Economic Excellence through Tax Policy

HBUD: Reigniting American Growth and Prosperity Series: Incentivizing Economic Excellence Through Tax Policy, June 22, 2023

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.

The second attachment, which is an excerpt from my book, Settling (and Squaring) Accounts: Who Owns the National Debt? Who Owes It? This lays out in greater detail why government spending leads to higher GDP and why speculative investment does not, as well as a history of the relationship between deficits/surpluses in one year and growth the second year - including graphs showing these relationships by tax regime.

The answer to long term growth, then, is to shift money to households; to not extend expiring provisions - as any attempt to do so would be vetoed, but rather to increase capital gains taxes to 25% (or 28.8% including Obamacare surtaxes on capital income and gains) as President Biden suggested. This was Senator Sinema's idea, and with the election of an additional Senator in Pennsylvania, Senator Manchin's objections to such an increase are irrelevant.

CBO and the JTC should model this scenario, which is likely once Special Prosecutor Smith pursues charges against those members of the House and Senate who participated in the planning of the insurrection and the operation of the "stop the steal" objection. While the latter cannot be charged criminally, it will likely lead to action by the Ethics Committee and likely expulsion. The 2024 election will most likely resemble the 1974 election, where the party associated with President Nixon was annihilated. (Italics signifies text not included in the 2024 comments.

For this reason, any tax reform must be bipartisan. If you put false bravado aside, there are many things that can be done bipartisanly. If you wait, the Democrats will have their way with tax policy in 2025.

The final attachment is our latest comprehensive tax reform proposal. It replaces 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.

Attachment: Tax and Job Cuts Act (not a typo)

Attachment: Deficit Economics

Attachment: Tax Reform Videos included