Improving Tax Administration Today

Comments for the Record

United States Senate

Committee on Finance

Subcommittee on Taxation and IRS Oversight

Hearing on Improving Tax Administration Today

Thursday, July 26, 2018, 10:30 A.M.

By Michael G. Bindner

Center for Fiscal Equity

Chairman Portman and Ranking Member Warner, thank you for the opportunity to submit these comments for the record to the Taxation and IRS Oversight Subcommittee.  Recent tax legislation has not met the Center’s policy goals, nor America’s, nor the goals of other advocates with similar proposals, for example the advocates of the FairTax, who were disappointedly silent in the last round of debate. While recent legislation will likely help, radical change is needed to really help the average family.

As you may know, we did raise our voices and will continue to, as the recent law will still have all of the flaws of the prior system as well as the asset inflation that would have made another Great Recession inevitable were not for the new biennial spending targets and appropriations, including much needed help for the IRS. Still, we withdraw none of our proposals. Therefore, 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 collection of the Employee Contribution to Social Security will be exactly as it is now. Like proposals for a FairTax, the Value Added Tax and NBRT/Subtraction VAT will be collected by the states. If the basic structure of reform is adopted in the states, the biggest change will be the need for a common base between federal and state consumption taxes.

Shifting from retail sales taxes and gross receipts taxes to value added taxes and VAT-like net business receipts taxes will change the nature of most state taxation, while enabling ease of collection of taxes on online sales, since taxes would be levied at every stage of the production process. The IRS will assist states in this process, which will likely take the form of some federal-state compact commission to draft and approve the transitional rules.

If a common base agreement can be negotiated for these taxes, state treasurers can collect both their own taxes and the federal taxes, as well as analytical information on tax credit usage, which can then be shared with the U.S. Internal Revenue Service in order to track income accruing to payers of the federal high income surtax, as well as to recipients of the federal child tax credit, which would be paid to employees with wages under the NBRT and then verified by a mailing from both the employer and the Internal Revenue Service, with employees verifying that their employees paid every dollar to them reported as a credit. There will likely be problems to resolve in our proposed system, where the states collect by the Value Added Tax and the Net Business Receipts Tax and forward the money and records to the Internal Revenue Service. This will not impact most taxpayers, since once they have bought a product, no further action is necessary.

The IRS will likely supplement state-based auditing with reviews of their own, but this is a small price to pay for a reform that will reduce the income tax payment and audit workload by at least 80%. Indeed, income tax simplification (through the elimination of all but a few deductions), will further eliminate the workload generated by remaining income tax payers.

Employees with children will need to annually verify the information provided by employers and, if they received less than was reported to the government, notify the IRS who will send a refund and collect the difference from the employer. This may trigger a dispute, but likely most employers will simply pay if there was an error. Fraud is another matter, which is criminal not a dispute to be settled. Other disputes may involve parents double dipping on two jobs or two earners, but these will likely work out a payment plan or contact their divorce lawyers to negotiate who pays.

Whenever an employee or an heir is paid interest, a dividend, a capital gain or an heir sells an inherited asset, information will be transmitted to the IRS, as well as sales to a qualified Employee Stock Ownership Program (untaxed) and aggregated by Social Security Number. Verification will be accomplished to make sure that tax avoidance does not occur through use of multiple SSNs.

Another option is to charge value added taxes on any capital gain at sale, with losses taxed at the average VAT payment of the last two sales. In this case, the NBRT of Lawrence B. Lindsey could be used to tax dividends paid and excess salaries paid at a higher rate, this making all income tax collection unnecessary.

If income taxes are retained, individuals making over $50,000 per year and joint filers making over $100,000 will have their information stored to compare to tax filings, unless the Congress authorizes an automatic filing system where all income surtax payers will receive notification when all data should have arrived and what their refund or payment will be once they correct the information or certify it is correct already. Banking information should be on file, so authorization for payment, either at once or installments should be easy.

Very little IRS Administration will be required to do this. Indeed, data management and mailing could be contracted out. All IRS employees could fit in a bathtub with room for Grover Norquist.

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.

Opioid Crisis: Implementation of the Family First Prevention Services Act

Comments for the Record

United States House of Representatives

Committee on Ways and Means

Human Resources Subcommittee

Hearing on The Opioid Crisis: Implementation of the

Family First Prevention Services Act (FFPSA)

Tuesday, July 24, 2018, 10:00 AM

By Michael G. Bindner

Center for Fiscal Equity

Chairman Smith and Ranking Member Davis, thank you for the opportunity to submit my comments on this topic. This hearing will review the Department of Health and Human Services’ ongoing progress implementing recently enacted legislation to address family substance abuse issues, improve child well-being, support kin caregivers, and strengthen families. I submit these comments as past health research data manager, prevention community leader, and a current recovered abuser and Medicare patient. I will leave the progress report to the Agency witnesses and address the relevant items.

Family Substance Abuse Issues

Substance abuse can occur in families in a variety of ways. One of the parents, but not the other, could be using, either innocently because of bad pain management or intentionally. Another pattern can be both parents using as a couple. When Cannabis is used this way, it is less damaging once the kids are down for the night. That cannot be said of the grip of an opioid addiction, however acquired. Lastly, one or more of the children, usually teens, sometimes even younger children or grown children in the household may be the addict. Prevention and intervention are different in each case.

Accidental addiction can be prevented by better medical treatment. No one needs opioids past their follow-up appointment to an injury or surgery and that appointment should be as soon as possible, with no pain management following.

If addiction is surrendered to or mutual, then adult intervention strategies are necessary, including family services to either monitor the situation or remove the minor children. Likewise, addiction by teens or adult children demands intervention. These drugs are so lethal that waiting for the user to have enough may result in death.

Improve Child Well-being

From our example above, the best thing for children if only one parent is an addict is to get the addict out of the home, with or without treatment. Family services and criminal justice already know how to do that and, except for the shortage of treatment beds and temporary housing, there is already a system in place to help both addicted adults and children, especially if managed by the Drug Court system.

The current penal system could be replaced by mandatory treatment rather than incarceration, with extended stays and funded pre-release programs, but that costs money but is cheaper than jail or prison, unless you own stock in Corrections Corporation of America, who I am sure is paying attention to these proceedings. 

If both parents are addicted, temporary placement is necessary for the children outside the home. However, this should not be an excuse to sell the home, let it lapse into foreclosure or permanently place the children in foster care or adoptive services.

Recovery is more likely if the government and family care agencies do not further aggravate conditions by kidnapping the children.  Instead, families should be fostered as a unit – both children and parents once they are able and are past the point of needing to be with their kids to stay sober – because if that is their excuse, they won’t do so.

Sobriety needs to be pursed for one’s self, but it is still easier when the perception that someone else wants your kids is removed. Of course, if the parents are frequent relapsers, there may not be any way to keep the family together, but that should be the rare case for people who fall into opioid addiction through bad medicine.

Support Kin Caregivers

If one or both parents is an addict, often siblings or parents are called to serve as foster care providers or to help deal with the addict in early recovery.  They don’t have the option that sponsors do to walk away (carry the message, not the mess) and it is a hard role to take, especially if social services proves intrusive in establishing suitable guardianship. 

As important is the provision of financial assistance to guardians. If there were a decent child tax credit that met the cost of living a middle class life style (which would require not punishing the poor for being poor), adequate funding would be no problem because the tax credit would come from the foster caregiver’s job, although the parents who are addicted would fight to keep that money. It is still not an excuse to not pay it. 

Another problem is that guardians become protective of the children and may not want to give them up to family members who may still be at risk. Managing that is the function of local family services agencies.  It is a hard job. The Federal Government needs to provide the money to pay them more.

Strengthen Families

The best way to strengthen families is to help make them less susceptible to addiction by providing all concerned with good quality education and training, including payment to train or get remedial education if the system has failed so far.

While the system loves low wage labor, especially in nursing homes, reinstituting slavery through welfare programs should not be a societal goal.  Eliminating poor people as a permanent source of cheap labor will prevent both drug sales and drug use. Ending the mass incarceration of African American males will strengthen their families as well, saving multiple generations at once. Whether Black Lives Matter or All Lives Matter, shutting down mass incarceration sends the message that this Act and these hearings are about more than public relations.

Prevention may also help prevent teen addiction if it offers a profitable way, such as paying students in danger of dropping out to attend school at enough of a wage, for them to not feel the need to sell drugs or be depressed enough to succumb to their use. This is not a cheap alternative; however it is cheaper than prison (unless you are paid to run the prison). The current regime has not expressed a willingness to spend the necessary resources to do what I suggest, as it is cheaper and more popular with its base to blame the poor for their poverty and addiction. At some point, that will no longer be acceptable. The Opioid Crisis may make that point sooner than later.

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.

Trade and Commerce at U.S. Ports of Entry

Committee on Finance, Subcommittee on International Trade, Customs, and Global Competitiveness, Trade and Commerce at U.S. Ports of Entry, July 18, 2018       

Chairman Cornyn and Ranking Member Casey, thank you for the opportunity to submit these comments for the record to the Committee on Finance, Subcommittee on International Trade, Customs, and Global Competitiveness. This combines elements from our comments from March to the full Committee and to the House Committee on Ways and Means from last year, with substantial new material regarding current Administration trade policy.

We suspect that port city witnesses will testify that most commerce passes through with minimal processing. Manufacturing for the American market may occur on the other side of the border or near the Chinese point of departure, but when goods arrive here they either keep driving to the point of sale or are loaded onto intermural transportation to it. As long as fuel prices remain relatively low, this will continue. The only danger is President Trump’s proposed deregulation of the Dodd-Frank reforms of the New York Mercantile Exchange Oil Futures market, which will cause oil prices to soar. Higher fuel prices and a trade war would bring manufacturing closer to consumers, but will do nothing for border cities. Creating more manufacturing opportunities at border cities going out requires tax reform.

Speaker Ryan’s 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 ultimately failed, although much of its failure likely is due to opposition by Chairman Hatch. In the end, Congress simply lowered rates, which did little for exports or workers.

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. Even then, a DBCFT is preferable to the current corporate income tax system, so what is said below about VAT is at least partially applicable to the DCBFT (with any increased subsidies for Children added to the personal income tax).

The main trade impact in our plan is the value added tax (VAT).  This is because (exported) products would shed the tax, i.e. the tax would be zero rated, at export.  Whatever VAT Congress sets is an export subsidy.  Seen another way, to not put as much taxation into VAT as possible is to enact an unconstitutional export tax.

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. 

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 10%-13% 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.

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.

Shifting the balance to more exports will require more labor, considering the fact that economists call this a full employment economy. Any boost in either manufacturing or technology will require more immigration. Some business owners want employees to stay in the shadows and be abused, others want legal employees (though non-union – repealing right to work laws would end illegal immigration because no one would hire an undocumented worker with union representation) and still others in the conservative camp simply hate the illegality or the ethnicity of the immigrants (speaking of the White House).

How would these development impact border cities? The trend will be to shift international manufacturing to the border, especially if imported components are used.

Increased manufacturing should mean stronger unions and real enforcement of union rights to organize. Attacking unions for the past 30 years has taken its toll on the American worker in both immigration and trade.  That has been facilitated by decreasing the top marginal income tax rates so that when savings are made to labor costs, the CEOs and stockholders actually benefit.  When tax rates are high, the government gets the cash so wages are not kept low nor unions busted.  It is a bit late in the day for the Majority to show real concern for the American worker rather than the American capitalist or consumer.

Reversing the plight of the American worker will involve more than trade, but I doubt that the Majority has the will to break from the last 30 years of tax policy to make worker wages safe again from their bosses. Sorry for being such a scold, but the times require it.

The best protection for American workers and American consumer are higher marginal tax rates for the wealthy.  This will also end the possibility of a future crisis where the U.S. Treasury cannot continue to roll over its debt into new borrowing.  Japan sells its debt to its rich and under-taxes them.  They have a huge Debt to GDP ratio; however they are a smaller nation. 

We cannot expect the same treatment from our world-wide network of creditors, an issue which is also very important for trade.  Currently, we trade the security of our debt for consumer products.  Theoretically, some of these funds should make workers who lose their jobs whole – so far it has not.  This is another way that higher tax rates and collection (and we are nowhere near the top of the semi-fictitious Laffer Curve) hurt the American workforce.  Raising taxes solves both problems, even though it is the last thing I would expect of the Majority.

We make these comments because majorities change – either by deciding to do the right thing or losing to those who will, so we will keep providing comments, at least until invited to testify.

Our proposed NBRT/Subtraction VAT could be made either border adjustable, like the VAT, or be included in the price.  This tax is designed to benefit the families of workers, either through government services or services provided by employers in lieu of tax.  As such, it is really part of compensation.  While we could run all compensation through the public sector and make it all border adjustable, that would be a mockery of the concept.  The tax is designed to pay for needed services.  Not including the tax at the border means that services provided to employees, such as a much-needed expanded child tax credit – would be forgone.  To this we respond, absolutely not – Heaven forbid – over our dead bodies.  Just no.

The NBRT could have a huge impact on trade policy, probably much more than trade treaties, if one of the deductions from the tax is purchase of employer voting stock (in equal dollar amounts for each worker).  Over a fairly short period of time, much of American industry, if not employee-owned outright  (and there are other policies to accelerate this, like ESOP conversion) will give workers enough of a share to greatly impact wages, management hiring and compensation and dealing with overseas subsidiaries and the supply chain – as well as impacting certain legal provisions that limit the fiduciary impact of management decision to improving short-term profitability (at least that is the excuse managers give for not privileging job retention). 

Employee-owners will find it in their own interest to give their overseas subsidiaries and their supply chain’s employees the same deal that they get as far as employee-ownership plus an equivalent standard of living.  The same pay is not necessary, currency markets will adjust once worker standards of living rise. 

Over time, this will change the economies of the nations we trade with, as working in employee-owned companies will become the market preference and force other firms to adopt similar policies (in much the same way that, even without a tax benefit for purchasing stock, employee-owned companies that become more democratic or even more socialistic, will force all other employers to adopt similar measures to compete for the best workers and professionals).

In the long run, trade will no longer be an issue.  Internal company dynamics will replace the need for trade agreements as capitalists lose the ability to pit the interest of one nation’s workers against the other’s.  This approach is also the most effective way to deal with the advance of robotics.  If the workers own the robots, wages are swapped for profits with the profits going where they will enhance consumption without such devices as a guaranteed income.

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.