Comments for the Record
United States House of Representatives
Committee on Ways and
Means
Subcommittee on Tax
Policy
Hearing on How Tax Reform Will Simplify Our
Broken Tax Code and
Help
Individuals and Families
Wednesday, July 19, 2017, 2:00 PM
By Michael G. Bindner
Center for Fiscal Equity
Chairman Roskam and Ranking Member Doggett, thank you for the opportunity to
submit these comments for the record to the House Ways and Means Committee
Subcommittee on Tax Policy. 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.
Simplify our broken tax code
Probably the most broken part
of our tax code is how businesses are taxed. Corporations pay separate taxes while
sole proprietors and ”pass throughs” pay taxes through the personal income taxes
of their owners. This has some people being taxed twice, regardless of whether this
is appropriate to extract taxes on higher incomes not collected through the business,
while others face complexity on their personal forms, as well as a different set
of rules. In 2003, President Bush and the Congress tried to fix this but could not,
settling instead on a lower rate for dividends and capital gains.
The results of simply cutting
rates were not pretty. CEOs and investors had an incentive to keep labor costs in
check and pocket all productivity gains, which were huge through automation and
outsourcing. Higher tax rates would have put a damper on such behavior. Of course,
because not every rich person can be a CEO and because most companies borrowed money
rather than issued stock, there were few good investments, which had beneficiaries
of the 2001 and 2003 tax cuts seek more exotic vehicles, like oil futures and mortgage
backed securities. This (not any action by the GSEs) led to the mortgage boom and
the Great Recession (as well as provisions in the 1986 tax reform that let home
owners use their houses as ATMs, a provision Trump wants to keep).
The President proposes simply
lowering the tax on ”pass through” income, which will increase the number of companies
fronting what would have been pay to individuals for salary and rent in order to
take advantage of the lower rates. This is tax DEFORM not reform. We tried such
cuts in 2003 and the proposed cut will yield the same result, especially if the
President succeeds in defanging Dodd-Frank through regulatory reform (again deform).
There is a better way. Value
Added Taxes and Net Business Receipts Taxes (Subtraction VAT) will both simplify
taxation and treat all businesses in the same way. While some special tax breaks
might be preserved in the NBRT, most would not because there would be no way to
justify taxing the labor or an activity and not the associated profit or taxing
research salaries one way and production wages another. All profit and wage would
be taxed at the same rate, which also removes the tax bias against wage income.
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.
This is not to say that there
will be no deductions. The NBRT will be the vehicle for social spending through
the tax code.
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 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.
Conceivably, NBRT offsets
could exceed revenue. In this case, employers would receive a VAT credit.
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.
Reduce the burdens on American families and
individuals
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.
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.
The expansion of the
Child Tax Credit in the NBRT 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.
A Value Added Tax gives everyone
the privilege and responsibility to fund discretionary government services delivered
in the United States. Everyone pays a proportional share of their consumption. If
taxes really are too high, we will know where to cut. The NBRT will fund social
services thorough employers. It allows people who need more to get more, even if
in an unregulated economy they could not afford it. Starvation is not liberty, especially
for children. The high income and inheritance surtax undoes the redistribution up
by shifting payment for net interest and debt reduction to those who benefited the
most from out of control tax cuts under Reagan and Bush. Those debts are not universal,
they adhere to future taxpayers who with the income to pay higher rates, the children
of the wealthy.
Deliver economic growth that creates jobs
and improves the quality of life of all Americans
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 2o11, 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
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.
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.
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.
