The Economic and Fiscal Benefits of Pro-Growth Policies

Comments for the Record

United States House of Representatives

Committee on the Budget

Hearing on The Economic and Fiscal Benefits of Pro-Growth Policies

Wednesday, June 7, 2017, 10:00 A.M.

1334 Longworth House Office Building

By Michael G. Bindner

Center for Fiscal Equity

Chair Black and Ranking Member Yarmuth, thank you for the opportunity to submit these comments for the record to the Committee on the.  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 obvious answer to whether fiscal and economic growth occurs with pro-growth policies is yes, however the devil is in the details.  Currently, the Committee could adjourn for the year and use the Budget Control Act spending caps to allocate discretionary spending, while leaving tax and entitlement policy alone and achieve economic growth, Indeed, because housing prices have turned around, this year may finally see the underlying economic depression end as under-water borrowers can rejoin the normal churn toward bigger properties to fit their growing families. 

This could have happened in 2009 had the current majority not resisted direct mortgage relief, with White House economic advisor Larry Summers caving on the issue.  Doing nothing would likely result in economic growth and fiscal health, however Republican ideologues will not let a good thing go unruined.  The lingering focus on taming entitlements long championed by your first witness is unnecessary if you consider that the Social Security Trustees are obliged to publish a conservative forecast.  The most likely forecast has Social Security well for the foreseeable future.

Your other headlining witness has helped lead the way in calling for tax reforms which would lower rates and broaden the base.  This was tried in 1986, 2001 and 2003 and the subtotal of these efforts was the Great Recession. 

It is possible to get tax reform right and our four-point program will do it, primarily by giving families more income, at $1000 per month per child, through cancelling home mortgage and property tax deductions, ending the child exemption and closing categorical aid to children, replacing it by more robust training programs.  The other major provision is to raise taxes on the wealthy, which will handily take care of the net interest crisis now looming by taxing the economic class that receives the interest, which will improve the economy by taking the incentive away from job destroyers who get a bonus by decreasing labor costs.  Tax that bonus away and wages will begin to grow, making America great again. However, this will take a degree of bipartisanship that this Congress and Administration have not yet shown.

Allow us to address the current state of tax reform and the recent remarks by the President about priming the pump. What the Center said in June of last year in response to the release of the Blueprint bears repeating.  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.

In The Economist, President Trump and Secretary Mnuchin cast doubt on their support for the DBCFT, instead preferring to simply cut rates for pump priming. This would mainly benefit the wealthy, which is ill advised.

Lower marginal tax rates for the wealthiest taxpayers lead them to demand lower labor costs. The benefit went to investors and CEOs because the government wasn’t taxing away these labor savings. In prior times, we had labor peace, probably to the extent of causing inflation, because CEOs got nothing back for their efforts to cut costs.

The tax reforms detailed here will make the nation truly competitive internationally while creating economic growth domestically, not by making job creators richer but families better off. The Center’s reform plan will give you job creation. The current blueprint and the President’s proposed tax cuts for the wealthy will not.

In September 2011, the Center submitted comments on Economic Models Available to the Joint Committee on Taxation for Analyzing Tax Reform Proposals. Our findings, which were presented to the JCT and the Congressional Budget Office (as well as the Wharton School and the Tax Policy Center), showed that when taxes are cut, especially on the wealthy, only deficit spending will lead to economic growth as we borrow the money we should have taxed. When taxes on the wealthy are increased, spending is also usually cut and growth still results. The study is available at 

http://fiscalequity.blogspot.com/2011/09/economic-models-available-to-joint.html

and it is likely in use by the CBO and JTC in scoring tax and budget proposals. We know this because their forecasts and ours on the last Obama budget matched. Advocates for dynamic scoring should be careful what they wish for.

The national debt is possible because of progressive income taxation. The liability for repayment, therefore, is a function of that tax. The Gross Debt (we have to pay back trust funds too) is $19 Trillion. Income Tax revenue is roughly $1.8 Trillion per year. That means that for every dollar you pay in taxes, you owe $10.55 in debt. People who pay nothing owe nothing. People who pay tens of thousands of dollars a year owe hundreds of thousands. The answer is not making the poor pay more or giving them less benefits, either only slows the economy. Rich people must pay more and do it faster. My child is becoming a social worker, although she was going to be an artist. Don’t look to her to pay off the debt. Trump’s children and grandchildren are the ones on the hook unless their parents step up and pay more. How’s that for incentive?

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.

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.

The high income and inheritance surtax will take money out of the savings sector and put it into government spending, which eventually works down to the household level.  Growth comes when people have money and spend it, which causes business to invest.  Any corporate investment manager will tell you that he would be fired if he proposed an expansion or investment without customers willing and able to pay.  Tax rates are an afterthought.

Our current expansion and the expansion under the Clinton Administration show that higher tax rates always spur growth, while tax cuts on capital gains lead to toxic investments – almost always in housing.  Business expansion and job creation will occur with economic growth, not because of investment from the outside but from the recycling of profits and debt driven by customers rather than the price of funds.  We won’t be fooled again by the saccharin song of the supply siders, whose tax cuts have led to debt and economic growth more attributable to the theories of Keynes than Stockman.

Simplicity and burden reduction are very well served by switching from personal income taxation of the middle class to taxation through a value added tax.  For these people, April 15th simply be the day next to Emancipation Day for the District.  The child tax credit will be delivered with wages as an offset to the Net Business Receipts tax without families having to file anything, although they will receive two statements comparing the amount of credits paid to make sure there are no underpayments by employers or overpayments to families who received the full credit from two employers. 

Small business owners will get the same benefits as corporations by the replacement of both pass through taxation on income taxes and the corporate income tax with the net business receipts tax.  As a result, individual income tax filing will be much simpler, with only three deductions: sale of stock to a qualified ESOP, charitable contributions and municipal bonds – although each will result in higher rates than a clean tax bill.

For the Center, the other key motivator is expanding employee-ownership.  We propose to do that by including an NBRT deduction, to partially reduce income to Social Security, to purchase employer voting stock, with each employee receiving the same contribution, regardless of salary or wage level.  In short order, employees will have the leverage to systematically insist on better terms, including forcing CEO candidates to bid for their salaries in open auction, with employee elections to settle ties.

Employee-ownership will also lead multi-national corporations to include its overseas subsidiaries in their ownership structure, while assuring that overseas and domestic workers have the same standard of living.  This will lead to both the right type of international economic development and eventually more multinationalism.

Simultaneously, the high income and inheritance surtax will be dedicated to funding overseas military and naval sea deployments, net interest payments (rather than rolling them over), refunding the Social Security Trust Fund and paying down the debt.

Both employee-ownership with CEO pay reduction and paying off the debt will lead to two things – less pressure to deploy U.S. forces overseas and sunset of the income tax.

Military spending both overseas and domestic will decline under this plan.  The VAT will make domestic military spending less attractive and overseas spending on deployments will be fought by income taxpayers, who are currently profiteering from such expenses.  Instead, defense spending can shift to space exploration, which also increases invention and economic growth while keeping the defense industrial complex healthy, although now they can pursue profitable enterprises rather than lethality.

In short, our plan promises both peace and prosperity, not for the few but for the many.  Prosperity bubbles up.  It has never flowed down and tax reform should reflect that.

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.