Increasing U.S Competitiveness and Preventing American Jobs from Moving Overseas

Comments for the Record

United States House of Representatives

Committee on Ways and Means and the Subcommittee on Tax Policy

Hearing on Increasing U.S Competitiveness

and Preventing American Jobs from Moving Overseas

How Border Adjustment and Other Policies Will Boost Jobs,

Investment, and Growth in the U.S

Tuesday, May 23, 2017, 10:00 A.M.

1100 Longworth House Office Building

By Michael G. Bindner

Center for Fiscal Equity

Chairmen Brady and Roskam and Ranking Members Neal and Doggett, thank you for the opportunity to submit these comments for the record to the Committee on Ways and Means and the Tax Policy Subcommittee.  

These comments continue the conversation on Tax Reform over the past several years, including the most recent hearing of May 18^th. Many of our comments are a restatement of those made in May of last year on Member Day on Tax Reform.

The Center offered a flurry of comments for the record during that period where Chairman Camp and his subcommittee held almost weekly hearings on tax reform, partly because tax reform was seen as a way to make lower taxes enacted by President Bush permanent, although the Republican and Democratic caucuses had differing views on whether there should be increased revenue from wealthier taxpayers, with the bipartisan Bowles-Simpson and Domenici-Rivlin commissions arguing for revenue positive reforms.  

Chairman Camp offered his own comprehensive reform, which was essentially a “school solution” which lowered rates and broadened the base.  The approach harkened back to the Tax Reform of 1986, although the historical model had its problems – the first being that it lowered rates on the highest taxpayers to such an extent that they had an incentive to demand labor cost savings with rewards for CEOs who accomplished that mission, leading to wage stagnation that plagues the economy even today, as well as too much money available for investment – leading ultimately to investments in home mortgages that caused the Savings and Loan crisis and the 2008 market crash.  The second problem, also leading to the mortgage crisis and market crash was the deductibility of second mortgage interest, which encouraged borrowers in an ever increasing housing market to use their homes as an ATM machine.  The Center for Fiscal Equity hopes that we do not go this way again.

President Obama offered solutions that year much like those of Domenici-Rivlin or Bowles-Simpson. Of course, after he secured passage of the American Tax Relief Act of 2013, which made the tax cuts for the bottom 98% of taxpayers permanent while renewing the Clinton era rates for the top 2%, all talk of tax reform ended, save for discussions of international and corporate reform, which seem to have gone nowhere until now.   Let us caution that due to the number of businesses which file under the individual code, no reform that is not entirely comprehensive is appropriate.

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.

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. Even then, a DBCFT is preferable to the current corporate income tax system, so what is said below about VAT is at least partially applicable to the DCBFT (with any increased subsidies for Children added to the personal income tax).

Value added taxes act as instant economic growth, as they are spur to domestic industry and its workers, who will have more money to spend.  The Net Business Receipts Tax as we propose it includes a child tax credit to be paid with income of between $500 and $1000 per month.  Such money will undoubtedly be spent by the families who receive it on everything from food to housing to consumer electronics. 

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.

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.

Moving the majority of Old Age and Survivors Tax collection to a consumption tax, such as the NBRT (or even a DBCFT), 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 choose 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. 

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 the opportunity to address the committee.  We are, of course, available for direct testimony or to answer questions by members and staff.