New Pandemic Debt

Eugene Steuerle and Erald Kolasi ask How Much Has the Pandemic Affected President-elect Biden’s Opportunity to Chart a New Course? My answer is at the bottom.

Social Security costs are pre-funded, with that funding to be repaid by higher income taxpayers. Health care costs are in flux as, by then, some form of single payer program with a broad based tax is likely.

I am betting on a new source - a subtraction VAT that would eat up most income tax collection, payroll tax collection and corporate/sole proprietor tax collection. These would fund entitlement and tax benefits for family support and health currently provided as tax expenditures - although they would be more generous to families and have a bigger burden on higher salaries with second, third and fourth tier subtraction tax brackets (taxing salaries from above $84,000 (because $75,000 does not buy what it used to) to $420,000.

Anything salary income over that would face a 13.5% levy. Over one million, the rate would be 26%. A goods and services tax would be levied on most commercial transactions (including groceries, medicine, drugs, etc.) and an asset value added tax of 26% would be levied on all capital gains and returns - including rental income. The GST (13%) would fund discretionary domestic military and civil discretionary spending. With regionalized fiscal policy, spending and rates could be adjusted (provided a constitutional amendment allows a non-uniform excise).

The key to such higher taxes passing is Europe and China having tax obligated debt backing their currencies. At that point, we can no longer roll over net interest payments into new debt. That the children of income tax payers (half of this revenue is collected from the top 2.5% of households) will have to repay the debt should provide some level of willingness to pay more now.

Any analysis of net interest must include the assumption that, for the vast majority of debt holders, it is counted as tax advantaged wealth creation. These assets provide the leverage to create more speculative assets and borrowing. This creation of paper wealth. These assets provide leverage over workers. For both bonds and mutual funds, the top 10% (who receive half of all income) hold 80% of assets. The lower 90% (who receive the other half) hold 20% of such assets.

IRS data shows that the income fractions apply to higher income levels as well. The top 1% receive as much income as the next 9% (25% of AGI). The top .1% receive as much as the remainder of the top 1% (12.5% of AGI). Household wealth is likely distributed in the same increasing proportions, that is of the wealth held by the top 10%, 20% is held by the lower 9%, while 80% is held by the top 1%. That is 64% of total mutual fund and bond wealth.

The top 0.1% hold 51% of all bond and mutual fund assets. The top .01% thus hold 40% of bond and mutual fund assets, with 6% of total AGI. The top 1450 households receive 3% of total national AGI. If the 80/20 rule still applies, this means that they hold about a third of mutual fund and bond assets.

I do not estimate stock ownership because, without debt leverage, it has little intrinsic value and none in bankruptcy filings. Actual plant and equipment investment is a smaller fraction speculative wealth. It has to be. Book value depreciates while speculation appreciates. The boom-bust cycle has much less to do with overproduction. It has everything to do with how much tax the richest households pay. When they get tax cuts, there is more speculation. When they pay more, there is more consumption. Stock ownership outside of mutual funds also has no relation to net interest on the debt payment or receipt.

If an asset VAT of 26% is zero rated for ESOP sales, that wealth disparity goes the other way. If salary taxes can be pre-paid into a zero return bond, interest on the debt would mostly go away - provided that such taxes are directed that way.

What percentage of TPC funding comes from the top 1450 house holds or their family charities? Get them behind my tax plan and the obscene ownership and income distributions in our economy will start going the other way. I am not optimistic, given that no attention has been given to these proposals.

To get back to the pandemic - for the wealthy, it is just another investment opportunity. The December Treasury Bulletin shows that, in June, of the $2.5 trillion of new borrowing, about $900 billion was monetized, $1.2 trillion was bought by mutual funds, $300 billion was bought by direct bond holders.