Friday, June 24, 2016

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.

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