Attachment One – Excerpts from Squaring and Setting Accounts: Who Really Owns the National Debt? Who Owes It?

The solution to our coming debt crisis also answers V.O. Key’s question of how to choose between spending on one expenditure over another. Our approach 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 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 24% or 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.  

Before rates are adjusted, salaries and wages for 70% of taxpayers would go away and, with FICA taxes, be collected through the I-VAT, C-VAT and S-VAT.  The top $5 trillion in salary would be subject to income tax. The bottom $2.5 trillion in salary and wages would be shifted. The A-VAT pick up taxation of interest ($105.7 billion), ordinary dividends ($215.5 billion), capital gains subject to preferential rates ($992.4 billion) and pass-through taxes from partnerships and Chapter S corporations ($832.6 billion). Add 3% to the rates paid on this income (14% tax increase). 

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 tradable debt instruments backed by income taxation, which is the secret to the ability of the United States to be the world’s bond issuer. Foreign nations hold $6.7 trillion of our debt, with China and Japan each holding $1.2 trillion. When the consume what they make, they will want their money. 

The real impact of the debt on the economy comes from other aspects of fiscal policy. Spending aggregates are fairly stable over time, which is why it is so hard to cut the budget by following this path. Most of the volatility is in tax policy. When taxes are increased, the budget deficit goes down. When they are cut, the budget deficit increases. 

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) in 2018 was $19 Trillion. Income Tax revenue for 2016 (from the 2016 IRS Data Book) was roughly $1.4 Trillion per year. That means that for every dollar you pay in taxes, you owed $13 in debt (although this will increase). The 2019 debt is $22 Trillion and change. Tax revenues for 2017 were roughly $1.6 Trillion. The tax to debt ratio is now $13.76.   

Note that using current fiscal year revenue figures is bleaker because of the Tax Cuts and Jobs Act because tax revenues are lower and, while the rich are getting more, wage growth is mostly stagnant. This is discussed below. The magic number for last year, this year and the follow-on years in the President’s Budget is $18 of debt for every dollar of income tax. This cannot be sustained. Income distributions are too skewed and revenues inadequate.  Apologists for Wall Street justify tax cuts as a boon to the economy. It is not unless you make your money on inflating asset prices.  

Inflation is an increase in prices chasing the same goods, which also increases the supply of goods of lesser quality, such as Cryptocurrency and private equity financing of mortgage backed securities. These are the next asset crisis. The money has already been sucked out of these ventures, so a crash is imminent. 

Cutting current discretionary or entitlement spending simply makes the problem worse. Both of these increase consumption in the same way that tax cuts fund the savings and speculation sector. Plant and equipment still follow from expected sales (consumption), not the cost of credit. 

When Republicans control tax policy, tax cuts result in higher savings and lower wages for the non-CEO class. The only way to keep the economy moving is to borrow as much as taxes are cut, plus the cost of net interest rolled over into further debt. After this point, increased spending is necessary for increased growth. 

When Democrats control fiscal policy, taxes on the wealthy go up. This not only fuels the economy with increased spending, but it extracts money from savings for consumption directly, rather than through bond markets (at interest). Because spending is mostly stable (most increases are simply catch up spending), a GDP growth rate of around 3% results. 

The way to increase growth beyond average is to increase federal and contractor wages and transfer payments, especially the latter. The recipients spend most of the money. Eliminating welfare as we know it under President Clinton helped balance the budget, but cutting capital gains taxes created the tech bubble and the resulting recession. Lower transfer payments made the recovery that much harder. 

The debt assets owed to the bottom 40% are sacrosanct, as they paid for it with regressive payroll taxes while they were working or by having to shift from the Civil Service Retirement System to the Federal Employee Retirement System which required savings rather than a defined benefit. Forty years ago, the decision was made to advance fund the retirement of the baby boomers, rather than immediately begin subsidies from the general fund. Doing so would have required repealing the tax cuts on the rich enacted by President Reagan, the Senate and just enough conservative Democrats in the House to do damage.  They also gave us the ill-advised 1986 tax reform.   

Now that the wealthy have to pay what they owe to the trust fund (or rather, the children of the wealthy of the 80s), people are talking about means testing Social Security and were talking about making it attractive to upper classes by investing it. The latter non-sense died in 2008. The former would again make asset holders fix the debt liability of the top 10%. It would also rob the bottom two quintiles of their most effective voice – higher income taxpayers who do receive benefits. As long as they get them, the program is safe. 

The income dynamics of the 1% bear examination. As this table shows, AGI for the top 1,433 families is almost as much as the next 13 thousand in the .01 percentile. Likewise, the top .01% make as much as the rest of the .1 percent. The .1 percent make about what the rest of the 1%. The 1% make about as much as the rest of the top 10% (the upper middle class). They make as much as the bottom 90%. 

For some income categories, like salaries and wages, the progression is not so concentrated. For those related to investments, it is more top loaded once the .01% level is reached. This is why the top 1,433 families support fewer tax brackets, while the rest of the upper class should. That the .001% make as much as the next .009% should be considered obscene. These are just income figures, not total wealth. The truth is that the top sliver has more wealth, they also have more economic power. They own everyone else. They need to pay more for their fun and the economic system needs to deflate their influence. Quite the curve.