Comments for the Record
United States House of Representatives
Committee on Ways and Means
Member Day Hearing on Tax Reform
Thursday, May 12, 2016, 10:00 AM
By
Michael G. Bindner
Center for Fiscal Equity
Chairman Brady and Ranking Member Levin, thank you for the opportunity to
submit these comments for the record to the House Ways and Means Committee.
The Center offered a flurry of comments for the record
during that period where Chairman Camp and his subcommittee held almost weekly
hearings on tax reform, partly because tax reform was seen as a way to make
lower taxes enacted by President Bush permanent, although the Republican and
Democratic caucuses had differing views on whether there should be increased
revenue from wealthier taxpayers, with the bipartisan Bowles-Simpson and
Domenici-Rivlin commissions arguing for revenue positive reforms.
Chairman Camp offered his own comprehensive reform, which
was essentially a “school solution” which lowered rates and broadened the
base. The approach harkened back to the
Tax Reform of 1986, although the historical model had its problems – the first
being that it lowered rates on the highest taxpayers to such an extent that
they had an incentive to demand labor cost savings with rewards for CEOs who accomplished
that mission, leading to wage stagnation that plagues the economy even today,
as well as too much money available for investment – leading ultimately to
investments in home mortgages that caused the Savings and Loan crisis and the
2008 market crash. The second problem,
also leading to the mortgage crisis and market crash was the deductibility of
second mortgage interest, which encouraged borrowers in an ever increasing
housing market to use their homes as an ATM machine. The Center for Fiscal Equity hopes that we do
not go this way again.
The President has offered solutions that year much like
those of Domenici-Rivlin or Bowles-Simpson. Of course, after he secured passage
of the American Tax Relief Act of 2013, which made the tax cuts for the bottom
98% of taxpayers permanent while renewing the Clinton era rates for the top 2%,
all talk of tax reform ended, save for discussions of international and
corporate reform, which seem to have gone nowhere. Indeed,
due to the number of businesses which file under the individual code, no reform
that is not entirely comprehensive is appropriate.
We doubt that any reform will occur because there have
been no talks between the White House and Treasury Department with the
congressional tax writing committees. If
they have occurred, then I comment you on your stealth. Still, this member day is a good sign that
bipartisan discussion is possible on this topic, so we are pleased to resubmit our
comprehensive four-part approach.
- 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.
CBO projections on the size of the debt and the role of Net Interest are
troubling in that they show that while most discretionary and entitlement
spending are projected to remain flat while net interest is due to explode.
It is helpful to explore the reasons for this. 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.
The
second option is higher rates than would otherwise occur, possibly including a
much more graduated tax system. 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 choose
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.
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.
