The Budget and Economic Outlook: Fiscal Years 2013 to 2023

Comments for the Record

to the

United States Senate

Committee on Finance

The Budget and Economic Outlook: Fiscal Years 2013 to 2023

Tuesday, February 26, 2013, 10:00 AM

By Michael G. Bindner

Center for Fiscal Equity

Chairman Baucus and Minority Leader Hatch, thank you for the opportunity to provide comments for the record on this topic. As always, we are available to more fully brief members and staff regarding our comments or to answer any questions.

We expect that Dr. Elmendorf will bring you his best assumptions, as is his duty as Director of the CBO. Meanwhile, Dr. Holtz-Eaken will likely continue to call for the need to cut entitlements while Mr. Greenstein will defend them.

At the Center for Fiscal Equity, we continue to offer a fresh approach that will help control spending, improve the performance of entitlement programs and lead to the paying down, if not paying off, of the national debt. In today’s comments, we will highlight how our four part plan of reform accomplishes this – especially if taken to its fullest extent. Our plan 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.
• 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.
• 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. The floor of contributions could also occur where the Earned Income Tax Credit occurs now, because employer contributions will be funded equally (regardless of individual wage). 
• 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, regional deficits 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.

Using these tools, we can gain control over our budgetary and economic policy, rather than have it happen too us as the CBO projections seem to indicate.

The debate for many years now centers on discretionary spending. Indeed, the current sequester takes place solely in that sphere because it is most controllable. Both parties hold on to the dream that the budget could be controlled if wasteful pork-barrel spending were limited. At the Center, we agree, although providing such control would require a constitutional amendment, as a Value Added Tax qualifies as excise taxes for constitutional purposes. Our proposal would be to segregate discretionary non-strategic military and civil spending into regional pools and have them be fully funded by a regional VAT. If a region wanted more spending, it would raise its tax rate. If it wanted less spending, spending cuts would occur. On the occasion that a region is facing dire economic circumstances and fiscal policy appears to be the answer, it would be allowed to run a deficit – but only then. This puts the power to determine the size of government back in the hands of the people, especially if the VAT is receipt visible.

Net Business Receipts Taxes (NBRT) are similar to a VAT, except that they allow employer offsets for providing social goals. If employer contributions to Social Security were to include personal retirement accounts (which should only hold insured employer voting stock rather than funds for the Wall Street Casino), they would be an offset to this tax. Otherwise, they would be offset from the VAT. This tax would also include offsets for health care funded by the employer as well as an enhanced, consolidated and refundable Child Tax Credit, as the Center has explained in multiple comments over the past two years. If the Affordable Care Act collapses the private insurance system, however, and no offsets are allowed, then the VAT rather than the NBRT would fund any single-payer system. The NBRT could also be regionally set (falling under the same constitutional change allowing regional VATs) and could include deficit spending to develop regions which face human capital deficits.

Individual OASI taxes can be reduced, with more of the burden put on employers and consumers – who in reality pay the tax anyway, especially if the employer tax is shifted to a consumption tax. The goal of such a change would be to reduce or eliminate bend points in the benefit system, with progressivity provided on the employer side while allowing employees an incentive to demand higher wages to build their retirement savings. The OASI taxes would need no adjustment to solve the Social Security funding program, as the easier fix would be to increase NBRT obligations instead. Because the NBRT and/or VAT have no income cap, increasing these taxes will not hurt American workers or jobs as much as a change to the payroll tax or benefit formulas surely would.

As to the income surtax, we would urge that inheritance tax changes recently enacted in the American Tax Relief Act be modified so that inheriting an asset is not a taxable event, but liquidating it becomes one above the same floor as the income tax. We urge you to respect equality among the living rather than among the dead.

The recent CBO report, which will undoubtedly be discussed, shows that the major driver for our deficit is the funding of net interest on the debt, especially internationally. The Center commented upon this instance to the House Ways and Means Committee on February 14th on this topic regarding tax reform and charitable contributions. We stated, regarding Net Interest, that:

This explosion essentially fuels the growth of the growth of the Dollar as the world’s currency. Essentially, this means that we pay our expenses with taxation (even without adopting the Center for Fiscal Equity Plan) while we roll over our debt without repaying it. This seems like a wonderful way for American consumers to continue to live like imperial Rome, however it cannot last.

There are two possible ends to this gravy train. The first is the internationalization of the Dollar, the Federal Reserve and our entire political system into a world currency or government and its concurrent loss of national sovereignty or the eventual creation of rival currencies, like a tradable Yuan or a consolidated European Debt and Income Tax to back its currency. In the prior case, all nations which use the Dollar will contribute to an expanded income tax to repay or finance the interest on the global debt. In the second case, the American taxpayer will be required to pay the debt back – and because raising taxes on all but the wealthy will hurt the economy, it will be the wealthy and their children who will bear the burden of much higher tax levies. 

In order to avert either crisis, there are two possibilities. The first is the elimination of deductions, including the Charitable Deduction itemized on personal income taxes – especially for the wealthy. If the charitable sector, from the caring community to the arts, industrial and education sectors, convince wealthier taxpayers to fight for this deduction, then the only alternative is higher rates than would otherwise occur, possibly including a much more graduated tax system.

 

Luckily, the American Tax Relief Act may provide a solution to some of these problems. In our studies on the relationship between tax policy, the federal capital markets and economic growth, which we shared with this committee on February 7, 2012, we showed that in Democratic regimes which raise taxes on the wealthy, the relationship between reducing the deficit and economic growth changes slope because more is taken out of the savings sector and added to the spending sector. If ATRA impacts over the next decade duplicate the Clinton years, much of the net interest problem will solve itself. If we have learned our lesson from the 2000s, we shall not make the same mistake again.

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.