U.S.-China Trade and Competition

Ways and Means, February 26, 2020

Recent developments indicate that Amateur Hour at the White House over trade policy has ended. Our naked emperor has moved on to self-defense, allowing the adults to put things back together again.

China is still firmly under the control of their Communist Party and membership still has its privileges, but the entrepreneurial spirit unleashed there, often with support by American expatriates, is surpassing what we can do. Artificial Intelligence research has or will soon surpass American progress. China may soon begin talking about our problems in protecting intellectual property, which are numerous.

Economic progress in China is not terribly different than the progress of economic and political freedom in the Global North of the Western World. While a Marxist revolution has never occurred in a Marxist state, a Marxian analysis (not the elevator speech that Stalin and Mao implemented), society moves forward in largely predictable ways.

Aristocracy (or Party) brings about industrialization under a capitalistic despotism, which includes militarism and imperialism. As the peasantry is forced into slave like conditions in urban factories, they soon acquire skills and savings. Eventually, they demand civil and union rights, which their capitalist masters resist until a consumer surplus is required to match the labor surplus, usually because production exceeds worker income.

China still has a dual economy problem, but it is making progress. Industrialization always moves the working class to the consumption class, so revolution may be avoided. This consumption may make America's status as a debtor nation problematic.

The rich in this country who call for and receive tax cuts must soon realize that the public debt is distributed not by population but by the ability to pay income tax. The President's Budget show’s $13.5 dollars of debt for every dollar of income tax collected. This cannot be sustained. Income taxes are too low to not put the children of high-income taxpayers at risk if much higher future rates. The dream of cutting spending to do so is delusional, as is the belief that inflating financial asset prices will cause future consumption.

It is also delusional to believe that current economic relations in this country can persist, that there is no alternative (TINA). Restive Millennials are demanding Social Democracy (which they mistakenly call Democratic Socialism). What they want is a Band-Aid. This is short-term thinking.

In the long-term, a more cooperative economy will be required (read employee ownership). As we have stated previously, a new worker-owned economy must spread its benefits to its overseas partners and suppliers. This will eliminate currency arbitrage and put international trade on a stable footing, taking it away from short-term politics or presidential tantrum.

Tax reform can facilitate this, both through establishing an employer-paid subtraction VAT to meet family income, educational, healthcare and employee ownership goal and an asset VAT to move taxing of capital income, gains and inheritance to point of sale, thus closing the tax gap for good. The latter will retain the current ESOP sales exclusion, accelerating progress to a real ownership society. See our updated Attachment on Tax Reform. We are also about to release an updated study on who owes and owns the national debt. Here is the key tables:

Attachment  – Tax Reform, Center for Fiscal Equity, September 13, 2019

FY21 Budget

House Budget, FY21 Budget, February 12, 2020

As we all know, the appropriations process for the next fiscal year takes place within the context of the Bipartisan Budget Act of 2019. In an election year, staying within the current parameters is the best course. Early passage makes transition easier for the next administration and Senate, regardless of electoral outcomes. Even if the President is reelected, staff turnover is to be expected in the Administration and the Committee. If changes are to be made due to changes in party, enactment before the election can always be supplemented with new legislation.

Our analysis on the level of spending has not changed in the past week. To repeat the BCA marks were devised to avoid a self-inflicted debt limit crisis and to conform to baseline requirements to fund making the tax cuts in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 permanent for all but the richest 2% of households. There was no appetite for making detailed tax and spending fixes that would raise revenue from wealthier taxpayers. A quirk in baseline calculations allowed the prior tax cuts to expire and be reinstated for the bottom 98% under the American Taxpayer Relief Act of 2012. In 2017, the Tax Cut and Jobs Act was passed with no concern for long term balance, which was reinforced by the Balanced Budget Act of 2018.  The TCJA expires, in part, in 2025. BBA 2018 expires at the end of FY 2019.

In the long-term, as we have stated recently as well, debt will be a problem – but not within the next few years – as neither Europe nor China will enact the same kind of consolidated income tax, debt and monetary reserve system that allows us to be the world’s currency securitization provider. See Attachment One for our latest on the Debt.

Debt reduction must not be an excuse to cut entitlements. As we state in our debt volume, Squaring (and Settling) Accounts: Who Really Owns the National Debt? Who Owes It? - December 2019, 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.

While we do not expect comprehensive tax reform in the last session of this Congress, we remind you it is inevitable, with our proposals detail again in Attachment One.

The answer cannot be shifting liability down or claiming that we owe debt on a per capita basis. It is raising taxes enough so that the debt is reduced and incomes for most households are increased.

To sell a tax increase on high incomes (or wealth, for that matter), we must make the wealthy want to pay more. They won’t do so to fund Medicare for All, the Green New Deal or to decrease abortion by increasing the Child Tax Credit. They will do so to get their children and grandchildren out of hock

We are not without solutions. Our tax reform plans, which can be found in Attachment Two, provide more money to families with children, while a higher minimum wage for both work and education from ESL and adult remedial education to technical certification and junior college through our Subtraction Value Added Tax proposal.

Attachment One – Excerpts from Squaring (and Settling) Accounts: Who Really Owns the National Debt? Who Owes It? - December 2019

Attachment Two – Tax Reform, Center for Fiscal Equity, September 13, 2019

Disappearing Corporate Income Tax

Ways and Means, The Disappearing Corporate Income Tax, February 11, 2020

If the Corporate Income (nee Profits) tax disappears, we shall not mourn it at the Center for Fiscal Equity. A border adjustable credit invoice value added tax (I-VAT) raises money more efficiently. Because it has a labor component, industry specific offsets to profit taxation cannot pass the smell test. This is especially the case with a standard deduction of $75,000 on individual income.

A subtraction VAT would be the vehicle for distributing tax expenditures for family size, health, retirement and education to workers and their families. An S-VAT is no harder to collect than payroll and income taxes for workers. The only employee reconciliation required is reporting issues with reporting the child tax credit for families with two working parents.

An asset VAT separates out collection of taxes on corporate income, capital gains, interest, rent, pass-through income, inheritance and dividends at point of sale rather than through self-reporting. This allows a simplified income tax to on high salary income, either on a stand-alone basis or as higher tiers of a subtraction/net business receipts tax.

A collection of consumption taxes will ease collection and preserve progressivity, especially including subsidies for workers and their families. Please see Attachment One for our current plan.

The Tax Cut and Jobs Act unified the tax rate on capital gains and returns at 21% (adding Affordable Care Act and Pease provisions increases the rate to over 23%). Rates in capital have been bouncing from 50% (pre- Reagan) to 28% (1986 tax reform, which was paid for by higher corporate rates) to 31% (Bush 41) to 39.6% then 28% (Clinton) to 20% (Bush 43) to 25% (Obama with ACA and Pease). Repealing ACA taxes and Pease and setting the rate at 24% as a bipartisan compromise will put us all out of business.
The proposals offered today for a 28% corporate profits tax on domestic and international flows are too high to be stable. A 24% rate (20% of invoice) will avoid this.

A plan with both consumption and high rate income taxes has many proponents, including the Generation X Committee, the Center for Fiscal Equity, the American Action Forum, Michael Graetz, Lawrence B. Lindsey, Bruce Bartlett and Tax Policy Center Directors William Gale and Len Burman. Perhaps it is time for legislation.

Sadly, no real change will occur until wealthy families are made to realize that our future debt bomb (caused by net interest, not entitlements) falls on future high rate income tax payers, AKA their heirs. There is no per capita debt because there are no per capita taxes.
May we suggest a hearing in liability and ownership of the national debt? We are about to release an updated edition of our monograph Squaring (and Settling) Accounts: Who Owns the Debt? Who Owes It? Attachment Two contains and excerpt.

Attachment One - Tax Reform, Center for Fiscal Equity, November 13, 2019

Attachment Two – Excerpts from Squaring (and Settling) Accounts: Who Really Owns the National Debt? Who Owes It? - December 2019

Taxation, Debt Liability and Ownership by Race

Explanatory Notes

The Brookings-Urban Tax Policy Center released its Feature on Racial Disparities and the Income Tax System January 30, 2020. These notes accompany our study on how taxes, debt liability and debt ownership are spread by race. Data sources are the Federal Reserve Consumer Finance Survey (2016), the 2017 tax distribution figures in the 2019 IRS SOI Data Book and the Census/BLS Household Current Population Survey Table HC01.

Racial groupings selected were Whites Only, Black AOIC (which may double count Latinos), Latinos of all races and Asian AOIC. No mix got close to the 125,000-household figure in HC-01, but the percentages do reflect the TPC graphic on Tax Burden. The first release of our table attempted to reconcile total income distribution, distribution among the top 10% and the bottom 90%, which were applied to the IRS Data. The numbers did not add up. Further analysis of the HC01 data was required.

HC01 data was weighted by income tax estimates. The mean value estimator for the bottom 90% ($145,000 and below) was 79% of the stated income brackets. Between $145,000 and $200,000, the mean estimator was 65%. These figures were based on the AGI estimates in the IRS data. The $200,000 and above level was used to estimate income for the top 5% of earners. The top two estimates were used for income estimates for the top 10%. Returns filed by race were estimated using population percentages from HC01. The income, credit and tax total by race were estimated based on the low and high numbers. This corrected the error of estimating total population and the top 10% and estimating income for bottom 90% (which had resulted in negative tax rates for Asians). Oops.

These rates were applied to IRS SOI data. Debt liability was calculated at 13.76 times tax liability for each racial/income grouping and the entire population. Federal Reserve SCF data were used to estimate the breakdown of debt ownership by percentile and race.  90th percentile debt estimates were distributed by racial estimates for FRS/Bank and other debt held by the public. Debt held by the government distributions existed include race for civil service membership, which was used to impute G Fund ownership and postal system retirement. Population based race distributions were used to estimate Social Security and Medicare asset distributions. Military retirement was entirely in the bottom 90% and had no racial breakdown.

Subtotals by economic class and race can be found in the accompanying tables.

Attachment - Wealth Taxes

Senators Warren and Sanders have proposed wealth taxes to get our financial house in order. As expected, wealthy donors are not liking the idea of a wealth tax, nor are those who felt that President Trump will still be in office by election day. They under estimate the desire by Senate Republicans for self-preservation. Even without Trump on the ballot, 2020 is more like 1974 than 1984. 

The bigger danger to enacting a wealth tax us that, even though Senator Warren is taking only small dollar donations, congressional candidates have no such qualms. 

Wealthy taxpayers must want to pay more or they will stop higher taxes cold. They won't pay more to fund a higher child tax credit, a Green New Deal or Medicare for All. 

Senator Warren is getting a raw deal on Medicare for All. Her funding solution was meant to fund the Sanders proposal. Critics are decrying her plan for being less specific, but the reality is that her plan dovetails off of his bill. Her proposal is an attempt to add meat to the revenue side, which Senator Sanders leaves open. 

Broad based social services must be funded by a broad-based tax, such as our proposed subtraction VAT in Attachment Two. The reason that the Affordable Care Act came under attack was not objections to mandates (which is a creature of the Heritage Foundation proposal), but because it was funded by a payroll surtax on unearned income from dividends and capital gains from taxpayers in the top 2% of filers. 

High income investors exercise monopsony power over their workers, it is likely that everyone shared the pain. A broad-based consumption tax would be an easier sell (were it not for President Obama's promise not to increase taxes on the bottom 98%). The cynical view us that Obama knew that attacks in ACA funding would make the Republicans demonstrate their fealty for the rich. If so, this stunt cost his party the Congress. 

A wealth tax can be considered an ex post facto income tax, also making it unconstitutional. It could be established by constitutional amendment, but it would be far easier to create salary surtax prepayment bonds. This plays to why the wealthy would want to pay more and would save us a bundle on net interest payments. 

Getting the wealthy on board is essential to reform. Social Security was passed because FDR played Wall Street against the threat if socialism. It is now time to fund socialism by helping Wall Street get out if the debt bomb it has created for itself.

Trade Infrastructure for Global Competitivenes

Ways and Means, Trade, Trade Infrastructure for Global Competitiveness, February 6, 2020

The WTO is a major part of our trade infrastructure. Our comments on the WTO were submitted to the full committee previously and was first submitted to the Senate Finance Committee in March of last year. Please find them in Attachment One. We will focus here on the interaction of tax and trade. For reference, the latest version of our revised tax reform proposals is Attachment Two. Two elements of these proposals are discussed below, our invoice and subtraction VAT proposals.

Enacting an invoice VAT is far superior to a tariff. The more government costs are loaded onto an I-VAT the better. Indeed, if the employer potion of Old Age and Survivor’s Insurance, as well as all of disability and hospital insurance are decoupled from income and credited equally and personal retirement accounts are not used, then there is no reason not to load them onto an I-VAT. This tax is zero rated at export and fully burdens imports.  Seen another way, to not put as much taxation into VAT as possible is to enact an unconstitutional export tax. 

The second tax applicable to trade is a Subtraction VAT or S-VAT. It could have a huge impact on long term 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). 

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.  Attachment Three further discusses employee ownership.

Over time, ownership 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.

Attachment One – Senate Finance, Approaching 25: The Road Ahead for the World Trade Organization, March 12, 2019
Attachment  Two - Tax Reform 
Attachment Three – Employee Ownership from Improving Retirement Security for America’s Workers, Center for Fiscal Equity, June 6, 2018 

Overcoming Pharmaceutical Barriers

Ways and Means, Health, More Cures for More Patients:  Overcoming Pharmaceutical Barriers, February 5, 2020

While it is not possible in this Congress (unless Democratic Leader Schumer steal two members from the Majority), some form of single-payer insurance is likely, whether it is a public option under the Affordable Care Act, Medicare for All or the latter with an tax exemption for ESOPs and Cooperatives. This is discussed in Attachment One. Regardless of which form it takes, the main issue is paying for it. 

This is addressed in Attachment Two, which proposes consumption tax funding rather than the payroll taxes (including at high income levels. If there is no option for employer funding, an invoice value added taxes, which would be border adjustable. If there is such an option, an employer paid subtraction VAT is proposed. Because this tax would shift employer provided funding rather than using the Treasury to distribute it, it would collect nothing and not be border adjustable.

Last year in comments to Senate Finance, House Budget and the full committee, we commented about how to fund orphan drugs and new treatments so that no one remains untreated due to insurance coverage.

A main problem with high cost drugs, especially orphan drugs, is the high development costs and the cost of small batch manufacturing. This could drive the need to raise drug prices for mature drugs in order to subsidize the orphans, although some hikes are undertaken because no one can stop them. The solution for this is for NIH and the FDA to own the rights to orphan drugs and to contract out research and development costs as it does basic research, as well as testing and production.

PhARMA would still make reasonable profit, but the government would eat the risk and sometimes reap the rewards. HIH/FDA might even break even in the long term, especially if large volume drugs which were developed with government grants must pay back a share of basic research costs and the attached profits, as well as regulatory cost.

Attachment - Single-Payer, June 12, 2019
Attachment  - Tax Reform 

Bloomberg's Tax Reform Plan

Mike does not realize that the top tax rate was 36% with a 10% surtax on the wealthy (3.6%). Assume a GOP 37% base (very unround number). I assume a 5% of income surtax, rather than on the base 37% tax - or a 44.6% tax. He might was well sell it as a cut from 37% to 36% with a 25% surtax on the high base rate - or 45%. Rookie mistake on his part - or that of his staff. He needs to hire better talent.

Also, a 28% tax on capital has no wings. We have been bargaining from 31% under Bush Sr. (up from Reagan 28% post bubble - which is what pissed of rich donors), to 39.6% and then 28% under Clinton (thank's Larry Summers - note sarcasm). W. went down to 20% (before Pease and ACA). O got us to 25 with surtaxes. Ryan got us to 23 and change with a 21% advertised base. You can guess the trend. It is toward a central figure. End Pease and make ACA a separate Subtraction VAT levy and 24% is a natural consensus number. Also because it can be 20% of price figure for a subtraction VAT.

Now that Cap Gains, Pass through, Corporate and Dividend taxes are at a single rate, they should stay that way. Inheritance too. Mark the Asset VAT to market at option exercise/IPO and sale after gift and inheritance and end quit talking about it in terms of income taxes at all. I will explain this to anyone with a DC office. Sorry, Mayors Pete and Mike. If being mayor of South Bend is a presidential qualification then so is being what was essentially a job as deputy mayor for public safety in DC. Voting for another billionaire would be insanity after Trump.

If I were running a scam, I would call it Identity Theft Central. Some kind of personal-consumption surtax would solve the problem as an afterthought. Just ask me, Holtz-Eakin, Bartlett, Gale, Lindsey, Graetz, Burman and even Ryan/Brady and their DBCFT. The question on tax reform is not how to do it but in giving Norquist donors a reason to support it.

Expanding the SEC fee to a full blown FTT is a nice start. Shifting from a capital gains tax to a full blown asset VAT is better, although a bit more obviously Pergovian. I would consider this to be a feature, not flaw. I don't think any billionaire would unless they found a personal interest in paying more for the sake of the next generation of 1 percenters (who owe majority of the future liability for national debt).