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.