Treasury FY 2020

House Appropriations, Treasury, April 9, 2019

Please allow me to comment on the Department of the Treasury Appropriation. We hope that these comments are useful is fashioning questions. They reflect how the Department might cope with tax reform. For context, we recommend a four part reform.

• A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure every American pays something. Carbon taxes are included in this category.
• 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. Capital gains taxes will be replaced by an Asset VAT or A-VAT of between 20% and 30%. At inheritance or at the exercise of options, previous tax payments will be set to zero. Brokers will collect these taxes and remit them to the SEC. Sales to qualified ESOPs will remain tax free. Short term trades will be subject to a Tobin Tax.
• 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 Fair Tax, 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. As you see, this is a much bigger change than reform around the edges.

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.

Individuals making over $50,000 per year and joint filers making over $100,000 will have their wage and dividend income information submitted to the IRS as part of NBRT filings, which will be 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.
Both before and after reform, many improvements are possible as long term employees retire, particularly from the IRS.
As taxpayers shift from paper forms to electronic filing, error detection accomplished by the IRS (which required its own error detection for its manual data entry) has been transferred to preparation software. As use of automation increases, data auditing needs go away over time, freeing up resources to pursue malfeasance. Automation even redirects customer service to preparers, provided they are well trained. These changes are incremental. Big change requires tax reform.

As we all know, there is more to Treasury than the IRS. Any reform must go through the Office of Tax Policy. We urge an increase in funding to examine what occurs after the repeal of the Tax and Job Cuts Act (not a typo).

One of the Department's growth industries is the Bureau of the Public Debt. The national debt is possible because of progressive income taxation. There is no per capita debt because there are no per capita taxes. The liability for repayment, therefore, is a function of that tax. For every dollar you pay in taxes, you owe $13 in debt. 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. If higher income taxpayers wish to finance deployments and roll over net interest payments and debt reduction, starting with the reimbursement of the Social Security Trust Fund as the Baby Boom spends it down, then the high income taxpayers if the future, their children and grand children, will be required to (again, with interest).  This table shows the impact by income strata.

Of course, for the Department to participate in any reform, it must be funded. As you well know, During the last Congress, budget and appropriation processes were examined without result. Treasury financial planning and operations depend on prompt enactment of funding legislation. The solution must include incentives to keep the process moving. We propose a Joint Budget Resolution to start the process. Automatic appropriations would occur at Joint Budget Resolution marks, and if no resolution is passed, revised Budget Control Act spending caps would end this difficulty and spur action by both parties. Because BCA levels are too low, the marks in the Act could be increased by the legislation amending the process itself. These marks should be realistic rather than punitive. Part of any reform must include new caps be set through 2025, when parts of the TCJA expire as well. 

The media assures us that Secretary Mnuchin will be questioned on the submission of Citizen Trump's tax returns. Chairman Neal can request the tax return of anyone, including President Trump. Usually, this is unnecessary because it has become the custom. President Nixon did so in a publicity stunt to show he was “not a crook.” It turns out that a reexamination of his returns led to greater scrutiny and a heavy tax bill. 

As a general matter, we would urge that we take great care in requiring what has been customary. While it might have given Candidate Trump pause before entering the race, hindsight is 20/20. Given his conduct in office, it is likely he would have filed suit and pursued election anyway. Given what we know of his business dealings, he seems oblivious to the past or to the authority of law.

Requiring the release of returns for a candidate for federal office skirts dangerously close to adding to the constitutional requirement for serving. The Court in U.S. Term Limits v. Thornton (citation omitted) found that extending such limits was unconstitutional. Mr. Trump may have actually had a case.

There is also the slippery slope argument. (While it is a logical fallacy to make such arguments, in this case, it applies). While Presidents and their Administrations have, from time to time, engaged in criminal behavior, the sad fact is that members of Congress are not immune from such conduct. If subject legislation is passed, or likely before, many will call for the release of the returns of sitting members of Congress and their opponents.

It need not stop there. Currently, there are IRS Statistics on Income Publication SOI Tax Stats – County Data is incomplete for the highest income levels because their release would be traceable to individual filers. As a tax scholar who proposed a high income and inheritance surtax, I would find free access to data at all income ranges quite useful to my analysis. Indeed, expanding publication to this area has actual public policy benefits apart from criminal investigations.

The question then remains, why stop now? If one citizen can be forced to release their personal tax information to the public, all citizens could one day be subject to such disclosure. Indeed, it would come up with every background check for applicants and employees. This information would be valuable to employers to make sure no outside income exists beyond the usual ethics disclosures. The standard objection to privacy concerns is that no one should refuse disclosure if they have nothing to hide. We trust that you can divine our feelings about this matter.