Examining the Proposed Medicare Part B Drug Demonstration

Comments for the Record

Senate Committee on Finance

Examining the Proposed Medicare Part B Drug Demonstration

Tuesday, June 28, 2016, 10:00 AM

by Michael Bindner

The Center for Fiscal Equity

Chairman Hatch and Ranking Member Wyden, thank you for the opportunity to submit our comments on this topic.  We will leave the description of the experiment to the Administration witnesses and concentrate on why the experiment may or may not be necessary.  As usual, our comments are based on our four-part tax reform plan, 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 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), 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 sixty.

While the Administration may be correct in siting this experiment as a way to both improve cost and care, the underlying reason has to be cost minimization.  As we saw with Medicare Part C in the mid-90s, minimization on its own leads to decreased care and providers who exit the system and need premium pay to return.

Aside from throwing up our hands and agreeing to deficit spending, as Congress did in establishing such incentives for Part C when it established Part D, some form of revenue increase is required.

Both the Simpson-Bowles Commission and the Rivlin-Domenici Commission recommended an increase in Part B and D premiums. That is all well and good, but seniors and the disabled don’t simply have spare cash to throw around without decreasing other spending, like housing or food.  For most people, that European vacation only comes as a gift from grateful children or merciful siblings.  Therefore, the only way to increase premiums is to also increase the basic Social Security and Disability benefit (which will need to happen anyway if the drive to a $15 minimum wage keeps gaining success).

Increasing the benefit is usually seen as a matter of raising the income cap and making the bend points in benefit calculation more severe so that the contribution increase does not simply lead to higher benefits for wealthier retirees.  There is, however, another option.

Our proposal is to lower the employee income cap on contributions to decrease the entitlement for richer retirees while the employer income cap is eliminated, the employer and employee payroll taxes are decoupled and the employer contribution credited equally to each employee at some average which takes in all income.  If a payroll tax is abandoned in favor of some kind of consumption tax, all income, both wage and non-wage, would be taxed and the tax rate may actually be lowered.

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), regardless of whether Part B and D premiums are adjusted.

Our Net Business Receipts Tax/Subtraction VAT proposal above is the recommended consumption tax.  It would not show up on the receipt because it can be offset by employer provided substitutes.

The NBRT can provide an incentive for cost savings if we allow employers to offer services privately to both employees and retirees in exchange for a substantial tax benefit, either by providing insurance or hiring health care workers directly and building their own facilities. Employers who fund catastrophic care or operate nursing care facilities 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.

This proposal is probably the most promising way to arrest 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.

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.

Thank you for this opportunity to share these ideas with the committee.  As always, we are available to meet with members and staff or to provide direct testimony on any topic you wish.

Response to the Tax Reform Blueprint

The Center for Fiscal Equity chides you for not listening, so we would like to make a few things clear.

What the new generation needs is not necessarily tax simplification or promises of growth on a discredited supply side economic model (luckily, the CBO and JTC has a copy of our model and appears to have used it in scoring the President's latest budget) - it needs a plan to both cut the deficit, begin paying rather than rolling over net interest costs and ultimately begin paying down the debt to the level necessary to provide the Federal Reserve with bonds to back the currency.

We have tried the reduce rates and broaden the base. In 1986, it actually happened, although second mortgage interest was left deductible, leading quickly to the savings and loan crisis and eventually the 2008 Great Recession, abetted by capital gains cuts which gave us the tech bubble. Efforts to call tax cuts a prelude to growth ring hollow and even those economists who backed them no longer support such theory.

The way to increase growth is to give more money to households, particularly households with children. This should not be an end-of-the-year payout, but should be included each week with wage and it should be substantial. Each child should be worth a tax credit of $1000 per month. To pay for this, put a floor on Social Security employee contributions and eliminate the EITC (while taking the cap from the employer contribution and crediting it equally rather than as a match to the employee levy) and eliminate the mortgage interest deduction. A $1000 per child per month refundable credit will cause a housing boom - people need money, not borrowing assistance, when they require shelter. Indeed, such a move will likely may abortion less likely, so this is a pro-life matter. Not only is it pro-life, it is pro-growth.

The task force has identified a series of very real problems. Let me suggest some solutions:

Problem #1: The Current Code Imposes Burdensome Paperwork and Compliance Costs.

Shifting tax reporting for most families to a combination of a consumer Value Added Tax (yes, it makes people who think they have avoided taxes actually pay - but taking away the possibility of avoidance lowers the costs inherent in such schemes) and a business subtraction VAT/Net Business Receipts Tax. The latter should replace corporate income taxes (yes, they should be zero), payroll taxes and some income taxes. Shifting these many taxes to one will hugely reduce paperwork, especially with the ending of many, but not all, corporate tax preferences. The research deduction should be ended, because personnel costs must be taxed - and so should profit. The remaining income tax would be much simpler with no pass through reporting and only the charitable contribution and ESOP sales deductions.

Problem #2: The Current Code Delivers Special Interest Subsidies and Crony Capitalism - Agreed, shifting to a subtraction VAT would do that.

Problem #3: The Current Code Penalizes Savings and Investment.

Individuals in the lower and middle classes should have these incentives. Higher income tax payers should not - paying normal income rates on their high income surtax. Note that every economic crisis in the last 100 years came about because someone cut the rate on savings and investment. The problem is that most investment in industrial production is already handled - there is just not that much of it. As a result, extra investment capital has gone to speculative ventures in small business (most of which fail) and housing finance - see comments above on 2008.

Problem #4: The Current Code Encourages Businesses to Move Overseas

Eliminate the Corporate Income Tax entirely and businesses will move back. Actually, businesses have left in name only (unless they have done so to reduce labor costs) - that part can be stopped by not allowing businesses to locate their headquarters to an inbox in Ireland or the Cayman Islands.

Problem #5: The Current Code Enables a Broken Tax Collector

Under-funding the IRS is what has broken it - and the latest appropriation bill is more of the same non-sense. Still, our proposal would move all VAT and Subtraction VAT collection to the states, with the IRS only collecting the high income and inheritance surtax.

On tax rates, we recommend a 13% Value added tax (although we can go 12), a 25%-33% Subtraction VAT (the 8% spread is for health insurance benefits provided by employers plus the child tax credit) and a high income and inheritance surtax (with disbursements from estates taxed as normal income, but not assets held) ranging from 8% to 32% for the mega-wealthy.

While it is impossible to do this in an election year, it is our hope that our response can provide a way forward to reduce the debt and grow the economy for the next Congress and the new President. 

Thank you for the opportunity to comment on this way forward. As always, we are available for consultation.

2016 Social Security Trustees Report

Comments for the Record

United States House of Representatives

Committee on Ways and Means

Social Security Subcommittee

Hearing on the 2016 Annual Report of the

Social Security Board of Trustees

Wednesday, June 22, 2016, 2:00 PM

By Michael G. Bindner

Center for Fiscal Equity

Chairman Johnson and Ranking Member Becerra, thank you for the opportunity to submit my comments on this topic. I will leave it to the Administration’s witnesses to explain the Trustees’ Report and will instead confine myself to what needs to be done in the future, with special emphasis on what not to do.  These remarks will be similar to those regarding the 2011 Trustees report, but at this point they bear repeating.

Lessons from the Great Recession

The only observation I will make regarding the Trustees report is that the 2008 Recession triggered by our continuing asset-based Depression has both temporary and permanent effects on the trust fund’s cash flow. The temporary effect is a decline in revenue caused by a slower economy and the temporary cut in payroll tax rates to provide stimulus.

The permanent effect is the early retirement of many who had planned to work longer, but because of the recent recession and slow recovery, this cohort has decided to leave the labor force for good when their extended unemployment ran out. This cohort is the older 77ers and 99ers who needed some kind of income to survive. The combination of age discrimination and the ability to retire has led them to the decision to retire before they had planned to do so, which impacts the cash flow of the trust fund, but not the overall payout (as lower benefit levels offset the impact of the decision to retire early on their total retirement cost to the system).

When Social Security was saved in the early 1980s, payroll taxes were increased to build up a Trust Fund for the retirement of the Baby Boom generation. The building of this allowed the government to use these revenues to finance current operations, allowing the President and his allies in Congress to honor their commitment to preserving the last increment of his signature tax cut.

This trust fund is now coming due, so it is entirely appropriate to rely on increased income tax revenue to redeem them. It would be entirely inappropriate to renege on these promises by further extending the retirement age, cutting promised Medicare benefits or by enacting an across the board increase to the OASI payroll tax as a way to subsidize current spending or tax cuts.

The cash flow problem currently experienced by the trust fund is not the trust fund’s problem, but a problem for the Treasury to address, either through further borrowing – which will require a quick resolution to the debt limit extension and preferable through higher taxes for those who received the lion’s share of the benefit’s from the tax cuts of 1981, 1986, 2001, 2003 and 2010.

The cost of delaying actions to address Social Security’s fiscal challenges for workers and beneficiaries.

Actions should be taken as soon as possible, especially when they must be phased in, as it is a truism that a little action early will have a larger impact later.

This should not be done, however, as an excuse to use regressive Old Age and Survivors Insurance payroll taxes to subsidize continued tax cuts on the top 20% of wage earners who pay the majority of income taxes. Retirement on Social Security for those at the lowest levels is still inadequate. Any change to the program should, in time, allow a more comfortable standard of living in retirement.

The ultimate cause of the trust fund’s long term difficulties is not financial but demographic. Thus, the solution must also be demographic – both in terms of population size and income distribution. The largest demographic problem facing Social Security and the health care entitlements, Medicare and Medicaid, is the aging of the population. In the long term, the only solution for that aging is to provide a decent income for every family through more generous tax benefits.

The free market will not provide this support without such assistance, preferring instead to hire employees as cheaply as possible. Only an explicit subsidy for family size overcomes this market failure, leading to a reverse of the aging crisis.

The recommendations for raising net income are within the context of comprehensive tax reform, where the first 25-28 percent of personal income tax rates, the corporate income tax, unemployment insurance taxes, the Hospital Insurance payroll tax, the Disability Insurance payroll tax and the portion of the Survivors Insurance payroll tax funding survivors under the age of 60 have been subsumed by a Value Added Tax (VAT) and a Net Business Receipts Tax (where the net includes all value added, including wages and salaries).

Net income would be adjusted upward by the amount of the VAT percentage and an increased child tax credit of $500 to $1000 per child per month. This credit would replace the earned income tax credit, the exemption for children, the current child tax credit, the mortgage interest deduction and the property tax deduction. This will lead employers to decrease base wages generally so that the average family with children and at an average income level would see no change in wage, while wages would go up for lower income families with more children and down for high income earners without children.

Gross income would be adjusted by the amount of tax withholding transferred from the employee to the employer, after first adjusting net income to reflect the amount of tax benefits lost due to the end of the home mortgage and property tax deductions.

This shift in tax benefits is entirely paid for and it would not decrease the support provided in the tax code to the housing sector – although it would change the mix of support provided because the need for larger housing is the largest expense faced by growing families. Indeed, this reform will likely increase support for the housing sector, as there is some doubt in the community of tax analysts as to whether the home mortgage deduction impacted the purchase of housing, including second homes, by wealthier taxpayers.

Within twenty years, a larger number of children born translates into more workers, who in another decade will attain levels of productivity large enough to reverse the demographic time bomb faced by Social Security in the long term.

Such an approach is superior to proposals to enact personal savings accounts as an addition to Social Security, as such accounts implicitly rely on profits from overseas labor to fund the dividends required to fill the hole caused by the aging crisis. This approach cannot succeed, however, as newly industrialized workers always develop into consumers who demand more income, leaving less for dividends to finance American retirements. The answer must come from solving the demographic problem at home, rather than relying on development abroad.

This proposal will also reduce the need for poor families to resort to abortion services in the event of an unplanned pregnancy. Indeed, if state governments were to follow suit in increasing child tax benefits as part of coordinated tax reform, most family planning activities would be to increase, rather than prevent, pregnancy. It is my hope that this fact is not lost on the Pro-Life Community, who should score support for this plan as an essential vote in maintaining a perfect pro-life voter rating.

Obviously, this proposal would remove both the mortgage interest deduction and the property tax deduction from the mix of proposals for decreasing tax rates while reducing the deficit. This effectively ends the notion that deficit finance can be attained in the short and medium term through tax reforms where the base is broadened and rates are reduced. The only alternatives left are a generalized tax increase (which is probably necessary to finance future health care needs) and allowing tax rates for high income individuals to return to the levels already programmed in the law as of January 1, 2013. In this regard, gridlock is the friend of deficit reduction. Should the President show a willingness to let all rates rise to these levels, there is literally no way to force him to accept anything other than higher rates for the wealthy.

This is not to say that there is no room for reform in the Social Security program. Indeed, comprehensive tax reform at the very least requires calculating a new tax rate for the Old Age and Survivors Insurance program. My projection is that a 6.5% rate on net income for employees and employers (or 13% total) will collect about the same revenue as currently collected for these purposes, excluding sums paid through the proposed enhanced child tax credit. This calculation is, of course, subject to revision.

While these taxes could be merged into the net business income/revenue tax, VAT or the Fair Tax as others suggest, doing so makes it more complicated to enact personal retirement accounts. My proposal for such accounts differs from the plan offered in by either the Cato Institute or the Bush Commission (aka the President’s Commission to Save Social Security).

As I wrote in the January 2003 issue of Labor and Corporate Governance, I would equalize the employer contribution based on average income rather than personal income. I would also increase or eliminate the cap on contributions. The higher the income cap is raised, the more likely it is that personal retirement accounts are necessary.

A major strength of Social Security is its income redistribution function. I 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.

I 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. I suspect 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, I 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 save 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.

One new wrinkle is that I would also put a floor in the employer contribution to OASI, ending the need for an EITC – the loss would be more than up by gains from an equalized employer contribution – as well as lowering the ceiling on benefits. Since there will be no cap on the employer contribution, we can put in a lower cap for the employee contribution so that benefit calculations can be lower for wealthier beneficiaries, again reducing the need for bend points.

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.

Budget Process Reform

Comments for the Record

United States House of Representatives

Committee on the Budget

Members’ Day: Budget Process Reform

Thursday, June 16, 2016, 10:30 AM

By Michael G. Bindner

Center for Fiscal Equity

Chairman Price and Ranking Member Van Hollen, thank you for the opportunity to submit these comments for the record on budget process reform.  These comments reflect what I published in my book, Musings from the Christian Left in 2004 and which I transmitted to the Committee in September of 2011. 

For most of recent memory, especially in years where large deficits loom, the Congress and the President have been unable to reach consensus on a budget in time for the start of the fiscal year on October first. This is almost scandalous, given the impact of the federal government on the economy. The lives of millions of hardworking public servants and contractors hang in the balance while Congress debates, or more likely stalemates. While it is healthy to debate the nature of government from time to time, holding the nation hostage to stage it is not.

When the government is divided between the parties, budgets are submitted "dead on arrival.” This leads to a series of missed deadlines and a likely impasse that threatens to shut the government down at the beginning of the fiscal year. Often, the impasse leads to the need for an Omnibus Appropriation Act, with its attendant pork barrel spending to assure passage (a practice which further undermines citizen confidence in the Federal Government). The same wasteful programs and tax benefits get funded and the budget crisis goes on. This goes on because each side gains political points for blaming the other, while no one has any stake in lessening their own role.

The federal budget process is broken. It must be replaced with a new budget process that allows for agreement on broad issues and a continuation of government while the details and controversies at the programmatic level are worked out. The solution must include incentives to keep the process moving. To force congressional movement on overall priorities, the administration withholds detailed appropriations proposals until a general solution is passed in both houses of Congress and signed by the President (a Joint Budget Resolution). After this is passed, detailed proposals are submitted and acted upon by the authorization and appropriations committees. A two-year budget process is suggested to assure the process is completed on time.

Phase One: The Joint Budget Resolution

The first phase of the budgetary process is high-level budget enactment. The budget message, revenue estimates and increases, departmental, independent agency and functional spending totals, and deficit projections are included in the Joint Budget Resolution proposal. Until the resolution is enacted the Executive withholds detailed spending estimate or authorizing language. The proposal is submitted to Congress during mid-January, with passage of the Joint Budget Resolution by the July 4th recess.

A Joint Committee on the Budget considers the resolution. The Committee consists of members of the leadership of both houses, various committee chairs and members, and members not assigned to any major authorizing or appropriations committee (who shall be a majority). The Chair alternates between chambers. Such a committee is necessary to expedite action.

After the Committee reports the resolution it is considered in an expedited fashion. If there are differences between the amended versions of the resolution it goes back to the Committee one final time, and acts as a conference committee in this case.

The Executive Branch uses the totals enacted in the Joint Budget Resolution as the totals in its detailed authorizations and appropriations submissions.

Phase Two: Authorization

The second phase of the budgetary process is authorization, which begins after the Joint Budget Resolution is signed, in July of the first session. Most of the authorization process is accomplished before the appropriations process begins. To guarantee this, no appropriations bill is marked up in committee in either house until the authorization bill has secured floor passage in that house, including tax and entitlement adjustments. This occurs by February of the second session. At the start of a new President's term honeymoon authorizations changes are submitted by February, with enactment by September so that they take effect October first.

Authorization legislation addresses changes to current law, revised spending ceilings and floors (which the marked up appropriations bills does not exceed or fall short of subject to a point of order), any new programs or program elimination (the only time these occur), changes to agency regulations, adjustments to any entitlement, and estimates of their effect on the next fiscal period.

The revenue committees examine the progressivity of both taxation and spending to assure that the middle class pays for itself and the upper 20% pay for the benefits they receive plus a lions share of the benefits for the bottom 20% of income earners. Corrections in the tax code are enacted as a result of this review. The revenue committees also examine the level for cost of living adjustments (COLAs) and indexing. COLAs and indexing are adjusted so the public sector neither loses or gains as the result of inflation.

As part of this process, authorizing committees consider major regulations enacted since the last authorization. Doing so avoids the practice of appropriators playing games with the funding of regulatory agencies, since Congress has the opportunity to work its will during the authorization process. Before continuing on to the appropriations phase, I briefly discuss ways in which regulatory power is exercised in such a way as to not appear illegitimate by the vast majority of the public.

Increasing Congressional Review of Regulation

A major theme in modern political life is the popular protest against regulations enacted by unelected bureaucrats. This anti-Washington theme aided the campaigns of many recent administrations, including the current one. Other reforms in the regulatory review process increased regulatory accountability to the President. However, these did little to improve the position of Congress.

On June 30, 1983, the Supreme Court ruled the legislative veto unconstitutional in an immigration case, In re: Chada. Since that time a Joint Resolution of Disapproval legislative veto has been enacted as a general case. Several other legislative vetoes have also been acted into law. However, many of these cannot survive the standards imposed by the Chada decision. Therefore, Congressional control of agency regulation remains an open question.

To regain control of regulations, authorization committees review the body of regulations under their purview during consideration of the President’s budget. The President or Independent Agencies submit any changes to their major regulations (enacted since their last authorization) as an appendix to their authorization proposals. If the authorizing committees approve of the changes they do nothing. However, if they are unsatisfied with the changes, or wish to make changes of their own they can at this juncture. These changes are made one of two ways. The first way is to write the change into law, which restricts subsequent action. If circumstances change the agency then seeks legislative relief or waits until the next authorization cycle. This option limits the ability of agencies to deal with emergencies, making it undesirable. The second way is to change agency regulation by law, allowing for further change as circumstance changes. This almost superficial difference preserves flexibility in the regulatory process, making it desirable.

Enactment of this proposal firmly places regulatory initiative with the Congress. This approach gives the people say in the regulatory process through Congress, strengthening representative government. In doing so it helps the less well organized (who know how to reach their Congressman, but not the administrative agency). The regulatory review provisions have two more advantages over the status quo. First, they bring the regulatory review process into sharper view, allowing for more involved citizen input. Second, they avoid the constitutional pitfalls of the legislative veto.

Phase Three: Appropriations

The third phase of the budgetary process is appropriations. The Executive Branch begins preparing its detailed appropriation submissions after passage of the Joint Budget Resolution in July of the previous year. It modifies its targets when Authorization legislation is marked up. The Appropriations submissions clear OMB and go to the Hill by March 15th of the second session. The submissions for each program are between the ceiling and floor listed in the authorization legislation. The total for the agency or department matches the total found in the Joint Budget Resolution. Agency submissions reflect program financial performance. Agency personnel defend the submission.

Appropriations sub-committees do not mark up legislation until after the authorization has cleared the full chamber. The full Appropriations Committees reports by June 15. If the total for an appropriations bill exceeds the total specified in the Joint Resolution the bill must clear the Joint Budget Committee before going to the floor. Legislation gets to the President's desk by Labor Day.

If an appropriations bill is not enacted prior to the start of the fiscal period (October 1) the current distribution of spending within current law is maintained, minus programs cancelled in the authorization phase, at the total set in the Joint Budget Resolution. This prevents the government from stopping at the end of the fiscal year.

Enactment of this proposal restores discipline to the budget process. Every actor in the process has specific responsibilities and incentives to meet them. Each actor maintains his share in the process, but not more than his share. The Executive Branch is forced to offer realistic proposals. The Legislative Branch meets its deadlines. The Federal Government then stops arguing about the budget and gets on with the business of governing.

There is support for these propositions in the academic and professional literature. Thomas Lynch of Florida Atlantic University also advocates a two-step budget process in "Federal Budget Reform," beginning with passage of a Joint Budget Resolution, which sets overall spending priorities. After this resolution passes agencies submit their requests, which are considered in detailed budget and bills. The strength of this approach is that it forces Congress to decide on overall priorities before they can begin to consider their local interests. Rudolph Penner and Alan Abramson, in their landmark book Broken Purse Strings, support the establishment of a Joint Budget Committee (echoing Senator Pete Domenici), a Joint Budget Resolution and multi-year budgeting.

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.

Challenges and Opportunities for U.S. Business in the Digital Age

Comments for the Record

Senate Committee on Finance

Challenges and Opportunities for U.S. Business in the Digital Age

Tuesday, June 15, 2016, 2:00 PM

by Michael Bindner

The Center for Fiscal Equity

Chairman Hatch and Ranking Member Wyden, thank you for the opportunity to submit our comments on this topic.  As usual, our comments are based on our four-part tax reform plan, 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 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), 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 sixty.

U.S. firms of all ownership types face many challenges doe to the digital age.  The most immediate of them is how sales taxes are collected across state lines.  Technology is also the answer to that.  Whatever the law is, it can be included in a simple digital application based on state of sale and/or state of origin.  Of course, if a Value Added Tax is adopted federally with state participation, taxation will occur where the work occurs rather than at the sales destination, mooting the entire question. This would be true for our first bullet, a Value Added Tax and our fourth, the Net Business Receipts/Subtraction VAT.

There is a far more difficult question that business faces, one which tax policy can help.  In the current information economy, there is pressure to hire the latest graduates who have the most recent programming training – even when older, more expensive, staff might be more productive overall, with better soft skills. 

Older workers expect to be paid for their longevity and need to be paid for their larger families.  The latter is harder to do, because firms that hire younger, childless workers can pay less money but offer a higher standard of living – at least in the short term.  The free market in this instance is a failed market, because although larger families benefit society – both in terms of demand and for retirement savings, the incentives don’t match up.  In such cases, it is appropriate for the government to offer a Child Tax Credit that is eve larger than the current credit.  In our model, this would be paid as a wage as a credit against the NBRT/Subtraction VAT.  This shows that such a credit is not only for the poor, but could be a major part of middle class compensation.

The NBRT/Subtraction VAT would fund the employer contribution to Social Security Old Age and Survivors Insurance.  We propose that the progressivity now found in the benefits calculation portion of the program be moved to the accumulation phase, with each worker receiving the same credit from the federal government, regardless of wage level.  Further, a portion of that credit could be used to buy employer voting stock, or for cooperative firms, one share of voting stock and the remainder of preferred stock, preserving warm body voting).  In either case, longevity compensation would be shifted to continued stock accumulation and dividend reinvestment or distribution, or a mix of the two.  Suddenly, it makes no sense to fire workers who are still valuable because their direct expense is lower.  Indeed, in a corporate model, the more experienced workers would be an asset and would vote their stock based on their experience level.

The employer contribution to Social Security OASI would remain a function of income, mostly because society would not tolerate rolling the entire program into the employer contribution, although that is also an option.

On the income tax front, one of the remaining deductions to the income and inheritance surtax would be sales of stock to a qualified ESOP.  This could accelerate the movement to employee-ownership, with the longevity compensation scheme described above.

These solutions work in any firm, but they do the most good where the need for a new approach is most needed, the digital sector.

What is not needed are attempts to cut taxes on business or income to make capital more available.  There is plenty of capital available now.  It is not being used because demand is anemic.  The last time we tried cutting capital gains tax rates to spur growth we got the tech bubble.  People got capital for all sorts of projects for which there was no demand. Let us not repeat that mistake. 

In the tech industry there exists the Computer-Aided Manufacturing – International Multi-Attribute Decision (MAD) Model.  The first element of the model is the market.  Not the stock market, but the product market.  Questions of the cost of capital are buried in Return on Investment figures and are of little importance. 

If a committee staffer joined a tech firm and tried to push investments because of low tax rates, he would be fired as an ideologue and sent packing back to the committee.  If, however, he could promise more spending in the tech industry by the government – or even more money for social programs, then he would go far in industry.  Of course, if he could get a $15 minimum wage enacted (along with the measures suggested above), which would spur pent up demand by the working class, they might make him CEO.

Let’s not make the same mistakes as the late 90s.  Instead, give families what they need and business will succeed beyond our wildest dreams.

Thank you for this opportunity to share these ideas with the committee.  As always, we are available to meet with members and staff or to provide direct testimony on any topic you wish.

The Need for Fiscal Goals

Comments for the Record

United States House of Representatives

Committee on the Budget

The Need for Fiscal Goals

Wednesday, June 15, 2016, 10:00 AM

By Michael G. Bindner

Center for Fiscal Equity

Chairman Price and Ranking Member Van Hollen, thank you for the opportunity to submit these comments for the record on the need for fiscal goals.  As usual, our comments are based on our four-part tax reform plan, 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 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), 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 sixty.

Every instance of taxing and spending reveals the fiscal goals of the sponsors and advocates.  What is needed is not the goal itself, we have that, but transparency into the goals implicit in the legislation.

The 1974 Budget and Impoundment Control Act sought to bring fiscal goal setting to a whole new level in hopes that the budget would be passed promptly.  It has not worked out that way.  In most years, especially of late, an Omnibus spending bill is put together and passed almost a half a year after the appropriations legislation was due.  There are a few of us in budget academe who speculate that the Act hurt timeliness, probably by throwing more stakeholders into the mix.  Sadly, Pandora’s Box has been opened and junking the budget process will probably not happen.  Note that we are discussing this in tomorrow’s hearing.

The fiscal goals of advocates are apparent too.  Ms. MacGuiness is noted for her desire to end tax expenditures and thus lower tax rates, as if her goals are important than those who enacted and advocate those expenditures in the first place (I am quite attached to the Child Tax Credit, which I believe should be expanded). 

Lowering the top tax rate for the top 2% of income earners, and higher, gives them the express incentive to cut labor costs, either as stock holders or executives, and pocket the difference.  The reason we had labor peace from Eisenhower through Carter – and especially from Ike to JFK – was because the 93% tax rate took away the incentive to make war on the working class.  While we can never get back to these levels again, something else must be done, which I will discuss below.

Dr. Holtz-Eakin is known for the urgency he brings to cutting retirement and health entitlements before they swallow the budget, although Obamacare has gone some of the way in achieving this goal and removing the income cap on the Social Security Employer Contribution (and equalizing it – possibly shifting to a subtraction VAT) would do the job quite well.  Dr. Stein will likely contradict Dr. Holtz-Eakin, having a more progressive set of goals.  I suggest hearing from someone new.

The purpose of the first point of our plan is to control discretionary spending – either allowing it to go higher or lower – by dividing domestic discretionary and domestic military (non-strategic) spending by the federal region in which it is located and requiring that the VAT rate for that region be adequate to fully fund it, lest sequesters and tax increases occur automatically. Note that this would require a constitutional amendment, but I believe this is the kind of thing that will be ratified quickly – and if not it will spur an excellent debate.

The purpose of the second point of our plan is to pay down the debt – not control it – eliminate it.  While on the macro-level it is mostly rolled over, especially to other national central banks, there are people who actually benefit financially from net interest payments.  Secretary Hamilton believed that this was necessary to get the elites behind the American prospect.  I believe it is time to end that experiment and to tax the class who receives these payments more heavily so that we can fund net interest (which CBO says is the budgetary item most out of control in the long term future), overseas military, naval and strategic spending (which is usually debt financed) and debt reduction. 

If the goal is to offset the worst offending future spending, there is hardly no better way to do so than the income tax.  Indeed, it is this class of people which is the most liable for the debt.  We borrow money because of the existence of an income tax promising liquidity in the future. That tax liquidity is the extent to which each family owes.  We do not have a head tax in the United States, so per capita debt figures are to be ridiculed.  Instead, debt liability at the household level must be a function of income taxation.

The goal of our third point is to have some variability in Social Security payments as an incentive to higher income.  This is actually silly.  Money is the incentive to higher income.  Not earning it is due to a lack of inequality of opportunity, not any desire to be less rich.  While we would jettison the employee contribution entirely, we admit that the policy community, including those on the left (Henry Aaron comes to mind), would never countenance it.

The goal of our fourth point is to assure the adequacy of social services.  A subtraction VAT is seen as the best way to do this.  We admit it is a money machine, but we do provide an out.  Any firm which provides subsidies in lieu of the government for such things as health care, mental health care in lieu of corrections, retirement savings, education (elementary, remedial, vocational and collegiate) and family support through a higher child tax credit, will pay low, if not no taxes.  Indeed, rebates are possible here, within reason (and limits on revenue size).

On the retirement savings side (and this is where Aaron really disapproves), we would allow firms to give employer voting stock (or preferred stock if cooperative voting is planned) in lieu of paying part of the tax.  Combined with repealing the Taft-Hartley Act, this would increase responsible employee-ownership in unionized and non-unionized firms alike, with one-third of the stock traded to an insurance fund holding other such company shares so that no business failure leaves its employees with no retirement assets.

The phase in on this can start slowly, but it has the potential of increasing quickly, especially if the deduction on sales of stock to a qualified ESOP is retained.  I trust responsible employees with any business more than a predatory and self-serving CEO any day of the week.  Enact these provisions and people will stop marching in the streets against capitalism (of course that means that capitalism would be somewhat rarer than it is today). This will restore the labor peace that we once had due to high tax rates on the rich.

As you can tell, my stated fiscal goals are rather clear.  It is the same with anyone proposing a change in the budget process.  The question is not whether there are or should be fiscal goals, but whose will be enacted.  This is why we have both elections and lobbying.

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.