President’s Fiscal Year 2018 Budget Proposals
Comments
for the Record
United
States House of Representatives
Committee on Ways and Means
U.S.
Secretary of the Treasury Steven Mnuchin
Wednesday, May 24, 2017,2:00 P.M.
1100 Longworth House Office Building
By
Michael G. Bindner
Center for Fiscal Equity
Chairman Brady and Rankin Members Neal, thank you for the opportunity to submit these comments for the record to the Committee on Ways and Means on the FY 2018 Budget. As usual, we will preface our comments with our comprehensive four-part approach, which will provide context for our comments.
- 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%.
- 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.
News reports indicate that the Administration proposes deep
cuts in entitlement programs benefiting the poor. We agree that these programs are
non-functional and should be replaced by a $15 minimum wage or a literacy and job
training program paying the same wage to participants, a $1000 child tax credit
per month per dependent through the net business receipts tax described above and
health coverage mandated through the employer or training program provider. Medicaid
for the disabled and elderly should be entirely federalized. Don’t just make smalls,
which is torture. Go big or go home.
These proposals are identical to what we have stated previously,
but they bore highlighting. Let us return to the usual details and analysis.
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.
The proposed Destination-Based Cash Flow Tax is a
compromise between those who hate the idea of a value-added tax and those who
seek a better deal for workers in trade. It is not a very good idea because it
does not meet World Trade Organization standards, though a VAT would. It would
be simpler to adopt a VAT on the international level and it would allow an
expansion of family support through an expanded child tax credit. Many in the
majority party oppose a VAT for just that reason, yet call themselves pro-life,
which is true hypocrisy. Indeed, a VAT with enhanced family support is the best
solution anyone has found to grow the economy and increase jobs.
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, however, 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.
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,
then the only alternative 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 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
chose 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.
posted by Michael Bindner at 2:00 PM
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