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.