HBUD: SOUNDING THE ALARM: Examining the Need for a Fiscal Commission, October 19, 2023
Job one for any fiscal commission is to allow the Tax Cuts and Jobs Act provisions to expire in 2025. No other baseline is appropriate. Without such a requirement, the Center for Fiscal Equity must oppose any such entity. Fiscal commissions are often an excuse to retain tax cuts that are about to expire.
The 2017 personal income tax cuts reward savings and speculation, rather than providing an incentive to invest in plant & 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.
Please see the second attachment for our analysis of the national debt.
The reality of our fiscal policy is that income tax collected is 1.5% of GDP too low. In other words, they need to be increased by 9%, or more because of how long they have been inadequate. Because the ability to borrow is based on the ability and willingness to tax incomes adequately, AA+ is a gift from ratings agencies. Any other entity with this revenue to debt ratio with an unwillingness to increase revenue would be rated at junk bond levels.
Oddly, the downgrade is good for bond holders because interest rates will go up. The vast majority of bonds held benefit high income taxpayers. By my calculations, based on observations from the 2019 Survey on Consumer Finance, the top 10% of households own 54% of public debt held by long term asset accounts (insurance policies, savings bonds, retirement accounts) and bank deposits (and therefore assets held by Federal Reserve Banks) and 77% of debt held by mutual fund accounts and direct bond holdings. Applying the same share ratios to the top 1% (which is supported by IRS AGI figures show holdings of 29% of long term debt and Fed held assets and 59% of high yield assets. The top 0.1% hold 45.6% of debt held by high yield assets.
Debt obligation is a function of income tax paid (FICA tax paid to create assets held in trust by the government, not debt obligation). The current factor is 19 dollars of debt owed for every dollar paid in tax.
Ownership of Social Security assets is realized when households are in the bottom quintiles who, at that time (because only 20% have income beside Social Security), own almost all FICA trust fund assets. The bottom quintiles hold more than their obligation.
The next three quintiles owe more than they own until we get to the top 0.1%. Because half of their income is earned through asset ownership taxed at preferred rates and their high share of ownership of debt, they break even. They own what they owe.
In other words, when interest rates go up due to downgrades, their wealth expands in terms of debt owned compared to debt owed. This should guide how the debt should be reduced responsibly.
As you may recall, the Center for Fiscal Equity has a tax reform plan, which is in the final attachment, that does the following:
- Takes 99% of families off the tax roles
- Repeals welfare, Food Stamps, and the EITC and stops using the IRS as paymaster for families with children
- Saves Social Security
- Rationalizes healthcare coverage
- Stops CEOs and Wall Street from evading taxes through fancy shelters
- Simplifies tax filing for small businesses
- Removes incentives to treat employees as contractors
- Repeals Corporate Income and Death Taxes and all the related tax breaks
- Closes the tax gap
- Protects family businesses and farms
- Repeals capital gains taxes
- Creates an ownership society
The Office of Tax Policy and revenue committee staff will hammer out the details as responsible actors. Again, no commission is necessary for the kind of tax reform we need to grow out of our fiscal crisis.
