Individual Tax Reform

Comments for the Record

United States Senate

Committee on Finance

Individual Tax Reform

Thursday, September 14, 2017, 10:00 A.M.

By Michael G. Bindner

Center for Fiscal Equity

Chairman Hatch and Ranking Member Wyden, thank you for the opportunity to submit these comments for the record to the Committee on Finance.  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.

Our proposals will have a huge impact on what we call Individual Taxes. The most obvious provision is that most families will no longer have to file individual income taxes. Most will receive all of their tax benefits through an employer paid net business receipts tax, which is essentially a subtraction VAT. Health benefits through the Affordable Care Act or the health insurance exclusion for corporate income taxes will come through the NBRT, as will a refundable child tax credit paid through wages or education or social insurance benefits, rather than through end of the year tax filing, the EITC, TANF or SNAP.

Business owners, whether sole proprietors, partners, Schedule C or 1099 employees will file through the NBRT and also collect VAT, both of which will be coordinated with state revenue agencies and forwarded to the government. 1099 employees will not be required to file or get their own insurance unless they have multiple clients. Even then, the clients will pay the tax on their value added and provide insurance and retirement savings as if they were employees. We have inflated the number of ”small businesses” for quite too long.

While some employees might like the freedom of multiple clients, most work for only one and would rather have full benefits and no tax filing. Congress can do this small thing for them in tax reform. Indeed, there is no reason to do tax reform without such changes (especially the child tax credit expansion). The larger firms will navigate and exploit the tax code regardless of reform, so their interests are not so important unless campaign contributions ARE really bribes.

The VAT and NBRT would eliminate the need for any corporate income tax, or as they used to be called, corporate profits taxes. Because consumption taxes burden labor and profit at the same rate, discounted tax rates on dividends and capital gains would no longer be required. Any residual income or inheritance surtax would be a way to maintain progressivity by charging a higher rate or rates for households receiving higher incomes from the same business activities.

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. 

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 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 in such decisions.

Continuing progressive income taxation is necessary so that lower income investors are not bid out of all the reasonable savings and investment opportunities. It is also important that taxes are high enough so that investors and management do not have an added incentive to keep cutting labor costs. We are below that rate and the economy for most families shows it.

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 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

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 and Gramm.

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.