Growing Our Economy and Creating Jobs

Comments for the Record

United States House of Representatives

Committee on Ways and Means

Tax Policy Subcommittee

Tax Reform:

Growing Our Economy and Creating Jobs

Tuesday, May 16, 2018, 10:00 A.M.

By Michael G. Bindner

Center for Fiscal Equity

Chairmen Brady and Buchannan Ranking Members Neal and Doggett, thank you for the opportunity to comment on the new tax law.

This is not the tax reform bill we had hoped for. Frankly, the path negotiated during the Obama Administration enacted under the American Tax Relief Act and The Budget Control Act were adequate to give us our current economy, which is improving, albeit too slowly for workers.  

We are on record predicting that enactment of the Fiscal and Job Cuts Act (not a typo) will restrict wages and cause other labor cost savings so that executives can cash in on the lower tax rates by earning higher bonuses, so that any economic gains (and growth could come faster) would be from deficit spending. While some companies gave very visible bonuses for the holidays, they did not als0 increase salary levels noticeably. Productivity has made huge gains but wages have not, mostly because employers have a market advantage in the down economy, which is good for CEOs and donors, but bad for the nation.

The tax law was a classic piece of Austrian Economics, where booms are encouraged, busts happen with no bail outs and the strong companies and best workers keep jobs and devil take the hindmost. It is economic Darwinism at its most obvious, but there is a safety valve. When tax cuts pass, Congress loses all fiscal discipline, the Budget Control Act is suspended and deficits grow. Taxpayers don’t mind because bond purchasers are sure to pick up the slack, which they will as long as we run trade deficits, unless the President’s economic naivete ruins that for us.

The two-year Omnibus will eat up most of the effect of the tax cut on the economy, which will now have a negative relationship between deficits (net of net interest, which controls for matching injection to the financial markets from federal borrowing) and economic growth, meaning deficits are good. The closest available curve showing that model are the Bush years, so given the current deficit size, the predicted growth rate in about a year (it takes time to obligate money and pay bills) should be around 3.3% or higher.

If you cut entitlements, growth will be reduced, although wealthier Americans will have more money, which will lead to asset inflation and another sizeable recession, akin to 2008. We had been worried about entitlement cuts, we no longer are. The votes are simply not available in the Senate to enact them.

Of course, we still have a tax reform plan and it does alter how we deal with entitlement spending, including Social Security, by shifting payroll and a good bit of income taxation (including pass-throughs) to a subtraction value added tax/net business receipts tax (NBRT), where certain entitlements can be shifted to employers in lieu of paying a portion of the tax, with this encouraging both employment and participation in training programs in order to have access to social services.

These deduction and credits could include everything from the last two years of undergraduate and graduate education to a more robust child tax credit to health care reform that encourages hiring medical staff directly (thus matching the incentive to cut cost to the ability to do so) to retirement savings in lieu of Social Security, although the savings should be in the form of employer voting stock rather than unaccountable index funds run from Wall Street. These reforms can be hammered out next year or in the next Congress, but the right tax to hold them is clearly the NBRT.

We remind the Committee that in the future we face a crisis, not in entitlements, but in net interest on the debt, both from increased rates and growing principal. This growth will only feasible until either China or the European Union develop tradeable debt instruments backed by income taxation, which is the secret to the ability of the United States to be the world’s bond issuer. While it is good to run a deficit to balance out tax cuts for the wealthy, both are a sugar high for the economy. At some point we need incentives to pay down the debt.

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 (although this will increase). 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. Your children and grandchildren and those of your donors are the ones on the hook unless their parents step up and pay more. How’s that for incentive?

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.