Tax Policies for Prosperity for American Families

WM Tax: Tax Policies to Expand Economic Growth and Increase Prosperity for American Families, December 6, 2023

I have been hoping that the Subcommittee would hold hearings on the Fair Tax and other potential tax reforms.  I will review the testimonies of the invited witnesses and then describe my own proposal. I am available  at your convenience to discuss this proposal with members and staff.

Consumption-Based Taxation in an International Setting, Alan J. Auerbach

Professor Auerbach provides a good summary of consumption based taxes, but then describes the Destination Based Cash Flow Tax, which he favors. This proposal leaves the current tax system which forces most households to file income tax - where a shift to an employer paid tax with deductions for family support and a goods and services tax would take the trash out of the tax system. His proposal assumes the continuation of the corporate income tax, both in the United States and abroad. The employer-paid subtraction VAT, adopted by our trading partners, would tax locally to provide services to families while exempting these services from border adjustment - thus ending the incentive to avoid these taxes and the associated benefits. 

In summary, the DBCFT is a small ball solution that keeps the complexity of corporate profits taxes intact - and adds to it.

Addressing the Long-Term Fiscal Imbalance with a Value-Added Tax, Alan Viard

Mr. Viard provides a textbook explanation of Value Added Taxation, but leaves adjustments to the income tax system that everyone must file intact. His assumption that income tax increases are impossible is short sighted, especially as these taxes are about to increase automatically if nothing is done. Indeed, the baseline for calculating income tax revenue must be the permanent rate, not the current rate which is soon to expire. Tax Reform MUST NOT be an excuse to leave income tax rates at their current level.

Adding a value added tax must be part of a more comprehensive solution - including levying income taxes solely on the highest one percent (although the top 20 percent would have subtraction VAT surtaxes paid for them by their employers on wages and dividends - with capital gains taxes being repealed in favor of a different tax). The remaining income tax would range between 6.5% and 26% - which is also the range for the VAT Surtax. As discussed below, the remaining personal income tax would go toward paying interest on the national debt and paying down a portion of the principal.

Americans for Tax Reform, Grover Norquist

Mr. Norquist is opposed to any revenue measure, despite the fact that when taxes are more progressive, the economy improves. This is shown by historic data included in our May comments to the House Budget Committee which demonstrated that when progressive income taxes are reduced, deficit spending must occur to avoid or recover from a recession (or worse). The reduction in growth that occurred before the Pandemic was one point lower than before the Tax and Job Cuts Act (not a typo) was enacted - this includes a one-year lag for investors to pocket their tax cuts and invest in the latest investment scam, such as crypto currency and single family home rental mortgage backed securities - while household consumption (and income) similarly declines.

Revenue is at historic lows as a percentage of Gross Domestic Product. Letting the TCJA expire as scheduled will be healthy for the economy, for households and does not violate the precedent that letting tax cuts expire does not trigger Mr. Norquist’s pledge, which was set in 2013.  Member conformity to Mr. Norquist’s will is no longer the standard for most far-right Republicans. It is now supporting former President Trump and excusing or minimizing the events of January 6, 2021 (which will have no impact on future criminal proceeding for Mr. Trump or any who assisted in the planning of that day’s events).

I propose actual tax reform - reform that simplifies the tax system while distributing burden equitably.

Americans for Fair Taxation, Stephen L. Hayes

Mr. Hayes begins his testimony claiming he is not a tax economist. Given the impact of his proposal on low income households and the boon his proposal is to high income households, I agree with his assessment. The idea of a national consumption tax is meritorious, as long as it is not a single tax. 

Unless he includes gambling at the Wall Street Casino as a consumable good covered under the Fair Tax, while retaining some kind of surtax for very high income individuals (one as part of the Fair Tax that employers remit - as Lawrence B. Lindsey suggested - and the second as residual high income tax that can be remitted early as a tax prepayment bond, thus reducing interest on the debt), his suggestion is profoundly unfair.

The Fair Tax proposal includes incentives for tax avoidance that a value added tax removes. There are already tax breaks for individuals and firms who collect income taxes - as such taxes are a deduction. With a VAT, such taxes are a CREDIT that is fully refundable. If I were selling a product, I would much rather have the full credit and not have to look over my shoulder for auditors looking to see if I am misusing the exclusion of wholesale goods.

The Fair Tax replaces income distributed to families through the child tax credit with a prebate that only covers the Fair Tax - a substantial income loss that would either force more people into very low wage jobs - those akin to slavery - or force the government to restore Aid for Families with Dependent Children (welfare) and Food Stamps to levels higher than when President Clinton reformed welfare as we knew it.

The subtraction VAT we propose takes the government out of redistribution almost entirely - save for payments of child tax credits to families receiving disability or unemployment benefits - with employers receiving tax benefits to provide adequate, family size sensitive, wages instead. Such a proposal would both benefit families, make work pay (along with increases to the minimum wage) and increase economic growth and household savings.

The final flaw in Mr. Hayes’ proposal is that it always comes around when income tax rates cuts are scheduled to expire. A single tax proposal which assumes the permanent baseline could not pass. The rate would be too high. America can do better - and it would be fairer.

The Tax Policy Center, Len Burman

Professor Burman addresses wage stagnation and the prospect that technological advancement may make it worse. He would use a universal earned income tax credit to remedy this. My answer to this is increasing the minimum wage. The UEITC would solidify the two-tiered economy. 

The other factor which has led to economic inequality is bad math. By bad math, I mean the rewarding of cost of living adjustments (which are an unearned benefit) on a percentage basis, rather than an equal dollar basis. Because prices follow the 90th percentile (with one half of total adjusted growth income under that point, with the other half above - counting dollars, not people), most families do worse each year. Only product improvement and social programs, such as the Child Tax Credit, allow most families to avoid starvation. Whether this effect is  accidental or intentional is a matter for more systematic study.

From here on in, adjust for cost of living on a per dollar an hour rather than on a percentage basis (or dollars per month or week for federal beneficiaries). Calculate the dollar amount based on inflation at the median income level. No one gets more dollars an hour raise, no one gets less dollars per hour in increases. Increase the minimum wage as above and consider decreasing high end salaries paid to government employees and contractors. Even without decreases, simply equalizing raises will soon reduce inequality. 

Burman echoes the proposal to restore the child tax cut to pandemic era level. I would double that, but take the IRS out of the income distribution business - as previously discussed. He and I agree on the Fair Tax - although I would use the term Fair Tax for a VAT as part of a multi-tax reform. Doing so extracts money spent by heirs and plutocrats who borrow from their fortunes to buy companies and luxuries. If they buy companies or take them public, they would pay an asset value added tax (see below).  Our proposals would end tax shelters. Tax expenditures for health care, family incomes, daycare and the eventual shift to employee-ownership to replace much of the employer contribution to FICA are not shelters, they are basic reforms.

The Center for Fiscal Equity Solution

A single tax will never provide enough revenue while being politically acceptable. We propose a series of taxes, which are detailed in the appendix, which will still prove easier to collect and administer than the current income tax system.

The tax gap leaves revenue on the table. Neither a wealth tax, nor the President’s proposal to tax capital gains at death should pass. Indeed, a wealth tax simply multiplies the problems of capital gains taxation.  It is time for the nation to shift away from taxing short term capital gains taxes at nominal rates and preferred rates for long term gains...

Excellence will come from sound tax policy, especially if the nation shifts away from taxing short term capital gains taxes at nominal rates and preferred rates for long term gains. Instead, set one rate for all transactions and shift from end of the year reconciliation to an asset value added tax for each transaction. 

At initial public offering, option exercise and the first sale after inheritance, gift or donation, the sale would logically be marked to market. If a family keeps the stock or company, there will be no tax until someone else buys it. The second tax cut would be to expand the ESOP tax exemption to all sales of public stock, rather than just private stock. Maximizing employee-ownership will bring a new level of motivation and excellence to the economy.

The 2017 personal income tax changes should not be made permanent or extended, as has been proposed. This will reward savings and speculation, rather than providing an incentive to invest in plant and equipment. The latter responds to greater levels of consumption by households funded by both the public and private sectors, including Social Security recipients. For a more detailed treatment of why this is the case, see the first attachment - which was drafted in 2017 in opposition to the Trump-Ryan-Brady tax cuts.

Our latest comprehensive tax reform proposal is in the attachment. We propose replacing the complexity of the Earned Income Tax Credit with a floor on FICA contributions by employees and a lower ceiling to reduce the amount of funding for high income households. The employer contribution would be shifted from employers to consumers (but not exporters) to the Fair Tax - which would also fund domestic discretionary spending and domestic military basing and operations.

This should be operated like a Value Added Tax - in other words, the deduction of sales taxes paid would be replaced with a tax credit for such payments. This change should be made, even without enactment of the Fair Tax. To not do so is to force companies to pay tax on tax - something that the uninitiated thing the VAT does, but in reality, this is what happens in the current tax system due to its extreme complexity.

Rather than providing for a prebate and shifting the more generous portions of the child tax credit (which is the most anti-abortion provision in law) to direct subsidy, expand the child tax credit and distribute it with Unemployment Insurance, Social Security old age, survivors and disability insurance and wages (including stipends paid for those in educational and work experience programs to raise them out of poverty). 

The child tax credit would be an offset to a subtraction value added tax, as well as a credit for providing employee health insurance. This will replace all Obamacare subsidies and the health insurance exclusion to corporate income taxes. Corporate income taxes would be abolished. The base level of the subtraction VAT should be a wash - with taxes fully offset by credits for the average business above 50 employees. Some firms would even get a rebate if their credits are greater than their tax obligations.

Personal income tax filing on wage and dividend income for middle income households will be replaced with a subtraction value added tax surtax for income above the ceiling for FICA employee contributions, which will be graduated from a 6.5% rate to a 26% rate for income over $425,000. 

At $500,000, an individual surtax ranging between 6.5% and 26% would fund net interest payments, debt reduction and paying down the Social Security Trust Fund. For this reason, these payments will be made to the Bureau of the Public Debt. The Asset VAT will be collected by the SEC. The subtraction VAT, any carbon added tax and the Fair Tax will be collected by the states (who will also do any auditing on tax collection issues). What would happen to the IRS? Abolition.

Thank you for the opportunity to address the committee.  Please contact us for an in person briefing or to arrange for a public hearing. Remember, given the involvement of members in the sad events of January 6th, there should be no delay in shifting from grandstanding to seeking actual compromise. The alternative is a 28.8% capital gains tax rate and a matching corporate income tax rate (rather than the abolition of both taxes, as suggested in our comments).

Attachment: Tax Reform Videos included