Private Equity’s Expanded Role in the U.S. Health Care System

WM Oversight: Examining Private Equity’s Expanded Role in the U.S. Health Care System, March 25, 2021

The problem of private equity did not come from nowhere. The public sector has a huge role in how it arose, both through tax policy and the failure to adequately fund public medicine. The District of Columbia is a case in point. D.C. General was closed, not because it was substandard, but because Congress wanted to close it. It also refused funds to open a new public hospital.

I was on the Mayor’s staff when we asked for more money for mental healthcare, including funding for St. Elizabeth’s, which started as a federal facility designed to serve the entire geographic region. When we asked, Congress did nothing, even though mental healthcare is traditionally a state function.

The District of Columbia is in no way unique. The decision to close public hospitals after not providing adequate funding was endemic in the late 20th and early 21st Centuries. We are now forced to live with these decisions.

How did private equity get the money to usurp public hospitals, which coincidentally, they were on the record as opposing, with the money to back it up? The extreme cuts to capital gains rates under Presidents Clinton and Bush. These provided the seed money to then borrow from the Federal Reserve to engage in epic land grabs in both medicine and housing. While it is fashionable to blame one party and not the other, the damage to our economy was bipartisan. I will not bother to name the guilty. It is a long list.

Private equity is an example of vulture capitalism. It takes advantage of funding shortfalls in state and local government or in religiously owned systems who must sell their property to provide for their retirees. That last bit was entirely the result of public policy, which refused to provide for retired religious on the grounds that they hold property. Even when they continue to hold hospitals, the lack of vocations has led to lay management used to corporate perks and cost cutting. Call it virtual private equity.

This type of expert capitalism closed down our mental health system in the 1970s and then called out pension funds who did not meet unrealistic capital requirements, thus allowing the industry to market inferior products to workers who expected better in their retirement.

This is one case where corporations are not solely to blame. Private equity is a small business affair as well as a corporate one. One of the great over-generalizations in economic discussion is to assume that all large firms are corporations or that one form of ownership is bad, while others are good, Capitalism can occur in large and small firms, in corporations, partnerships and sole proprietorships. Use of the term “corporations” is a way not to be seen as a Marxist and a Russian sympathizer. What we used to call big businesses are now referred to as corporations.

The rise of Putin shows that capitalist authoritarianism can take many forms, from state capitalism to oligarchs. In the United States, the old Soviet Union and modern (?) Russia, the form of organization of a firm has no bearing on its true nature. The only difference in recent times is that a modern Republican President brought sympathy with Russian authoritarianism, and its methods, to the White House.

The term capitalism is widely misused. Many conflate it with free markets. They are not the same thing. The key feature of capitalism is the exploitation of workers, consumers, suppliers and (in corporations) shareholders. The key feature of that exploitation is not size, it is the withholding of information. Entrepreneurs, whether they are in the C Suite, Trump Tower or the back office is the ability to monopolize information.

Nowhere is this more true than in private equity. Information is as private as ownership. These operations do not file annual reports, while pass-through arrangements means they take profits as if they were corporate. This practice is not untoward on its face, but have no illusions that these “small businesses” are not big business. This fact is often lost in the rhetoric. Firms go to great expense at election time to make sure it says lost.

There are two options here. One is to simply adequately fund public hospitals and provide decent remediation of what can be considered predatory student loan policies. These policies prevent doctors from handing out their own shingles, requiring them to get jobs in large practices. Allowing private malpractice insurance (and even some public ones) to seek excessive profits contributes to the decline of individual or small group practices.

Adequate funding can include single payer insurance, from a public option to Medicare for All to an entirely public system. See the first attachment regarding the inevitability of single-payer systems. Even without single payer, public hospitals can be reestablished and Catholic hospitals shored up by including sisters and nuns in the public retirement system.

These are big changes. Too big to rely simply on taxes on the wealthy. Ideally, such taxes would be high enough to discourage the payment of large salaries. Such salaries were simply not paid when the marginal tax rate was 91%. Tax reform could bring us back there, not in a direct assault but in the multi-tiered attack laid out in our proposed plan.

The other option is to encourage employee-ownership of both medical practices and hospitals through Employee Stock Ownership Programs. Potentially, such firms may also make agreements with similarly owned firms or join with them, depending on the size of either entity or group of entities.

This can start small, through expanding the ESOP exemption from capital gains taxes to all ownership sales, from stocks to private equity partnerships. Marking inherited shares to market (rather than maintaining estate taxes) would encourage any heirs who do not wish to join the family business to sell their interests tax free. As such firms under more democratic management become common rather than being just a retirement option under ERISA, more aggressive funding options will evolve, as detailed in the second attachment.

Cooperative firms are the opposite of capitalist firms. They thrive on open information. They are the antidote to private equity capitalism. Cooperative firms with their own medical staffs align cost cutting with financial responsibility. Third party insurance is not required, nor is malpractice insurance, when doctors, nurses, medical assistants and managers are all fellow employees. The care is better too.

In short, the options are public social democracy or private voluntary socialism. Either or both options are better than what we now experience. All that is lacking is the will to go forward.

As an aside, a recent paper by the National Bureau of Economic Research asking “Does Private Equity Investment in Healthcare Benefit Patients? Evidence from Nursing Homes” is essential in addressing this issue. I commend it to your attention. You can find it online at https://www.nber.org/papers/w28474

Attachment: Single Payer

Attachment: Employee-Ownership

U.S. International Tax Policy

Finance, How U.S. International Tax Policy Impacts American Workers, Jobs, and Investment, March 25, 2021

The main feature of the last tax reform, which I call the Tax and Job Cuts Act, was the decrease in the corporate tax rate, which was designed to bring money being held offshore for tax reasons back to the United States, where it could be used for investment in plant and materials, leading to job growth. 

To not pervert incentives toward choosing the corporate form, pass-through provisions were added to the tax code. Thus, taxing the returns from capital from any source would be within the same range, roughly 21%, give or take a to include Affordable Care Act and Pease provisions.

Generally, when doing tax reform, the idea is to lower rates while broadening the base. This was not done in the Job Cuts Act. Without cuts to tax benefits to reward profit, the Act was simply a give-away. 

The impact of the Act was to ring a starting bell in a race to the bottom for other nations to cut their corporate rates further. Now the race is on to find new sources of revenue lost due to this race, like additional tax on online profit.

Whether intentionally or not, the Act was essentially a test of trickle down economics, It failed. 

Even before the pandemic, GDP growth slumped from the 3% range experienced in the last few years of the Obama Administration, which carried over through the first two years of the next administration. The growth remained the same because tx policy had not changed. Changing tax policy took money out of consumption and put it into speculation.  

The cuts overall gave Wall Street the seed money to further fuel cryptocurrency and to bid up the price of exchange traded funds. The new feature in ETFs was the addition of mortgage backed securities which allowed Steve Mnuchin and Wilbur Ross, with their partners, to cash out the value of their single family rental holdings.

Stop me if you have heard this story before. 

Without the pandemic and the associated assistance to prop up the bonds in question, the crypto and EFT bubbles were about to burst.

Investment in savings instruments is not really investment as it exists as part of Gross Domestic Product. GDP is based on productive activity in the real economy: government purchases, household consumption, net exports and investment in plant and equipment.

As an aside, the government's impact comes in more than just buying stuff. It is a major contributor to household consumption through others and including the stuff it buys. It buys or creates natural resources (food, oil, land, and water), supplies, buildings, military assets, health care (military, civil service, old age, disabled, Indian, international, indigent), transportation infrastructure roads, airports, bridges, spaceports, and private capital used to make government purchases.

It also distributes current and future household income via employee salaries, military pay, government pensions, old age, survivors and disability income, interest on government trust funds, contractor pay and benefits, Temporary Assistance to needy Families, Food Stamps, supplemental security income, temporary disability income, refundable income and child credits, pays net interest to bondholders, and distribution of resource payments to tribal nations (land rentals and resource extraction). This amounts to more than half of household income resulting in consumption and savings.

Consumption from these income streams also creates private sector income, leading to consumption and savings (second and third order - which is private sector spending and savings resulting from private sector consumption). All of this leads to investment in land, plant and equipment for household consumption and exports.

Tax collections and double counting are the means by which all this spending goes round and round. The double and triple counting is what is known as the multiplier effect.

Investment in plant and equipment happens when households have money (for example, through a higher minimum wage or child tax credit, so they buy more goods and services. More goods and services on a long term horizon cause manufacturers to purchase what is needed to make more: plant and equipment. 

The cost of funds has no impact on the decision to invest, only on how to raise the money. Firms with an excess of money, but a smaller customer base, will not invest. Firms with an expanding base will find the money. Any investment decision which depends on bringing money back to the US. for tax reasons is probably not wise in the long run.

So where did the money go?  It certainly did not go to workers. GDP the year following the Act declined by 1% (the one year lag is how long it takes for tax and spending changes to circulate through the economy. Answering the question would require an analysis of the executive compensation information provided in the annual reports of firms whose tax rates were reduced. 

To date, I have not seen such an analysis. No think tank who is funded by donations from the holders of capital would ever fund such a thing.

Taxing labor and profit in separate systems generally distorts the allocation between labor and capital. Consumption taxes, by nature, tax all value added at the same rate. This is much better for workers and makes subsidies built into the tax code favoring one or another activity impossible. 

The existence of corporate income tax subsidies carry with them the very justified impression that less well connected industries must pay higher taxes in order to preserve these tax subsidies. Worse is the perception, which would arise with their use in an invoice or subtraction value added taxes (IVAT and SVAT), that such subsidies effectively result in lower wages across the economy. Such a perception, which has some basis in reality, would be certain death for any subsidy.

One must look deeper into the nature of these activities to determine whether a subsidy is justified, or even possible. If subsidized activities are purchased from another firm, the nature of consumption taxes alleviate the need for any subsidy at all, because the VAT paid implicit in the fees for research and exploration would simply be passed through to the next level on the supply chain and would be considered outside expenditures for subtraction VAT calculation and therefore not taxable. 

In the oil industry, if research and exploration is conducted in house, then the labor component of these activities would be taxed under both the IVAT and the SVAAT, as they are currently taxed under personal income and payroll taxes now.

The only real issue is whether the profits or losses from these activities receive special tax treatment. Because profit and loss are not separately calculated under such taxes, which are essentially consumption taxes, the answer must be no. The ability to socialize losses and privatize profits through the SVAT would cease to exist with the tax it is replacing.

To return to the corporate, pass-through, dividend, Pease, Affordable Care Act SM taxes and capital gains taxes, a uniform tax rate will limit gaming. We propose enactment of an Asset Value Added Tax, as described in Attachment Two.

The range of acceptable rates has been narrowing over the past 40 years.  President Reagan set the tax to 28% at the top, with a 33% bubble. Bush 41 settled on a 31% rate, which raised more from the highest incomes but, in a quirk of math, when combined with the impact of the FICA cap, left a proportional tax rate of 30.9% in place for everyone. The increased money from the wealthy still caused later growth.

President Clinton took rates higher (with a top rate on capital at 39.6%). He then cut that rate to 28%, which fueled the tech bubble (our best minds were working on IPOs, not innovation). This led to recession as the bubble burst - and the further cutting of capital tax rates by Bush 43 to 20% (but leaving corporate rates at 35%). Obama put individual capital rates back to 25% (including Pease and ACA SM), which Trump-Ryan notched down by  a bit over 1%. President Biden now proposes a 28% rate for everything (as far as I know - not moving it all to the same rate invites gaming).

We propose an asset value tax with a compromise 26% rate (halfway between the current 24% and the Biden 28%. We also propose higher tier subtraction VAT rates for salaried income, with a top tier rate of 26% on all income over $340,000. At $425,000, additional salary surtaxes paid by individuals would kick in, with a top surtax rate of 26% for salaries over $680,000. At this level, all additional dollars received, whether through asset or salary income, would be taxed at 26%. Shifting to a separate business entity would result in a 26% top rate after $340,000. Setting up multiple businesses to minimize taxation would be penny wise and pound foolish. It would cost more to pay the accountants than to pay the full tax, and anti-abuse language could guard against this.

Why would wealthy taxpayers agree to such reforms? We cannot simply vote in more than the cosmetic reforms proposed by the President and not expect backlash in 2024. As was the case with establishing Social Security, the rich need to want this. I discuss why they should in Attachment Three on the national debt. The issue has come up recently. Let me provide light to balance the heat.

The table is a bit out of date. It is based on the debt figures from last summer and the 2017 tax year. Revisions are ongoing and will be released (with copies to the Committee) within the next six weeks.

Attachment Four discusses how tax reform affects trade, both in terms of union rights and in joining everyone else in using the zero rating of value added taxes for export, making American manufacturing more attractive. We also note how internationally based employee ownership of both subsidiaries and supply chains discourages wage and currency arbitrage, which is the best way to share the gains of reform with workers internationally while removing the incentive to send production outside our borders.

Note that adding border-adjustable goods and services taxes allows the removal of other trade barriers with no loss of jobs. The last four years have shown us an extreme example of how not to use tariffs. The prior administration used economic policy as gunboat diplomacy, but without having a navy.

Attachment: Tax and Job Cuts Act

Attachment: Tax Reform

Attachment: The Debt as Class Warfare

Attachment: Trade Policy

FY 2022 Budget Priorities: Members Day

House Budget: FY 2022 Budget Priorities: Members Day, March 23, 2021

WM: Members Day, March 23, 2021 

The revenue side should be familiar to you . The Center for Fiscal Equity has had a tax plan which has more or less been the same since we were The Generation X Committee for Social Security, Tax and Healthcare Reform in November 1998. While there have been some modifications since those days, such as the inclusion of a separate credit invoice value added tax and an asset value added tax, the main elements are recognizable. 

Since those days, we have also written on the budget process. No one doubts that the process is broken nor would they argue that the measures recommended by the Joint Select Committee of 2018 did nothing to improve it. The coin of the realm in Washington is information. 

If detailed estimates are held back until a general outline on spending is agreed to as a Joint Budget Resolution (considered by a Joint Budget Committee), the process would move more quickly. Everyone wants to see the numbers. Likewise, should the process fail, as it often does, there should be a fallback. 

The next incarnation of the Budget Control Act should list reasonable budget targets that would act as a JBR should none be passed by a date certain. When the new fiscal year starts, the current service estimates would become law if the relevant appropriation has not passed, with any late passage taking the form of a supplemental. These proposals have been submitted to the Committee many times, so I will not bother adding a more detailed attachment.

Senior members and staff may have seen some of our spending proposals before, many of which date to the Fiscal Commission which did its work in 2010, largely to pay for making the Bush tax cuts for the bottom 98% of households permanent, while allowing the Clinton era and Affordable Care Act taxes on the top 2% take effect, as scheduled, in 2013. I must note that the period of accelerated growth after the great recession started when taxes on the wealthy went up.

I did not agree with President Obama’s resolve to hold the middle class harmless in passing the ACA, nor do I favor President Biden’s resolve to only increase taxes on incomes over $400,000 per year. Such promises foreclose tax reform, a long needed increase in the motor fuels tax (to balance out gains in fuel efficiency or a carbon tax and taxes required for broad based health care reform. 

President Bush 41 was not denied a second term because he went back on his no new taxes pledge. Indeed, the 1990 Tax Act began the period of growth in the 1990s, which were accelerated by President Clinton. As we come out of the COVID recession, higher taxes on the wealthy are desirable, and will occur. Our tax reform provisions double down on them. Our usual attachment, including a summary of how current provisions will change, is attached (as usual).

Our spending proposals mirror our tax reform proposals and will be dealt with in the same order.

Retirees and the disabled need more money, while minimum wage workers should not feel the burden of payroll taxation. Therefore, there should be a floor on the employer contribution of $16,000. If and when the minimum wage is increased, this floor would go up correspondingly to $20,000 for a $10 minimum wage to $24,000 for a $12 minimum wage. The $10 wage should take effect immediately, phasing to $12. You can argue about a $15 or $18 minimum after the mid-term elections.

The payroll tax floor and increases to the minimum would be paid for by ending the Earned Income Tax Credit and decoupling the employer contribution from wages earned. Instead, some type of consumption tax, either paid for through a goods and services tax or a subtraction VAT, with no limit on either.

Current benefits will be rebased to reflect the higher minimum wage as if they were inflation. My benefits are higher than average and they are not adequate to provide food for the month nor unsubsidized housing. Due to a disability and my income level, I qualify for assisted housing and rental support. My housemate, whose benefits are less, receives food stamps and is dual enrolled in Medicaid as well as Medicaid.

We should not have to face a smorgasbord of programs while still having to scrape by at the end of the month. Additionally, neither of us can afford transportation, aside from free bus service provided by Montgomery County. We need a rise, as do all of the retired and disabled. Disability should pay the same amount as a minimum wage, full time job.

This is a huge ask, but additional consumption taxes with no ceiling, and the tendency of minimum wage increases to lead to higher wages for the working class will fund increased benefits going forward.

The next element of the plan is health insurance. While there is an argument to increase Part B and D benefits for Medicare, doing so would eat up most of the higher income proposed above. Doing this is a nasty habit. While Social Security should not be means tested, Parts B, C and D should be. Those receiving the bottom rate should not have to pay higher premiums. 

Those who meet the threshold on taxing benefits should pay a 35% premium. As importantly, the amount at which taxes must be counted as income should be indexed for inflation and the amount increased to include the same percentage of retirees who are excluded from paying additional taxes as when the threshold was adopted.

President Reagan’s New Federalism proposal would have removed Medicaid from state budgets in exchange for ending or block granting other federal programs. This was a good idea then and a better idea now. Medicaid Part E should be created to both relieve states and the District of Columbia (or Washington, Douglass Commonwealth) from providing Medicaid for Seniors and the Disabled and seeing to enforcement of practice standards for nursing homes who receive these funds.

Medicaid for poor families should be distributed, where possible, through the health insurance plan of their educational providers or the plan for state and local government employees. 

The working poor, as well as patients with pre-existing conditions should be automatically enrolled in a Public Option as part of further improvements to the Affordable Care Act. Ending pre-existing condition reforms are likely the price for passing such changes’

Subsidies for the public option, as well as increases to the Child Tax Credit (which should be expanded to replace EITC payments to poor families), would be funded by a subtraction VAT or by offsets to quarterly payroll, income and estimated tax payments. 

The child tax credit level passed in the American Recovery Act should be made permanent and doubled, with distribution through private sector payrolls, unemployment insurance benefits, emergency benefits for families and paid participation in educational programs.

Programs, both public, private and sectarian, will include the following

• English as a Second Language
• Expanded Job Corps
• General Education Degree preparation
• Technical and vocational training
• Psychiatric and occupational rehabilitation programs 
• Community College to an Associate's Degree 

All of the above should include a stipend at the minimum wage pending satisfactory performance and be tuition free). Education providers will be the conduit to tax benefits and any other state or federal subsidies.

SNAP payments should be abolished, as well as TANF, except for people who cannot be enrolled in another program. For these, SNAP must include a cash benefit, thus ending the incentive to sell food stamps in order to buy toilet paper or gasoline.

Local welfare programs will channel clients to appropriate educational programs (with no legal residency requirement), training through workforce investment boards or other social services. One Stop programs should really be handled in one stop.

It should be noted that a great many federal welfare and educational programs can be eliminated by these reforms, both at the state and federal levels. Subtraction and Invoice Value Added Taxes will be collected and audited by state governments. The Asset Value Added Tax will be collected by the Securities and Exchange Commission. High Salary Surtaxes will be collected by the Bureau of the Public Debt, which will also issue tax prepayment bonds.

Discretionary, intergovernmental programs outside of human services and military spending based in the continental United States would be funded by invoice taxes as well. Programs would be managed regionally.  A regional vice president will oversee regional administration.

Regional boundaries will be changed so that, to the extent possible, they represent roughly the same number of equal electoral votes. Each region will have two appropriations and authorizing  subcommittees, two for civil spending and two for military spending. Federal Reserve and Appellate Court boundaries will be reset to be consistent with each region and reset as necessary with every decennial census. 

Budget levels in each region will be set based on goods and services taxes (called an invoice VAT in the attachment) collected by purchases, including imported goods, in that region. A constitutional amendment will be proposed to the states allowing for regional excise taxes rather than the current national excise tax. This will also be the case for subtraction VAT levels, with recommended tax levels included in the President’s Budget each year. Regions will therefore get what they are willing to pay for. 

Department of Defense product and logistic commands will be funded based on where units are assigned and based. Strategic systems will be nationally funded.

An additional amendment will also include election of regional vice presidents by each region through either direct election or the electoral college, with one elector for each congressional district and additional electors assigned by the majority of the popular vote for that region. In the interim, this could occur by compact - although ratification of such an amendment would be easier than negotiation of such a compact.

Strategic and overseas military deployments and civil spending, as well as grants to regions whose economies will not support their levels of spending, will be funded by the Asset Value Added Tax. This tax, as well as a surtax on high salaried individuals, will be dedicated to funding net interest payments on the national debt, reimbursing the Social Security and Medicare Trust Funds and decreasing the debt held by the public. 

Worker safety, equal employment opportunity and wage and hour enforcements must be fully staffed, overseen or operated by the U.S. Department of Justice and partially funded through fines, preferably criminal fines. The next frontier in civil rights enforcement must be criminalization. Adding a sting to non-compliance will work where consent decrees do not. These activities will also be funded by the asset value added tax and income surtaxes.

If possible, the AVAT rate will be negotiated internationally to prevent race to the bottom. A portion of AVAT proceeds collected internationally may also fund allied deployments.

The AVAT will include zero rated for sales to qualified ESOPs. Once such systems are in wide use, funding of the employer contribution to OASI will move to subtraction VAT collection, with offsets for purchasing preferred shares in the employing firm and in an insurance fund holding such shares. This option will not be enacted any time soon, but is inevitable.

These proposals will maximize both equality and liberty. The size of government will be reduced, but its functions will live on, as they must. There is no reason, other than toxic partisanship, that these proposals cannot be supported by both parties.

Attachment: Tax Reform

COVID-19 in the Nation’s Nursing Homes

Finance: A National Tragedy: COVID-19 in the Nation’s Nursing Homes, March 17, 2021

I will not pull any punches.

This crisis is worse than you think. For whatever reason, the Coronavirus Task Force has ignored the first round of symptoms of this ailment. In my experience, it begins as a cold with heavy mucus. Bad timing made many sufferers believe that they had merely suffering from hay fever. There is then a week of dormancy. If you assume that exposure occurs two weeks prior to the first symptoms, there are four weeks, rather than two, before SARS symptoms are manifested, including fever, fatigue from low oxygen levels and fatigue from the manufacture of immunity (which feels like a gut punch over a two-week period).

Ignoring the early symptoms in CDC guidelines means that, even with the best of care, the pandemic can blow through the nursing population before anyone realizes that COVID is running amok. The continuing denial of this model means that the disease will continue unabated until it runs out of vectors - meaning that vulnerable patients will continue to die until vaccinated.

On the positive side, our experience is that once one has marked symptoms), full immunity is most likely. Young people, who laughed off the early symptoms of the virus or simply did not experience it, are now getting sick. This could lead to another round of reinfection in nursing homes staffed with younger workers. Older workers, who likely have had symptoms, are now safer care givers for the elderly. 

One of the developments no one talks about is the shedding of PPE. Healthcare workers see patients when they are after the contagious stage. Heavy PPE frightened people with the virus in the first wave had them avoid care until it was too late. Publicizing this will get people into care faster. Fearing death becomes a self-fulfilling prophecy when care given early will save lives. 

Getting nursing home patients into a hospital setting will preserve their lives. Leaving their care to nursing home staff, especially when the disease is first evident, means that residents will get care from rookies. This is not a disease that tolerates mistakes in care.

COVID mortality has hastened death for older victims. Those who would have died of a heart attack within the next five years likely died this past year.  We will see how high COVID deaths reach in comparison to heart attack death for the year. I suspect the latter will be down and the former may be second to cancer, if not the number one cause of death this year.

In comments provided to congressional committees last summer, I predicted at least 120 deaths per 100,ooo individuals in the population. I had assumed that the nation would have done better than New York, which at the time had 150 deaths per 100,000. If mortality mirrors New York from that period, 500,000 people would have died. We have exceeded the more pessimistic estimate by tens of thousands. 

Careful chart review will likely show under-reporting, so true death rates may turn out to approach 1,000,000 deaths. Let this sink in for a moment. 

This virus originally did not hurt younger people. The latest variant is now making them very ill, but is less likely to kill them. By the time vaccines arae available to them, they will have already been ill. 

The science is now showing that children have more robust immune systems. To them, COVID-19 is just another cold virus to fight off. Their immune systems are in high gear. For this reason, vaccinating them will be a mistake. They need to build their immune systems by getting sick and recovering. Robbing them of this experience leaves them vulnerable to the next pandemic. They need to play in the dirt and with each other, even when sick. Colds are not ebola. Treating it as such is counter-survival for the species. 

Why were older people more vulnerable at first? Older citizens are farther away from having colds and being exposed to them. Current precautions also degrade immunity because it is not challenged. This is also why Influenza is so dangerous to nursing home residents. Older citizens who are not in a nursing home, especially those in a multi-generational household, are less likely to become sick, primarily because their immune systems are challenged by their snot-nosed grandchildren. 

Any parent will confirm that their younger children are constantly sick and that they share the pain – much to the horror of co-workers – although having sick parents come to work also spreads manageable illness. Being shielded, however, leaves one vulnerable to symptoms. My daughter is with her mother in Knoxville. I got sick. My ex-wife probably will not, especially as she has just had her second shot.

A major problem in getting care is our insurance system. A single-payer system, either through a public option, Medicare for All or cooperative care through employee-owned and provided medicine, including nursing homes, will save lives in the next pandemic. 

The attachment presented in 2019 is still as timely as it was then. Even more so, since it covers the public option within the Affordable Care and American Recovery Acts. If pre-existing conditions were repealed, for profit insurance would move more people to the public option each year, which would be their undoing. Single-payer health care as part of a bailout of the industry would be the natural result.

A recent paper by the National Bureau of Economic Research asking “Does Private Equity Investment in Healthcare Benefit Patients? Evidence from Nursing Homes” is essential in addressing this issue. I commend it to your attention. You can find it online at https://www.nber.org/papers/w28474  

Attachment: Single Payer

Effect of the U.S. Tax Code on Domestic Manufacturing,

Finance: Made in America: Effect of the U.S. Tax Code on Domestic Manufacturing, March 16, 2021

The public discourse on manufacturing uses large corporations as a stand in for capitalism. Talking about capitalism carries Cold War connotations. For those who are confused, and many are, the Soviet Union was dissolved over twenty years ago. It had not been socialist since the time of the revolution. Because Marx believed that workers would figure everything out, little thought was given to how it would work. It truly has never been tried. The system of state capitalism in the Soviet era has been supplanted by oligarchy in Russia (six on one, half dozen of the other) and it is thriving in China.

Marx focused on capitalism. His main contribution was describing the exploitation of factory workers. In a modern enterprise, creative branding is as important as design and more important than production. Sales is always important, as are company services. The explosion of innovation centers in China are now competing with America on all fronts, not just manufacturing. 

In October of last year, we delivered comments to the House Ways and Means Oversight Subcommittee on tax fairness. In it we discuss the causes of the decline in wages as compared to productivity. This started in 1965, which cut post-war high marginal tax rates from 91% to 70%. This cut took away the disincentive for wage theft by the CEO class. This  accelerated with the Reagan tax cuts. 

The 1986 tax reform gave us the current system. It has changed round the edges since then, but has not been significantly reformed. The Clinton and Bush to capital gains and dividend rates set up the 2008 Great Recession, delivering too much money to the speculation sector (it is not investment as understood as a factor of GDP. President Obama reversed the Bush cuts and the economy recovered because of them. 

The Ryan-Brady-Ryan cuts started us back the other way, but seem to have shown enough restraint to indicate there was more bipartisanship involved than anyone will admit. The main contribution of the Act was bringing corporate and business rates into relative parity. It did nothing for workers and did not bring money home, as promised. No studies have been  done on executive compensation subsequent to the Act, although the growth rate one year after passage fell by one whole point of GDP before the Pandemic. 

As in the 2000s, monetary policy was providing us with the perfect storm of tax cuts leveraging speculation, this time in Cryptocurrency and securities created so that providers of single family rental housing (which boomed in the foreclosure crisis) could cash out, with these funds packaged, again as AAA bonds, into Exchange Traded Funds. As we exit the pandemic, expect a financial crisis having nothing to do with COVID. This crisis will be used as an excuse to further move operations off-shore. 

The President has put forwarded reasonable rate corrections that may stop the coming crisis, or make it less severe. Still, the proposals are nibbling around the edges. More basic reform is needed.

Loading almost all taxation into payroll and income taxes continues the advantages of the CEO donor class. Splitting the elements of these taxes into a system of consumption and asset value added tax, as we propose in Attachment Three, extracts revenue at multiple points. Most taxpayers will only be hit once by goods and services and employee payroll OASI taxes and will benefit from making American Recovery Act subsidies for families both permanent and more generous. 

Higher tier subtraction VAT rates and residual income surtaxes will reduce wage theft. Offering high income taxpayers an opportunity to purchase tax prepayment bonds, and generally using salary surtaxes to pay down the debt is essential to making sure our economy is competitive when other nations duplicate our system of tax backed debt backing currency. These bonds also avoid interest payments - the item which causes most of the danger of an expanding debt.

Our proposed Asset Value Added Tax simplifies income tax filing greatly and expands tax breaks for funding Employee Stock Ownership Programs (as well as Cooperatives - which are simply an ESOP with one voting share per employee-owner, with the balance of ownership in preferred shares.) Currently, only sole proprietors can take advantage of the ESOP exclusion from Capital Gains Taxes. allowing shareholders the same privilege, especially heirs whose Asset VATs are marked to market when sold, will accelerate employee-ownership.

Attachment Four discusses how tax reform affects trade, both in terms of union rights and in joining everyone else in using the zero rating of value added taxes for export, making American manufacturing more attractive. We also note how internationally based employee ownership of both subsidiaries and supply chains discourages wage and currency arbitrage, which is the best way to share the gains of reform with workers internationally while removing the incentive to send production outside our borders.

Attachment: Large Corporations

Attachment: Tax Fairness

Attachment: Tax Reform

Attachment: Trade Policy

Attachment – Trade Policy

Attachment –  Trade Policy

Consumption taxes could have a big impact on workers, industry and consumers. Enacting an I-VAT is far superior to a tariff. The more government costs are loaded onto an I-VAT the better. 

If the employer portion of Old Age and Survivors Insurance, as well as all of disability and hospital insurance are decoupled from income and credited equally and personal retirement accounts are not used,  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. Adopting an I-VAT is superior to it’s weak sister, the Destination Based Cash Flow Tax that was contemplated for inclusion in the TCJA. It would have run afoul of WTO rules on taxing corporate income. I-VAT, which taxes both labor and profit, does not. 

The second tax applicable to trade is a Subtraction VAT or S-VAT. This tax is designed to benefit the families of workers through direct subsidies, such as an enlarged child tax credit, or indirect subsidies used by employers to provide health insurance or tuition reimbursement, even including direct medical care and elementary school tuition. As such, S-VAT cannot be border adjustable. Doing so would take away needed family benefits. As such, it is really part of compensation.  While we could run all compensation through the public sector.

The S-VAT 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).  Over a fairly short period of time, much of American industry, if not employee-owned outright  (and there are other policies to accelerate this, like ESOP conversion) will give workers enough of a share to greatly impact wages, management hiring and compensation and dealing with overseas subsidiaries and the supply chain – as well as impacting certain legal provisions that limit the fiduciary impact of management decision to improving short-term profitability (at least that is the excuse managers give for not privileging job retention).  

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. 

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 others.  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 - Tax Administration

Shifting to a single system for all business taxation, particularly enacting invoice value added taxes to collect revenue and employer-based subtraction value added taxes to distribute benefits to workers will end the need for filing for most, if not all, households. Any remaining high salary surtax would be free of any deductions and credits and could as easily be collected by enacting higher tiers to a subtraction VAT. 

Subtraction VAT collection will closely duplicate the collection of payroll and income taxes – as well as employment taxes – but without households having to file an annual reconciliation except to verify the number of dependents receiving benefits.

Tax reform will simplify tax administration on all levels. Firms will submit electronic receipts for I-VAT and Carbon Added Tax (C-AT) 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 reporting by employers. 

Employees with children will annually verify information provided by employers and IRS, responding by a postcard if reports do not match, triggering collection actions. The cliché will thus be made real.

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 $84,000 or only one employer need not file high salary surtax returns. Separate gift and inheritance tax returns will no longer be required.  

State governments will collect federal and state I-VAT, C-AT, S-VAT payments, audit collection systems, real property A-VAT and conduct enforcement actions. IRS collects individual payroll and salary surtax payments, performs 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 the government.   C-AT 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. Very little IRS Administration will be required once reform is fully implemented. All IRS employees could fit in a bathtub with room for Grover Norquist.

Attachment - Tax Fairness

To start, we must distinguish between fairness and justice. Fairness is having your say. Justice is getting or paying what is due to or for you.

Lower income taxpayers depend on the fairness of the system, rather than individual fairness. It is costly to make one’s case to the IRS when disputes arise. To an extent, they must pay and obey. As long as they can provide information when it is lacking or work out payment arrangements when they do not have funds available the system is fair. Generally, they do, although currently the unopened mail resulting from the pandemic stretches that fairness, as Chairman Neal noted in August (2020).

Higher income taxpayers have more room to argue with the IRS, as well as more to argue about. Sometimes their attempts to hide income are too clever by half. If they succeed in beating the system, the result for all of us is both less fair and unjust. A wealth tax, because the elements are both debatable and gameable, compound the problems inherent in current capital gains taxation.

The tax rate on capital gains is seen as unfair because it is lower than the rate for labor. This is technically true, however it is only the richest taxpayers who face a marginal rate problem. For most households, the marginal rate for wages is less than that for capital gains. Higher income workers are, as the saying goes, crying all the way to the bank.

The injustice in the system is baked in by the maldistribution of income in the economy at large. Prior to the Kennedy-Johnson tax cuts, high marginal rates prevented the extraction of economic rent from workers. Any labor cost savings went to the government, so gains in the economy were shared by all. In 1981, the problem got worse and in 1986, higher marginal rates were traded for reduced tax benefits, with corporations taking the hit. The class warfare which began in 1965 was over twenty years later. Labor lost, both organized and otherwise.

Recently, tax rates for corporations and pass-through income were reduced, generally, to capital gains and capital income levels. This is only fair and may or may not be just. The field of battle has narrowed between the parties. The current marginal and capital rates are seeking a center point, as much of the recent tax law was based on negotiations, even as arguments flared publicly. Of course, that would never happen in Washington. Never, ever.

Compromise on rates makes compromise on form possible. If the Pease and Affordable Care Act provisions are repealed, a rate of 26% is a good stopping point for pass-through, corporate, capital gains and capital income. A single rate also makes conversion from self-reporting to automatic collection through an asset value added tax levied at point of sale or distribution possible. This would be both just and fair, although absolute fairness is absolute unfairness, because there would be little room to argue about what is due and when. 

Ending the machinery of self-reporting also puts an end to the Quixotic campaign to enact a wealth tax. Out of fairness, if the revenue committees do give its proponents and opportunity to testify, it must hear from me as well. It would only be fair.

Tax Tools to Help Local Governments

WM Special Revenue Measures, Tax Tools to Help Local Governments, March 11, 2021

There are four options to deal with this issue.

Step one passed yesterday. Thank you. May it be the camel’s nose for #3, just as some fear

The second option is to enact a no-year disaster assistance appropriation with provisions for revenue loss during a long-term event. Disaster supplementals used to be a way to be seen as bringing home the bacon. Of late, they have become a way to grandstand on the debt, which is perverse. Until our politics becomes about governing rather than winning elections, automatic government is sadly necessary.

The third option is tax reform  The Urban Institute’s State and Local Finance Initiative study on How the COVID-19 Pandemic is Transforming State Budgets show that 

Those who did best include states that have progressive income taxes, those that tax groceries, and those that enacted tax rate increases for fiscal year 2020. States with these characteristics saw some growth in overall tax revenues.

 This finding shows that comprehensive tax reform is necessary, especially for states whose systems were inadequate to face the pandemic. This is option 3. Our current proposal is attached. Such reform should, at best, be bipartisan rather than passing under reconciliation.

Reform allows a rebalancing of fiscal responsibilities. The federal child tax credit we propose, plus increases in the minimum wage to at least $12/hour may provide enough family income in most states. Other states would add additional support through a state subtraction VAT.  Comprehensive reform will truly end welfare as we know it by giving families what they need for a decent living.

The state SVAT would fund education, with options for funding private schools either as donors or clients. Espinoza v. Montana has settled the question of whether this is constitutional. Now the question is the political will to enact such tuition support and for private schools to allow teachers to organize. 

It would also fund remedial education, english as a second language (regardless of immigration status), junior college and technical education and pay for all students who have completed sophomore year in high school or, after their cohort has reached that level.

Retail sales taxes, corporate income and most personal income tax filing would be replaced with the SVAT and a border adjustable goods and services credit-invoice tax (which we call IVAT for short). The state-level IVAT would fund public safety and commercial regulation. Property taxes, without the burden of funding education, would fun both building inspections and local public works, with the latter supplemented by tolls, motor fuel and/or carbon value added taxes (also receipt visible). 

States would collect federal SVAT and IVAT, review compliance audits and investigate and prosecute criminal violations.

An asset VAT at the state level would collect taxes on rental income (as would the federal AVAT), with states collecting an additional AVAT on real property transfers with price appreciation. This levy would be collected at closing and forwarded to states. Other AVAT collections would be collected by brokers and submitted to the U.S. Securities and Exchange Commission. 

Any state AVAT collected on financial transactions would be forwarded to the states by the SEC. I would not recommend state enactment of such levies should an international or OECD AVAT rate be negotiated. This type of competition leads to a race to the bottom.

Any state-level debt service and retirement would be satisfied by higher salary surtax. State constitutional amendments to implement these changes would also include permission to incur debt in a federally declared disaster. This debt would be satisfied by any federal disaster assistance and the salary surtax.

Option 4 is to do all of the above. This sounds like the best choice.

Attachment: Tax Reform

Health Profession Opportunity Grants; Past Successes and Future Uses

WM: Worker and Family Support, Health Profession Opportunity Grants; Past Successes and Future Uses, March 10, 2021

These remarks rely on my experience in a wide variety of positions in and out of government. These include:

• Program Analyst in the Office of the City Administrator in Washington, D.C. government in the late 1990s,

• Contracted grants office technical representative with the H-1B Technical Skills Training Grant Program in the early 2000s with the Department of Labor,  

• Proposal coordinator for Graduate School USA in the late 2000s and early 2010s, including submitting Grant Applications for this program,

• Contracted research on the results of welfare reform in the same time period, including reviews of academic literature and government reports, 

• Submitting comments for the record to the Ways and Means Committee on these issues for the past decade (which have been consolidated into book form),

• Exploring options on how to lift workers from the bottom tiers of the workforce to a more cooperative economy.

When President Clinton and Speaker Gingrich ended welfare as we knew it, I had a front row seat in the D.C. government on how Temporary Aid for Needy Families was to be structured.  The race was on to provide adults, usually women, with jobs in the medical and hospitality industries, as well as channeling those who needed it into basic literacy programs. 

The H-1B program expanded its reach from technical skills training to this program, although such training was beyond the scope of the authorizing legislation. This led to the current program, including the site bid for by Graduate School, USA. Budget cuts to meet baseline requirements happened in the interim, leading me into an early retirement after a period of low wage work. These remarks are made without funding.

I am not a fan of this program. It only leads to higher wage work in unions where the Service Employees International Union is open for business. In right to work states, wages are less and working conditions are harder for graduates of these programs.  These are some of the worst jobs there are and the training provided can only take graduates so far up the career ladder. I would be shocked if many, indeed any, program graduates have climbed the career ladder to medical school. A true career ladder would lead there.

This program and those like it channel people into different forms of poverty. Women, in particular, are tracked into what is considered “women’s work.”  While there are more male nurses and physician’s assistants, they are the exception, not the rule. When entrance into medical school requires nurse’s training, plus a period of practice, I will believe that a career ladder exists.

Accidents of birth and deliberately bad urban education leave workers unprepared for an escape from our dirtiest jobs. No job is dirtier than being a nurse’s aide in a hospital. Members of the Subcommittee should try it sometime.

Before people enter these programs, they must first be offered not only remedial education as necessary, but should be paid to pursue it. This should include English as a Second Language and be given regardless of immigration status. The minimum wage should be paid for attendance and homework so that the opportunity costs of the students are met. Students with academic promise should be tracked toward higher education, which should also be paid - both in terms of tuition and salary.

If they are not entirely repealed, an exception to right to work laws must be enacted for this type of work. Dignified work is also well-paid. On top of this, the child tax credit should be expanded and made refundable so that mothers and fathers with children can participate in both literacy and training programs. This should include intact families. Individuals receiving unemployment compensation, or any benefit, should be included in this funding stream. 

The CTC would be paid by government pensions and benefits, educational programs and employers. The CTC would be paid with wages with employers deducting these payments from either an employer-paid subtraction VAT or from current quarterly payments to income and FICA taxes. Tax rates should be high enough to also include either private health benefits, Affordable Care Act benefits and Medicare and Medicaid. A separate credit invoice value-added tax would fund discretionary government (both military and civil) and possibly the employer share of FICA. Please see the attachment further detailing our tax reform proposals.

Attachment – Comprehensive Tax Reform, March 4, 2021

Reauthorizing Trade Adjustment Assistance

WM Trade: Reauthorizing Trade Adjustment Assistance: Opportunities for Equitable Access and Modernization, March 4, 2021

The most important step in this process is making sure unions are strengthened. Without a strong labor movement, the program will wither away and die. They are the key to its success. All members, including leadership, must be up to date on the latest technology. If they are, jobs may not be lost to trade in the first place. 

If a subtraction value added tax is adopted in tax reform, employers would get a credit for providing this training. If not, it should be an offset to their quarterly corporate or estimated tax payment. Please see our updated attachment on tax reform.

When job losses are unavoidable, undergoing training should be compensated at the prior wage and not limited to technical retraining. Some individuals are ready for pursuit of a bachelor’s or master’s degree. If they are, pay for it while also paying them to meet their opportunity costs.

Thank you for the opportunity to address the committee.  We are, of course, available for direct testimony or to answer questions by members and staff. 

Attachment – Tax Reform, March 4, 2021