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.