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 One – The Tax and Job Cuts Act
The Tax and Job Cuts Act (not a typo) was a classic piece of Austrian Economics, where booms are encouraged and busts happen with no bailouts. Strong companies and best workers keep jobs and devil take the hindmost. It is economic Darwinism at its most obvious, but there is a safety valve. When tax cuts pass, Congress loses all fiscal discipline, the Budget Control Act baseline discipline is (as it should be) suspended and deficits grow. Bond purchasers pick up the slack caused by the TCJA, which they will as long as we run trade deficits, unless the President’s economic naiveté ruins that for us.
Modern economics has become infected with the idea that higher tax rates and lower public spending hurt the economy. By definition, this is not the case. The exact opposite is true. To refresh our memories of what is in the U.S. Code and most basic economics textbooks, Gross Domestic Product equals equal government purchases, consumption from government employee, contractor, transfer recipient and second order private sector spending, which leads to private sector investment, and exports net of imports (which creates a source of funds for debt finance).
Anything that is not part of GDP is considered “savings” or in reality, is asset inflation. If you want to end poverty, give poor people and retirees more money and the economy will grow. Increase government expenditure (even bombers) and the economy will grow, including for the now notorious upper middle class.
Lower tax rates also made money available to chase the same supply of investment instruments, which bid up their price, and caused the invention of a whole range of new products which would be built up and sold by the emerging financial class, who would profit-take and watch what they created go bust and start yet another modern recession, especially the Great Recession just experienced. Only higher tax rates or increased deficit spending control such asset inflation (and the consumption cycles associated with them – which Marx thought was the driver of the boom bust cycle – Marx had a failure of imagination).
A key part of our proposals is to increase income tax revenue from the very wealthy through our income surtax. The higher the marginal tax rate goes, the less likely shareholders and CEOs will go after worker wages in the guise of productivity while pocketing the gains for themselves. Since shareholders usually receive a normal profit through dividends, it is the CEO class that gets rich off of workers unless tax rates are high enough to dissuade them.
Attachment Two: Settling (and Squaring) Accounts: Who Owns the National Debt? Who Owes It?
Deficit Economics
To start with the obvious, the impact of the debt on the economy comes from fiscal policy (taxing and spending). The size of the national debt and the federal budget began to balloon with the passage of the Sixteenth Amendment authorizing the taxation of income. Prior to this amendment, the direct taxation provisions in the United States Constitution, which apportion direct tax liability between the several states based on population enumeration, were never used because they would fall more heavily on poorer states and less heavily on richer states. With the exception of the funding for the Civil War, which was funded by an income tax, revenue was raised from excise taxes and tariffs and the government remained small.
The need for spending increased with World War I and became entrenched after World War II. Modern budgetary economics dates from that era. Boom and bust cycles could now be explained by what we call welfare economics. We can now measure economic growth (changes in Gross Domestic Product) and see how we are doing before catastrophe strikes.
Gross Domestic Product (GDP) is determined in theory and economic policy by the following equation. GDP=Government Purchases + Household Consumption + Investment in Plant and Equipment + Net Exports – Imports. Investment is not mean happens on Wall Street or the Commodities Markets. These deals are done with monopoly money and affect the mix of savings. Sadly, many economists and journalists conflate the two.
The yeast in every economy is when the government buys things, pays people and transfers money to the poor and retired. This leads to household spending, leading to household spending in the non-government sector as well. All of this causes investment in plant and equipment – regardless of how it is funded.
Government's impact comes in more than just buying stuff. It is a major contributor to household consumption through other 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.
Government 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 of this spending goes round and round. The double and triple counting is what is known as the multiplier effect.
Government spending is stable over time, which is why it is so hard to cut the budget by following this path. Most of the volatility is in tax policy. When taxes are increased, the budget deficit goes down. When they are cut, the budget deficit increases.
The deficit or surplus is a barometer of whether we are about to grow or shrink the economy. In the financial markets, when the deficit is equal to what we spend on net interest, injections and leakages from fiscal policy balance out. When they are not equal, we can tell how the economy is likely to go. If fiscal policy is extracting money from the savings sector, the deficit goes down AND more government spending and household spending results, making GDP higher. If fiscal policy is shifting money from consumption to savings through tax policy, the economy slows unless offset with more spending or higher transfer payments.
Predicting Growth
… The real revolution happened under Reagan, however, in a three round tax cut and subsequent comprehensive tax reform. The latter changed the basic structure of tax rates in a way that has seen adjustments, but no revolutionary change, since then. For this reason, we will demonstrate how taxing and spending interact from that point. The Reagan expansion was not due to tax cuts. It was due to high deficits that resulted from deficit spending. As this chart clearly shows, The larger the deficit, the more economic growth the next year.
After the 1990 budget deal, which reduced tax rates on the upper middle class (33%) and increased rates on the upper class (28%) to a flat 31% rate. Capital and labor rates were the same and as effective payroll tax rates decreased, the income tax rate kicked in, yielding a 30% flat tax for most taxpayers. That increase on top taxpayers shifted more savings toward consumption.
When Democrats control fiscal policy, taxes on the wealthy go up. This not only fuels the economy with increased spending, but it extracts money from savings for consumption directly, rather than through bond markets (at interest). Because spending is mostly stable (most increases are simply catch up spending), a GDP growth rate of around 3% results.
President Clinton raised taxes to 36% with a 10% surtax (3.6%), further increasing growth. The resulting expansion continued until the tech boom and bust, which was triggered by a lowering of the capital gains tax rates. This made taxes lower for investing in or starting an IPO than working.
The way to increase growth beyond average is to increase federal and contractor wages and transfer. payments, especially the latter. The recipients spend most of the money. Eliminating welfare as we know it under President Clinton helped balance the budget, but cutting capital gains taxes created the tech bubble and the resulting recession. Lower transfer payments made the recovery that much harder.
When President Bush 43 took office, tax cuts were already in the agenda. There were concerns that a balanced budget would create a shortage of federal debt to back monopoly money for the rich. The tech bust provided additional justification for tax cuts. This repeated the Reagan economy, where deficit spending was required to keep up with the tendency to shift profits from consumption and offset two rounds of tax cuts. Lower capital gains rates fueled an investment bubble. Slower consumption and income growth caused the Federal Reserve to cut interest rates and fuel an asset bubble. This gave us the Great Recession.
In reaction to the Great Recession, President Obama increased spending. Had he let the Bush Tax cuts expire on schedule, the recovery would have been more vigorous due to less saving, more consumption and higher incomes. Insisting that the Federal Reserve mark mortgage debt to market would have been more effective.
The Budget Control Act of 2011 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. This likely added almost a point to GDP growth.
The ATRA of 2012 (passed January 2, 2013) increased tax rates on what is now the top $1.225 trillion of salary, leaving increases on those who now pay over $6 trillion on the table. Over the last six years, that left $600 billion dollars of revenue on the table. Making the upper middle class pay at Clinton rates would have let us tax enough to avoid that amount of spending cuts – or allowed less stringent collection of student loans. Without publicly financed elections, the upper middle class is more influential in some ways than the top 1433 families.
After the 2013 uptick in growth, spending increases for the Great Recession expired and were not renewed. The economy flattened in 2015, probably in response to budget cuts the prior year, slowing to an average 2% growth rate. Higher taxes would have meant more spending and less accommodation of speculation by the Federal Reserve would have kept more money out of the make-believe world of Wall Street.
President Trump’s focus on the wealthy and the bad tax cut bill started to make matters worse. The first data point after the Tax Cut and Jobs Act is a full point of GDP below his first year in office (which was due to Obama’s tax policy (and therefore, his economy). After that, the COVID recession and recovery are outliers, because it was a designed recession, not one that was the result of fiscal policy.
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