Attachment TCJA

Attachment – The Tax and Job Cuts Act

The 2017 tax reform is a mixed bag.   On the upside, corporate income, pass-through income, capital gains and dividend taxes were all set to 21%, or near enough to each other to make transition to a subtraction value added tax for employers and an asset value added tax for investors the next logical steps in tax reform. Speaker Ryan, Chairmen Camp and Brady and committee staff are to be commended for doing this, especially given Senate Finance Committee Chairman Orin Hatch's vocal opposition to any kind if value added tax. I doubt most members were not aware what was happening. President Trump very likely had no clue.

The downside of reform was the fact that taxes were cut. The Tax and Job Cuts Act (not a typo) was a classic piece of Austrian Economics, where booms are encouraged and busts happen with no bailouts. 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 baseline discipline is (as it should be) suspended and deficits grow. Bond purchasers pick up the slack caused by the TCJA, which they will as long as we run trade deficits, unless the President’s economic naiveté ruins that for us.

Modern economics has become infected with the idea that higher tax rates and lower public spending hurt the economy. By definition, this is not case. The exact opposite is true. To refresh our memories of what is in the U.S. Code and most basic economics textbooks, Gross Domestic Product equals equal government purchases, consumption from government employee, contractor, transfer recipient and second order private sector spending, which leads to private sector investment, and exports net of imports (which creates a source of funds for debt finance).
Anything that is not part of GDP is considered “savings” or in reality, is asset inflation. If you want to end poverty, give poor people and retirees more money and the economy will grow. Increase government expenditure (even bombers) and the economy will grow, including for the now notorious upper middle class.

Lower tax rates also made money available to chase the same supply of investment instruments, which bid up their price, and caused the invention of a whole range of new products which would be built up and sold by the emerging financial class, who would profit-take and watch what they created go bust and start yet another modern recession, especially the Great Recession just experienced. Only higher tax rates or increased deficit spending control such asset inflation (and the consumption cycles associated with them – which Marx thought was the driver of the boom bust cycle – Marx had a failure of imagination).

A key part of our proposals is to increase income tax revenue from the very wealthy through our income surtax.  The higher the marginal tax rate goes, the less likely shareholders and CEOs will go after worker wages in the guise of productivity while pocketing the gains for themselves.  Since shareholders usually receive a normal profit through dividends, it is the CEO class that gets rich off of workers unless tax rates are high enough to dissuade them.

Multiple Consumption Taxes, or How to abolish the IRS

Innovation means working yourself out of a job. The title is meant to be provocative, as there must always be an agency coordinating all domestic revenue management and policy. This paper presents options for discussion rather than research.

This paper answers V.O. Key’s question of how to choose between spending on one expenditure over another. My answer is to abandon the principle of non-appropriability of income, matching spending to the category of spending it supports. The following tax structure is proposed:

Individual payroll taxes will continue to fund Old Age benefits and survivors’ insurance for retired spouses. This retains a link between salary level and benefits. A floor of $20,000 per year eliminates the need to file a separate EITC, along with an increased minimum wage.  A ceiling of $75,000 per year reduces benefits for upper-income individuals. With an asset VAT, post-retirement income tax filing is eliminated.

Invoice Value-Added/Goods and services taxes (I-VAT) fund discretionary military in the continental U.S., discretionary civil spending and entitlement spending that cannot be transferred to an employer paid tax credit, including the employer contribution OASDI for existing retirees, a subsidized public option or single-payer catastrophic. Employer OASI and DI contributions would be credited on an equal dollar basis, rather than linked to income. I-VAT would be zero rated for exports and fully burdened on imports.

Carbon VAT (C-VAT) provides more visibility than a carbon tax, so that consumers can make more informed choices about their carbon footprint. It would replace fuel taxes and fund environmental research and enforcement, mass transit and infrastructure.

Subtraction value added/Net Business Receipts Taxes (S-VAT) are a non-border adjustable vehicle to distribute tax benefits to employees and their families, including an expanded refundable child credit distributed with pay; health insurance for workers and retirees, savings accounts and Tri-care; stipends and tuition from ESL to grade 14; and personal retirement accounts credited on an equal dollar basis, holding shares of employer voting and preferred stock and an insurance fund holding stock in all such firms. TANF/SNAP programs will be eliminated

High Salary Surtaxes above an individual standard deduction of $75,000 per year, with rates from 6% to 36%. Surtax, multi-tier S-VAT and A-VAT fund net interest, redemption of FICA Trust Funds, strategic, sea and non-continental U.S. military deployments, veterans’ health benefits for battlefield injuries, and further debt reduction. A multi-tier S-VAT could replace surtaxes in the same range.

Asset Value-Added Tax (A-VAT) at 20% of price replaces individual filing on income from capital gains taxes, stock option exercise, rental property, estates and gifts, dividends, pass-through income and interest. Taxes are collected at sale or distribution. Sales to qualified broad based ESOPs remain zero-rated. Payments for option exercise, inherited and gifted assets will be at market rate with no credit for prior taxation.

Firms submit electronic receipts for I-VAT and C-VAT credit, leaving a compliance trail. S-VAT payments to providers, wages and child credits to verify that what is paid and what is claimed match and that children are not double credited from separate employers. A-VAT transactions are recorded by brokers, employers for option exercise and closing agents for real property. With ADP, reporting burdens are equal to those in any VAT system for I-VAT and A-VAT and current payroll and income tax re porting by employers.

Employees with children annually verify information provided by employers and IRS, responding by postcard if reports do not match, triggering collection actions.

High salary employees who use corporations to reduce salary surtax, and pay I-VAT & S-VAT for personal staff. Distributions from such corporations to owners are considered salary, not dividends.

Transaction based A-VAT payments end the complexity and tax avoidance experienced with income tax collection. Tax units with income under $75,000 or only one employer need not file high salary surtax returns. Separate gift and inheritance tax returns will no longer be required.

State governments collect federal and state I-VAT, C-VAT, S-VAT payments, audit collection systems, real property A-VAT and conduct enforcement actions. IRS collects individual payroll and salary surtax payments, perform electronic data matching and receive payments and ADP data from states. SEC collects A-VAT receipts.

I-VAT gives all citizens the responsibility to fund government. 

C-VAT invoices encourage lower carbon consumption, mass transit, research and infrastructure development.

A-VAT taxation will slow market volatility and encourage employee ownership, while preserving family businesses and farms.