individuals to employers and from the personal income tax to a VAT-like Net Business Receipts Tax that every employer of a certain size pays, with some firms who now employee consultants adding them as statute employees. The NBRT would both fund public collegiate and vocational education and allow offsets for providing tuition assistance to employees for pursuing education after grade 14 (until that point, education would be free).

 

We propose that tuition assistance take two forms – the creditable portion which need not be paid back and a loan portion that would be paid back with a service requirement, with the federal government offering student loans only when the employment situation does not work out or the degree is not completed. Involving employers more closely after grade 14 allows for the negotiation of volume discounts – which is a hallmark of the success of such programs as the H-1B Technical Skills Training Grant and the more recent community college initiative. Such employers might also provide housing or pay housing and living expenses through some kind of stipend.

 

Our proposals go beyond incentives for higher education to other tax incentives to help people obtain adult education, either through employers or through an employer-based tax payment or charitable contribution in lieu of taxes.

 

Some young people have learning deficits. We propose that instead of placing them in job training right away, we first pay them to achieve literacy at the tenth grade level, with either vocational or college prep/community college after that. In all such cases, students who have families or are living outside the home should be paid a minimum wage for their study time, with the wage funded either by an employee-sponsor or directly by the taxpayer through the training provider, with the funding coming from the NBRT. This training can be arranged either by local government, a local public or private school system or by employers directly as an offset to the NBRT levy. This would replace Temporary Aid to Needy Families. Program providers would also receive a subsidy for providing insurance to participants through the policy under which their employees are covered, replacing Medicaid for needy families.

 

The other problem that young families face is low wages. While there are certainly tax credits that make having children more affordable, they are not adequate to meet expenses. We propose increasing the Child Tax Credit to $6000 per year (federal share) and making it refundable. This would consolidate assistance now provided by the current CTC, the Earned Income Tax Credit, the exemption for children, the Supplemental Nutrition Assistance Program, the Mortgage Interest Deduction, and the Property Tax Deduction.

Note again that this proposal will likely result in a higher birthrate, as well as lower wages for non-parents or for parents whose children have moved away. As such, this provision will also decrease the use of both abortion and contraception. If support for it is not considered an essential vote for scoring the by National Right to Life Committee, then that scoring is hopelessly partisan, as this particular proposal will prevent more abortions than any criminal sanction ever would (the Guttmacher Institute estimates that 72% of abortions are for economic reasons, including the financial well-being of teen parents).

 

Thank you for the opportunity to address the committee. We are, of course, available for direct testimony or to answer questions by members and staff.

Hearing on Public Charity Organizational Issues, Unrelated Business Income Tax, and the Revised Form 990

Comments for the Record

House Ways and Means Committee

Subcommittee on Oversight

Hearing on Public Charity Organizational Issues, Unrelated Business Income Tax, and the Revised Form 990

July 25, 2012, 9:30 AM

1100 Longworth House Office Building

By Michael G. Bindner

Center for Fiscal Equity

Chairman Boustany and Ranking Member Lewis, thank you for the opportunity to submit comments for the record on these issues.  We will leave it to others to examine how the current system is working and confine our comments to how our tax reform program would impact these questions.  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) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure every 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 agree that charity has become big business and needs to be taxed accordingly where appropriate.  We also agree that charitable organizations deserve special treatment in any tax reform.

Charities that have commercial operations will be subject to a VAT, like any other commercial company, at least to the extent of such commercial operations.  This is essential to provide visibility to their customers as to taxes imposed by the entire supply chain, unless sales to charities are also made VAT exempt.  As this would turn every business into some form of charitable organization overnight, this would not be advisable.  Fiscal conservatism should not be synonymous with empowering tax evasion schemes.  The degree to which this needs mention shows the extent to which it has become so.

Whether non-commercial operations are subject to a VAT depends on the extent they are used to fund entitlement spending and payroll taxes versus discretionary government spending.  For example, if Social Security or Medicare were to become VAT funded, replacing the payroll tax, than charitable organizations must continue to fund these operations, as they will benefit the employees of these organizations.  If, however, entitlement services are funded through our proposed VAT-like NBRT, then there is an argument to leave the non-commercial activities of these entities VAT-exempt and we would urge you to do so.

Political organizations and committees would pay VAT on their payroll and their purchases would not be VAT exempt.

Transferring tax exemption to the VAT will also soften the blow should the charitable contribution be eliminated from flatter individual income surtax rates.  The rationale for cancelling such an exemption is that if everyone uses the exemption, it will simply require that the tax rates be set higher to yield the same income.  The Center is agnostic as to which option is best, as this depends on how entitlements are funded, although contributions to political organizations should certainly not be tax exempt after reform.

Charitable organization employees will continue to pay the employee contribution to Old Age and Survivors Insurance, assuming it is not subsumed into the NBRT.

Charitable organizations will pay the NBRT because their employees will benefit from the programs funded by this levy or from offsets to it.  For example, Catholic Charities employees might designate the Catholic school system as an alternative provider to public schools, which would allow Catholic Charities agencies to take a credit on this levy, which would otherwise be paid against their total value added.  Likewise, employees would be paid the same child tax credit as commercial employees – again as an offset to NBRT levies.  Health and higher education credits proposed for other enterprises would also be available to charitable organizations, as well as any other applicable credits.  Note that because certain payroll and personal income taxes will be eliminated, the gross pay of charitable employees will decline in like manner to those of their commercial counterparts.

On the issue of disclosure, payments of various taxes may or may not be listed on the Revised Form 990, although doing so would serve the function to donors of offering receipt visibility for the VAT.  The total amount of NBRT paid may or may not be included, as well as the total amount of credits taken.  We are agnostic as to whether the credits taken should be itemized, as privacy concerns should be dealt with in deciding whether to do so on a public form.

Finally, this schema is as applicable to governmental organizations as it is to charitable organizations, with modifications.  State governments would be the federal NBRT, while federal organizations would pay the state NBRT, both on the same basis relating to value added through payroll.  These organizations would not pay NBRT to themselves, however their personnel systems should contain a similar range of benefits.  This schema provides a better explanation of how a FairTax might work on these levels, while also providing a rationale for adjusting government employee salaries and providing for non-governmental performance of services through the same type of alternative NBRT programs.

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.

Hearing on Physician Organization Efforts to Promote High Quality Care and Implications for Medicare Physician Payment Reform

Comments for the Record

U.S. House of Representatives

Committee on Ways and Means

Subcommittee on Health

Hearing on Physician Organization Efforts to Promote High Quality Care and Implications for Medicare Physician Payment Reform

July 24, 2012, 10:00 AM

by Michael G. Bindner

The Center for Fiscal Equity

Chairman Herger and Ranking Member Stark, thank you for the opportunity to submit my comments on this topic. This hearing allows us to highlight comments made last month on the implications of physician payment reform.

As I stated in our last comments:

In April of 1998, (my) father, Jim Bindner, had a heart attack, due in part to either an undetected acute episode of diverticulitis (which was not detected until autopsy) and in part to a lack of oxygen resulting from successful radiation treatment for metastatic lung cancer. Had this attack occurred today, there is a chance that advances in emergency medicine, including cooling of the patient, might have resulted in a successful outcome. This strategy, however, did not exist in 1998 and is still not widely practiced. As a result, resuscitation was incomplete and Mr. Bindner was left in a coma in intensive care for almost a week before he passed.

Since these comments were made, my mother was the victim of a gas leak when her foundation shifted. Neighbors found her, roused her and moved her to safety and all was looking well until she collapsed with no vital signs once paramedics arrived. This began two days of intensive care after she was revived in the ambulance, but never regained consciousness. She died two days later when we removed life support because no measurable brain function could be detected, even after cooling was tried.

The relevant question remains as it did in my father’s case, what would a results based medicine scenario pay for in situations such as this? Would the government have forced Mercy Medical Center to simply eat the costs? If so, would there have been pressure from the hospital to end care sooner? Would the alternative have been a copayment for these services for the family?

Worse yet, would someone have forced the choice on my siblings and I to either agree to payment or discontinue life support earlier to save cost? These are the questions that such modalities as results based payment bring forward loud and clear and they will hit every family with children of a certain age. This is not the specter of the death panel. It is something much worse – a demand to agree to pay or make a tragic decision at the most difficult time in anyone’s life.

While some families could, of course, afford to pay for greater end of life services, the prospect that money might by longer life, or a greater chance for miraculous recovery to occur, would turn such care from what is now a right to a commodity. The Center for Fiscal Equity and my family find this unacceptable.

In fee for service medicine, this choice is simply not required. Certainly the richest society on the planet can afford to allow women facing imminent widowhood to avoid such heart breaking choices if possible. Recent reforms have essentially turned the Medicare Part A Payroll Tax into a virtual consumption tax already by taxing non-wage income above $250,000 a year. It would be as easy to shift from a payroll tax to a value added or VAT-like net business receipts tax (which allows for offsets for employer provided care or insurance) and would likely raise essentially the same amount of money, as most non-wage income actually goes to individuals now liable for increased taxes. If a VAT system is used, tax rates can be made lower because overseas labor will essentially be taxed, leaving more income for American workers while raising adequate revenue.

Premium support systems would not have any impact at all on end of life care decisions, except to the extent that they lead to cost cutting and the kind of choices mentioned above that we can all hopefully agree are abhorrent. Ultimately, this negates much of the cost savings that could come from premium support, so this idea should be dropped.

A single-payer catastrophic plan would guarantee payment by the widow of any difference between the catastrophic deductible and the accumulated health savings account. This, again, is the last thing any widow should have to face, even if the survivors have adequate insurance.

Replacing payroll taxes with Value Added Tax (VAT) funding will have no impact on whether fee for service medicine at the end of life continues, except for the fact that more adequate funding makes the need to save costs less urgent.

Shifting to more public funding of health care in response to future events is neither good nor bad. Rather, the success of such funding depends upon its adequacy and its impact on the quality of care – with inadequate funding and quality being related.

Thank you for the opportunity to address the committee and share what many of my generation regard as very real concerns, both as our parents age and we approach that stage of life where such decisions may apply to us. I am, of course, available for direct testimony or to answer questions by members and staff.

Tax Reform and the U.S. Manufacturing Sector

Comments for the Record

United States House of Representatives

Committee on Ways and Means

Tax Reform and the U.S. Manufacturing Sector

Thursday, July 19, 2012, 9:30 AM

1100 Longworth House Office Building

 

By Michael Bindner

Center for Fiscal Equity

 

 Chairman Camp and Ranking Member Levin, thank you for the opportunity to address these topics, which were also submitted to the Senate Finance Committee in March. In our comments, we will address how our four part tax plan relates to these issues, specifically how investment expenses are paid for in a consumption tax environment, the impact of lower tax rates on productivity and jobs, how corporate ownership may be impacted under various scenarios for Personal Accounts in Social Security and the impact of tax reform on globalization.

  

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 OASI employer contributions but, because it has offsets for providing health care, insured 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.

 

In a VAT and Net Business Receipts Tax environment, tax is paid to the suppliers of plant and equipment when services are invoiced. VAT is receipt visible, while NBRT, as a vehicle for deductions, is designed not to be (hence the need for a second tax). Those providers then pay taxes to the taxing authority based on those sales. How these assets are accounted for in the price of the product, however, is open for debate.

The credit against VAT and NBRT collections resulting from purchasing investment assets might be applied in the year the purchase is made or, if Congress so desires, the credit can be applied over the useful life of the asset. Extending the credit allows the taxpaying business to even out tax payments over time and will cause less disruption along the supply chain so that the entire price of the item is not a VAT credit at the next stage in the production process. How other nations deal with these questions is dealt with in the VAT literature and is beyond the scope of these comments. Should the Committee desire a more complete treatment of this issue, a separate hearing would be appropriate.

 

Separate rules could conceivably be adopted for VAT and NBRT, as VAT is collected on a transaction basis, similar to Sales Taxes, while NBRT can be calculated on a period basis, like Corporate Income Taxes. This is especially the case if NBRT collections are not “receipt visible” due to their purpose as a vehicle for claiming offsets for the Child Tax Credit, the health insurance exclusion and other tax expenditures.

 

As important as how capital expenditures are treated as a factor of production is how dividends and capital gains are taxed. Prior to 1981, tax rates at the highest income levels were confiscatory, especially between 1956 and 1965 when the tax rate was 91%. During this era, special tax benefits were necessary so that when combined with state taxes, the effective tax rate was not over 100% of income. Beginning in 1981, tax obligations for these forms of income declined in several steps, including the 1986 tax reform, the 1997 decrease in capital gains tax rates to the current permanent rate of 20% and the 2003 tax legislation which dropped these rates to 15%.

 

While technology exploded during this period, as we moved from the mainframe computer to Cloud Computing, robotic and the iPad, much of this explosion was incentivized by the ability of owners to keep an ever increasing percentage of the resulting productivity gains, as well as productivity gains from taking advantage of the expansion of free trade due to the North American Free Trade Agreement, other trade actions and the opening of China as a source of cheap assembly. If the gains from these investments were all kept by the government, they might not have been made. The downside of such gains, however, is the loss of manufacturing jobs, as well as a greater incentive to engage in union busting and the threat of union busting to keep wage increases low, essentially excluding the middle class from enjoying the benefit of these gains through wages, although some might realize them to the extent that they have accumulated either pension assets or participated in defined contribution plans.

 

Studies have shown that dividend payouts of these productivity gains are generally at the level of normal profit. Dividend levels have not substantially increased due to these gains. Instead, they have gone mainly to CEO bonuses and stock grants and options. While CEO leadership is, of course, important to the adoption of innovation and investment, it is not so great that this factor deserves the lion’s share of reward.

 

It is rather unseemly that fiscal policy has had what amounts to a causal effect on what can be described as disastrous levels of inequality, leading most consumers to borrow to maintain their standard of living and partake in the rise of advanced consumer electronics that in another form has reduced their wages. This overleveraging has led us to the financial situation now plaguing this nation, which can best be described as a long term Depression, even though there are periods of recession and recovery within this era.

 

Tax reform can ameliorate these effects. Adoption of consumption taxes like a VAT and NBRT impact labor and capital equally. In Europe, this allows for the adoption of lower rates for capital gains taxes. While profit is theoretically taxed by the Corporate Income Tax, such taxation is uneven given the maze of special tax provisions favoring some industries and businesses over others, leaving profit untaxed in many cases, except as part of personal income taxation. Given the probability of evasion, lower rates are not justified. This Center opposed these rate cuts in 2003 and we continue to oppose them.

 

In the area of personal income taxation, the Center favors a single rate structure for dividend, capital gain, wage and inherited income (rather than inherited assets that are not yet liquidated – with the only exception being that proceeds from sales of these assets to a broad based Employee Stock Ownership would remain tax free). Tax rates could range from 4% on at the $100,000 a year level for joint filers or widows ($50,000 for individuals) to a top level of 28% - which is roughly the effective rate for the NBRT (to discourage income shifting). While fewer, less graduated rates are possible, most middle income taxpayers would not find them desirable. As tax tables will only have a single rate for each income level, the existence of multiple rates does not increase complexity for the taxpayer.

 

Another option to ameliorate the maldistribution of wealth is the adoption of Personal Retirement Accounts for Social Security, although doing so is like holding a lightning rod in a thunderstorm. We 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.

 

A major strength of Social Security is its income redistribution function. We suspect that much of the support for personal accounts is to subvert that function – so any proposal for such accounts must move redistribution to account accumulation by equalizing the employer contribution.

 

We propose directing personal account investments to employer voting stock, rather than an index funds or any fund managed by outside brokers. There are no Index Fund billionaires (except those who operate them). People become rich by owning and controlling their own companies. Additionally, keeping funds in-house is the cheapest option administratively. We expect it is even cheaper than the Social Security system – which operates at a much lower administrative cost than any defined contribution plan in existence.

 

Safety is, of course, a concern with personal accounts. Rather than diversifying through investment, however, we propose diversifying through insurance. A portion of the employer stock purchased would be traded to an insurance fund holding shares from all such employers. Additionally, any personal retirement accounts shifted from employee payroll taxes or from payroll taxes from non-corporate employers would go to this fund.

 

The insurance fund will serve as a safeguard against bad management. If a third of shares were held by the insurance fund than dissident employees holding 25.1% of the employee-held shares (16.7% of the total) could combine with the insurance fund held shares to fire management if the insurance fund agreed there was cause to do so. Such a fund would make sure no one loses money should their employer fail and would serve as a sword of Damocles’ to keep management in line. This is in contrast to the Cato/ PCSSS approach, which would continue the trend of management accountable to no one. The other part of my proposal that does so is representative voting by occupation on corporate boards, with either professional or union personnel providing such representation.

 

The suggestions made here are much less complicated than the current mix of proposals to change bend points and make OASI more of a needs based program. If the personal account provisions are adopted, there is no need to address the question of the retirement age. Workers will retire when their dividend income is adequate to meet their retirement income needs, with or even without a separate Social Security program.

 

No other proposal for personal retirement accounts is appropriate. Personal accounts should not be used to develop a new income stream for investment advisors and stock traders. It should certainly not result in more “trust fund socialism” with management that is accountable to no cause but short term gain. Such management often ignores the long-term interests of American workers and leaves CEOs both over-paid and unaccountable to anyone but themselves.

 

Progressives should not run away from proposals to enact personal accounts. If the proposals above are used as conditions for enactment, I suspect that they won’t have to. The investment sector will run away from them instead and will mobilize their constituency against them. Let us hope that by then workers become invested in the possibilities of reform.

 

All of the changes proposed here work more effectively if started sooner. The sooner that the income cap on contributions is increased or eliminated, the higher the stock accumulation for individuals at the higher end of the age cohort to be covered by these changes – although conceivably a firm could be allowed to opt out of FICA taxes altogether provided they made all former workers and retirees whole with the equity they would have otherwise received if they had started their careers under a reformed system. I suspect, though, that most will continue to pay contributions, with a slower phase in – especially if a slower phase in leaves current management in place.

The international consequences of adopting personal retirement accounts which include employee-ownership are also interesting. As employees begin to own and control their workplace, they will find it in their best interests to include overseas subsidiaries and their supply chains in the same type of arrangement. They are also more likely to set transfer pricing so that all employees in an international enterprise receive the same standard of living from work, so that incentives to exploit other workers would be eliminated. This development would not only revive the labor movement, it would make it international in a way that trading agreements have not been able to accomplish. Recognition of this fact should make the possibility of personal accounts more attractive to progressives and the more populist members of the Tea Party, but not to the more corporatist members of either party.

 

International aspects are unavoidable in a discussion of tax reform. Indeed, one of the reasons for engaging in tax reform is to increase the competitiveness of American manufacturers. While VAT does not function as an explicit tariff, the lack of one while many of our trading partners have one essentially builds all of our tax costs into the cost of exported products, where competing nations exclude these costs at the border. The current regime violates the spirit, though likely not the letter, of constitutional provisions banning export taxes.

 

As the Committee is well aware, VAT is good for competiveness because it can be zero rated at the border for exports and collected fully for imports. 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.

 

It is not appropriate for NBRT to be zero rated, as doing so would decrease the incentive to pass Child Tax Credit and Health Insurance tax benefits to employees. As importantly, the tax benefits and government services provided under this tax go to workers and their families. As such, overseas purchasers accrue benefits from these services and should therefore participate in their funding.

 

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.

 

The final question on capital investment is the repatriation of profit from overseas subsidiaries. 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 for the opportunity to address the committee. We are, of course, available for direct testimony or to answer questions by members and staff.

An Open Letter to the President on Tax Policy

Mr. President:

It is with great interest that I see you have, yet again, called for extending middle class tax cuts while allowing tax cuts on the top 2% to expire.  Frankly, sir, I fail to see how this strategy works now when it has not worked for your entire presidency.  In 2010, it did not even work politically, as the Republicans stood their ground and no pre-election debate to embarrass them ever took place in the Senate.  Let us not be outflanked again, as the result was, in the area of tax policy, we have a third Bush term.  The truth hurts and as a voter, I am not sure that I can go along with tax policy votes that don't actually raise tax rates on dividends.  I would almost rather see all the tax rates expire instead.  This would allow greater government spending, which means I might be able to rejoin the civil service or government contract community.  With a Master of Public Administration and no job, I can do little else.

Please allow me to offer a different menu of compromise provisions.  If enacted, they will benefit our family much more than the measures you have resubmitted into the congressional sausage machine.

1.  Eliminate all tax exemptions, replacing the individual and spousal exemptions with a larger standard deduction while increasing the Child Tax Credit and making it permanent.  Increase it still further by eliminating the Earned Income Tax Credit and make it refundable for all earners.  Allow for negative withholding so that families who are not paying income taxes need not file to get their money, unless there was an error in how the credit was distributed (such as double crediting to both parents).  Allow the 10% tax rate to expire and shift that savings to a higher child tax credit as well.  Pay the child tax credit to non-workers and end the inadequate SNAP program.

2.  Lower the income cap on the employee contribution to Old Age and Survivors Insurance (to lower high income benefits) and shift the remainder of employee FICA taxes, as well as the employer FICA tax.

3.  Enact a Value Added Tax - with the employer contribution to OASI credited equally for all full-time workers (decoupling it from the employee contribution).

4.  Increase the standard deduction on personal income taxes so that the vast majority of families need not even file - while increasing the VAT accordingly to cover non-payroll tax contributions to Medicare and to cover federalizing Medicaid.

5.  Set corporate and personal income tax rates, dividend rates and capital gains rates to between 25% and 29% (negotiate to 27%) if a VAT solution is accepted.

6.  If a VAT is not possible, leave payroll taxes alone for now, and extend the income tax rate cuts for another year, while allowing the capital gains tax rate, Pease rate and Health Care Reform non-wage income tax provisions to take effect January 1.  Increase the dividend rate to 20% (which after Pease and non-wage additions becomes 25%).

These proposals give both sides something, while not increasing taxes for the vast majority of lower middle class families.  The upper middle class can likely afford higher taxes and will vote for you anyway.   The important thing is to allow dividend and capital gains rates to go up to essentially a 25% rate, as when these rates are too low large employers have a strong interest in continuing to reduce labor costs, which keeps unemployment high.

Respectfully,

Michael Bindner

Boosting Opportunities and Growth through Tax Reform: Helping More Young People Achieve the American Dream

Comments for the Record

United States Senate

Committee on Finance

Boosting Opportunities and Growth through Tax Reform:

Helping More Young People Achieve the American Dream

Tuesday, July 10, 2012, 2:45 PM

215 Dirksen Senate Office Building

By Michael Bindner

Center for Fiscal Equity

Chairman Baucus and Minority Leader Hatch, thank you for the opportunity to address this topic. As always, our comments will be in the context of our four part proposal for tax reform, which is 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.

While preserving Social Security in some form is essential to holding onto the American Dream in retirement, most of the impacts for young people come through our proposals to enact the NBRT. Before listing these impacts, however, a further word is needed on income tax rates.

It is absolutely essential that tax reform include increased tax rates on dividends and capital gains. If only dividend rates rise, than what would be paid in dividends will be used to manipulate the stock price, so both must be addressed and have an identical tax rate. Currently, young people are bearing the brunt of this recession. This is largely because investors and CEOs paid with carried interest or dividends get to keep 85 cents of every dollar in labor cost savings.

While that is not the whole story on the taxation of capital by any means, the low rate certainly provides a strong incentive to keep wages low and to hold back on hiring staff (two conditions that build on each other and keep the economy in Depression). Reducing these incentives, on the margin, will actually take away the personal incentive to continue cutting costs. This has been born out in the actual economy. Things will not get better until these cuts are reversed and I urge the Senate to block any changes that extend these cuts, even if poor and middle class families take a small hit in tax withholding (which according to the Brookings-Urban Tax Policy Center will only be between $5 a week and $20 a week for most families). A small tax increase is much easier to bear than having no job at all.

One of the chief problems young people face is paying for education. The NBRT would both fund public collegiate and vocational education and allow offsets for providing tuition assistance to employees for pursuing education after grade 14 (until that point, education would be free). We propose that tuition assistance take two forms – the creditable portion which need not be paid back and a loan portion that would be paid back with a service requirement, with the federal government offering student loans only when the employment situation does not work out or the degree is not completed. Involving employers more closely after grade 14 allows for the negotiation of volume discounts – which is a hallmark of the success of such programs as the H-1B Technical Skills Training Grant and the more recent community college initiative. Such employers might also provide housing or pay housing and living expenses through some kind of stipend.

Some young people have learning deficits. We propose that instead of placing them in job training right away, we first pay them to achieve literacy at the tenth grade level, with either vocational or college prep/community college after that. In all such cases, students who have families or are living outside the home should be paid a minimum wage for their study time, with the wage funded either by an employee-sponsor or directly by the taxpayer through the training provider, with the funding coming from the NBRT. This training can be arranged either by local government, a local public or private school system or by employers directly as an offset to the NBRT levy. This would replace Temporary Aid to Needy Families. Program providers would also receive a subsidy for providing insurance to participants through the policy under which their employees are covered, replacing Medicaid for needy families.

The other problem that young families face is low wages. While there are certainly tax credits that make having children more affordable, they are not adequate to meet expenses. We propose increasing the Child Tax Credit to $6000 per year (federal share) and making it refundable. This would consolidate assistance now provided by the current CTC, the Earned Income Tax Credit, the exemption for children, the Supplemental Nutrition Assistance Program, the Mortgage Interest Deduction, and the Property Tax Deduction.

Note that this proposal will likely result in a higher birthrate, as well as lower wages for non-parents or for parents whose children have moved away (which eliminates the incentive to fire productive workers who are at the age where salaries that allow them to raise their families also make them economically unattractive). As such, this provision will also decrease the use of both abortion and contraception. If support for it is not considered an essential vote for scoring the by National Right to Life Committee, then that scoring is hopelessly partisan, as this particular proposal will prevent more abortions than any criminal sanction ever would (the Guttmacher Institute estimates that 72% of abortions are for economic reasons, including the financial well-being of teen parents).

Part of the American Dream is self-determination. One option within the NBRT is a credit for funding insured personal retirement accounts in the employer, as appropriate. Unlike the Bush era proposal, which mostly empowered management and subsidized Wall Street, this scenario empowers workers and makes outside funding less necessary. It also shifts compensation from wages to stock dividends, possibly even before retirement (workers would have the option of either taking or reinvesting dividends), so that layoffs of older workers become less attractive.

We believe that employee-owned firms operating in a more cooperative manner will naturally offer financial services to their employees directly (most cooperative systems have both educational and credit union provisions), thus replacing the need to seek credit for mortgages from the banking system. Indeed, if such employers offer mortgages and lines of credit directly, they can do so at zero interest because such agreements need not be a profit center – they would simply impact the profitability

We have provided details previously on this proposal, including the insurance provision which assures that no one loses their retirement savings because of employer mismanagement or fraud. If the committee has further questions on these proposals, we are available to answer them at greater length.

One would hope that such proposals as this would deserve some kind of hearing before the Committee and in the public sphere generally. We do not expect such hearing, however, as they would be slowly revolutionary in their impact and would not make anyone rich or individually powerful. We would hope that you would have the courage to defy this expectation.

Thank you for the opportunity to address the committee. We are, of course, available for direct testimony or to answer questions by members and staff.

Hearing on the Tax Ramifications of the Supreme Court’s Ruling on the Democrats’ Health Care Law

Comments for the Record

United States House of Representatives

Committee on Ways and Means

Hearing on the Tax Ramifications of the Supreme Court’s Ruling

on the Democrats’ Health Care Law

Tuesday, July 10, 2012, 10:30 AM

by Michael G. Bindner

The Center for Fiscal Equity

Chairman Davis and Ranking Member Levin, thank you for the opportunity to submit my comments on this topic. We must note that because the law is actually part of the U.S. Code, it applies to all of us. As we pointed out in March, it is based on a model signed by the Republican Governor of Massachusetts and designed by the conservative leaning Heritage Foundation. The tax ramifications of the law being ruled constitutional go much beyond the impact of the taxing power to the viability of the mandate as written and the impact of the ruling that states who do not chose to participate in the expansion of Medicaid can do so without losing all Medicaid funding.

In our March comments, here is how we addressed the taxing power in relation to the law:

Before even considering the constitutionality of mandates under the Commerce Clause, the Supreme Court will examine if the mandate penalty is actually a tax and if it is a tax, whether consideration of this issue is even ripe. The Center for Fiscal Equity has always believed that this penalty is, in fact, a tax, and that the Court will likely quickly rule that it is and that further consideration of its constitutionality must wait until the tax is collected, leaving all other issues in abeyance until that occurs – although, frankly, it would be an act of judicial malpractice to let clients go forward on a what would be a Quixotic quest against the taxing power to bring this up again.

That is the first hurdle and it is the out that the Court is looking for to avoid the complicated constitutional question. The second is that the dollars funding the public relations campaign against the law are not brought out because the donors object to the mandate, but because the non-wage income payroll taxes which will take effect soon are costing rich people money - especially since there are no offsets to paying them or passing the cost to customers - essentially turning these taxes into a VAT. Indeed, a VAT would be less objectionable than keeping these taxes in place, because the burden is more broadly shared, more visible and refundable at the border.

It seems that we were mostly right on this issue, although we should have foreseen that the Court would not invoke the Anti-Injunction Act because the taxing power to do the mandate was not challenged, merely the use of the Commerce Clause. Any such challenge could be made, but it will not be ripe until this portion of the law takes effect, which is cold comfort to those who funded the legal challenge who will commence paying taxes on non-wage income at the beginning of the next calendar year. Among those commenting on the issue, we suspect our analysis was likely one of the best predictions, so we marvel at the fact that we have not been invited to testify on this issue.

As to the impact of the decision on the taxing power, we are given to understand that this decision relies on existing precedent, United States v. New York (citation omitted) so this does not break any new ground in the interpretation to lay and collect income tax, which is plenary as it is.

We also considered the Medicaid question. We missed this one by a mile, as demonstrated below:

As an aside, the objection to using the threat of loss of federal funding to enforce Medicaid reforms is a long objection of so called “Federalists” (who are in truth, states rights supporters, which is something different) has never gained much traction, from using highway funding to enforce the 55 mile per hour speed limit to using the same funding to force a 21 year old drinking age. It is an unsophisticated objection. I made the same argument in Iowa Model legislature when in High School – contending that the clause prohibiting differing regulations of commerce or revenue applied. Any first year law student or historian will point out that this clause applies to international trade, not the regulation of interstate commerce or the use of intergovernmental funds. We suspect that the Court has likely allowed it to be argued to kill this argument once and for all. To expect either a radical rethinking of the Commerce Clause or intergovernmental funding requirements will occur at this time is the legal equivalent of believing in unicorns.

While this precedent has nothing to do with the taxing power under the Constitution, it will likely make the eventual federalization of the entire Medicaid program all the more likely, along with a shift to consumption taxes to fund health care generally, rather than reliance on a combination of personal income taxes, the health insurance exclusion to corporate income taxes and the Hospital Insurance payroll tax.

We believed at the time that opposition to the Law had nothing to do with mandates, the Commerce Clause or Medicaid funding. The real reason conservative major donors don't like the law is the funding mechanism for much of reform. Wealthy donors were and are writing checks because of provisions creating additional taxes on un-earned income that fix Medicare Part A funding and fund other health care reform, essentially turning the Hospital Insurance Tax into a Value Added Tax with an exemption on profits paid to the 98%. Fighting for repeal on this basis, however, would only be politically unpopular.

Only judicial repeal of the whole law would have stopped this tax hike. While this might be possible under reconciliation, we believe that a point of order will be enforced against it in the Senate, so any reform that busts the budget is unlikely, especially provisions which repeal the new non-wage income tax. As much of the new tax was designed to make Medicare Part A viable, we find no logical ground to repeal it unless replaced by a broader consumption tax. As we stated in March:

Note that whenever this tax applies to those whose holding operate in less than a perfectly competitive market, in other words to most commerce in 21st century America, the costs will likely be passed to the consumer and it would be more honest to simply enact a Value Added Tax or VAT-like Net Business Receipts Tax (which is proposed below).

Our prior testimony on the adequacy of mandates is as applicable now as it was in March, if not more so. We believe that the stock market priced in repeal and may react negatively to the prospect of guaranteed issue and community rating. The Committee ignores these predictions at their own peril. As we stated previously:

We will now return to the question of the adequacy of mandates. The key issue for the future of health care consolidation is the impact of pre-existing condition reforms on the market for health insurance. Mandates under the Affordable Care Act (ACA) may be inadequate to keep people from dropping insurance - and will certainly not work if the mandate is rejected altogether for constitutional reasons.

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

In the event that Congress does nothing and private sector health insurance is lost, the prospects for premium support to replace the current Medicare program is lost as well. Premium support, as proposed by Chairman Ryan, also will not work if the ACA is repealed, since without the ACA, pre-existing condition protections and insurance exchanges eliminate the guarantee to seniors necessary for reform to succeed. Meanwhile, under a public option without pre-existing condition reforms, because seniors would be in the group of those who could not normally get insurance in the private market, the premium support solution would ultimately do nothing to fix Medicare’s funding problem.

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

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

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

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

Unlike a VAT, an NBRT would not be visible on receipts and should not be zero rated at the border – nor should it be applied to imports. While both collect from consumers, the unit of analysis for the NBRT should be the business rather than the transaction. As such, its application should be universal – covering both public companies who currently file business income taxes and private companies who currently file their business expenses on individual returns.

The key difference between the two taxes is that the NBRT should be the vehicle for distributing tax benefits for families, particularly the Child Tax Credit, the Dependent Care Credit and the Health Insurance Exclusion, as well as any recently enacted credits or subsidies under the ACA. In the event the ACA is reformed, any additional subsidies or taxes should be taken against this tax (to pay for a public option or provide for catastrophic care and Health Savings Accounts and/or Flexible Spending Accounts).

If cost savings under an NBRT, allow companies to offer services privately to both employees and retirees in exchange for a substantial tax benefit. 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 no so much that the free market is destroyed. The ability to exercise market power, with a requirement that services provided in lieu of public services be superior, will improve the quality of patient care.

This proposal 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.

Employer provided health care will also reverse the trend toward market consolidation among providers. The extent to which firms hire doctors as staff and seek provider relationships with providers of hospital and specialty care is the extent to which the forces of consolidation are overcome by buyers with enough market power to insist on alternatives, with better care among the criteria for provider selection.

The NBRT would replace disability insurance, hospital insurance, the corporate income tax, business income taxation through the personal income tax and the mid range of personal income tax collection, effectively lowering personal income taxes by 25% in most brackets. Note that collection of this tax would lead to a reduction of gross wages, but not necessarily net wages – although larger families would receive a large wage bump, while wealthier families and childless families would likely receive a somewhat lower net wage due to loss of some tax subsidies and because reductions in income to make up for an increased tax benefit for families will likely be skewed to higher incomes. For this reason, a higher minimum wage is necessary so that lower wage workers are compensated with more than just their child tax benefits.

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.