How Tax Reform Will Help America’s Small Businesses Grow and Create New Jobs

Comments for the Record

United States House of Representatives

Committee on Ways and Means

Subcommittee on Tax Policy

Hearing on How Tax Reform Will

Help America’s Small Businesses Grow and Create New Jobs

Thursday, July 13, 2017, 10:00 A.M.

1100 Longworth House Office Building

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 Committee on Ways and Means Tax Policy Subcommittee.  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.

These remarks are an update of our recent remarks on how tax reform will grow the economy.  The scope of Tax Reform is still in flux, but recent remarks from the President and the Administration indicate that they are supporting more of a rate cut than a basic reform of the system.  Recent scoring by the Tax Policy Center does not look good for the proposal.

The proposal includes a rate cut for pass through firms to 15%.  This will do what tax reform should not, create sham businesses as a way for rich taxpayers (your donor base) to keep from paying money at a higher rate without actually causing any new economic activity.  This will hurt, rather than help, real small businesses who will now be carrying more of the load of taxation for rich people and who would be forced to formally start a business that can utilize these rates in order to keep up with competitors.  

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.

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  

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

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.

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 15^th 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 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.

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.