Chairman Baucus and Ranking Member Hatch, thank you for the opportunity to address this topic. As always, our remarks will be in the context of our proposals for tax and welfare reform.
As the invited witnesses amply noted, recent decades have seen marked increases in inequality. We have noticed that most productivity gains have gone not to the more productive workers, but to business owners and managers who extracted these gains, sometimes through closing American factories. Fiscal policy has aided these developments by lowering tax rates on dividends and capital gains, thus providing incentives to trim labor costs.
The Center for Fiscal Equity believes that lower dividend, capital gains and marginal income taxes for the wealthy actually destroys more jobs than they create. This occurs for a very simple reason – management and owners who receive lower tax rates have more an incentive to extract productivity gains from the work force through benefit cuts, lower wages, sending jobs offshore or automating work. As taxes on management and owners go down, the marginal incentives for cost cutting go up. As taxes go up, the marginal benefit for such savings go down. It is no accident that the middle class began losing ground when taxes were cut during the Reagan and recent Bush Administrations, both of which saw huge tax cuts. Keeping these taxes low is also part of why we are experiencing a jobless recovery now.
As long as management and ownership benefit personally from cutting jobs, they will continue to do so. Tax reform must reverse these perverse incentives.
In order to preserve vertical equity in a given tax year in a consumption tax environment, some form of progressive income and inheritance taxation is essential, otherwise the debt crisis cannot be avoided as consumption taxes will never be adequate to replace the lost revenue.
The Center suggests retaining surtaxes on high income earners and heirs. These would replace the Inheritance or Death Tax by instead taxing only cash or in-kind distributions from inheritances but not asset transfers, with distributions remaining tax free they are the result of a sale to a qualified Employee Stock Ownership Plan.
In testimony before the Senate Budget Committee, Lawrence B. Lindsey explored the possibility of including high income taxation as a component of a Net Business Receipts Tax. The tax form could have a line on it to report income to highly paid employees and investors and pay surtaxes on that income.
The Center considered and rejected a similar option in a plan submitted to President Bush’s Tax Reform Task Force, largely because you could not guarantee that the right people pay taxes. If only large dividend payments are reported, then diversified investment income might be under-taxed, as would employment income from individuals with high investment income. Under collection could, of course, be overcome by forcing high income individuals to disclose their income to their employers and investment sources – however this may make some inheritors unemployable if the employer is in charge of paying a higher tax rate. For the sake of privacy, it is preferable to leave filing responsibilities with high income individuals.
Identifying deficit reduction with income and inheritance surtaxes recognizes that attempting to reduce the debt through either higher taxes on or lower benefits to lower income individuals will have a contracting effect on consumer spending, but no such effect when progressive income taxes are used. Indeed, if progressive income taxes lead to debt reduction and lower interest costs, economic growth will occur as a consequence.
Using this tax to fund deficit reduction explicitly shows which economic strata owe the national debt. Only income taxes have the ability to back the national debt with any efficiency. Payroll taxes are designed to create obligation rather than being useful for discharging them. Other taxes are transaction based or obligations to fictitious individuals. Only the personal income tax burden is potentially allocable and only taxes on dividends, capital gains and inheritance are unavoidable in the long run because the income is unavoidable, unlike income from wages.
Even without progressive rate structures, using an income tax to pay the national debt firmly shows that attempts to cut income taxes on the wealthiest taxpayers do not burden the next generation at large. Instead, they burden only those children who will have the ability to pay high income taxes. In an increasingly stratified society, this means that those who demand tax cuts for the wealthy are burdening the children of the top 20% of earners, as well as their children, with the obligation to repay these cuts. That realization should have a healthy impact on the debate on raising income taxes.
A second tax impact on inequality is declining value of the child tax deduction and the various tax credits to support low wage earners, families with children and children in daycare, as well as the need by most taxpayers to utilize professional tax preparers to utilize these credits, often with the inducement to get a refund anticipation loan at higher interest than they can afford, except for the fact that many consider this to be found money rather than an earned entitlement.
While the child tax exemption is now indexed to inflation, this has not always been the case, with the value of this deduction, when adjusted for inflation, now worth way below its buying power in the days of large baby boom families. The dependent tax credit does not fully fund the cost of daycare, forcing many to rely on subsidies. While the Child Tax Credit was temporarily doubled in 2001, it has not been adjusted for inflation since and is due to expire at the end of this year. These tax benefits have been inadequate to both guarantee some basic level of equality for families, have certainly not made up for declining social welfare subsidies to needy families (Temporary Aid to Need Families (TANF) and Supplemental Nutrition Assistance (SNAP)) and have not helped counteract the aging of society.
In the long term, the explosion of the public debt comes from the aging of society and the funding of their health care costs. Some thought should be given to ways to reverse a demographic imbalance that produces too few children while life expectancy of the elderly increases.
Unassisted labor markets work against population growth. Given a choice between hiring parents with children and recent college graduates, the smart decision will always be to hire the new graduates, as they will demand less money – especially in the technology area where recent training is often valued over experience.
Separating out pay for families allows society to reverse that trend, with a significant driver to that separation being a more generous tax credit for children. Such a credit could be “paid for” by ending the Mortgage Interest Deduction (MID) without hurting the housing sector, as housing is the biggest area of cost growth when children are added. While lobbyists for lenders and realtors would prefer gridlock on reducing the MID, if forced to chose between transferring this deduction to families and using it for deficit reduction (as both Bowles-Simpson and Rivlin-Domenici suggest), we suspect that they would chose the former over the latter if forced to make a choice. The religious community could also see such a development as a “pro-life” vote, especially among religious liberals.
Enactment of such a credit meets both our nation’s short term needs for consumer liquidity and our long term need for population growth. Adding this issue to the pro-life agenda, at least in some quarters, makes this proposal a win for everyone.
Administration of an expanded child tax credit is an important issue as well. If administered within the context of personal income taxes, filers will continue to need the services of professional (and sometimes very-unprofessional) tax preparation services, which are often tied to predatory refund anticipation schemes because such credits are often seen as found money.
It would be preferable to instead tie this credit to an employer-based Net Business Receipts Tax (NBRT). Such a tax would be similar to a Value Added Tax (VAT), but would not appear on the customer receipt because it would have offsets for both the child credit and employer-provided health insurance (or direct services) for employees and possibly for retirees as well. As importantly, attaching this tax to the employer provides an incentive to adjust base pay downward for non-parents and parents whose children have left the nest – providing an incentive to have children for younger workers and providing an incentive to keep older workers on board, rather than replacing them with younger workers.
A separate VAT would also be established to fund discretionary spending occurring in the United States (both military and civil). This tax would make everyone conscious of supporting the operation of government and provide a direct incentive to save costs, because it could be made visible on the receipt at every level, including retail.
Both the NBRT and VAT would, as consumption taxes, burden both labor costs and profit. Enactment of both taxes would allow repeal of separate corporate income taxation, business income tax collection under personal income taxes, the hospital insurance and disability insurance payroll taxes and low rate personal income taxes on everyone, including higher income individuals.
In other OECD countries, all of whom have consumption taxes, capital gains taxes can be lower, since a portion of the taxation of capital already occurs as part of the VAT. The logic to enact lower capital gains and dividend taxes outside of a consumption tax environment is not as strong. These countries also have subsidies for families, however they don’t have wage penalties for not having families, as we have suggested above – which is why their populations continue to decline.
The end of welfare in the 1990s has also increased inequality. While some have been undoubtedly helped leave welfare dependency, a great many clients left the rolls, not because they did not need support but because they were not good candidates for work. SNAP benefits were also reduced so that people could not game the system, which has forced those who were not attempting to do so into a worse condition when they needed help the most than if no changes had been made in the program.
The work opportunities available to most TANF participants can easily be described as low wage work and, without significant resources in human development, are likely dead-end jobs. Such jobs often receive tax subsidies, such as the Earned Income Tax Credit and the recently expired Making Work Pay tax credit. One must look askance at any programs which transfer the responsibility for providing adequate wages from the employer and the consumer to the taxpayer.
The recently expired Making Work Pay tax credit subsidized low wage labor where the preferred option would be a higher minimum wage, forcing employers and ultimately consumers to pay for the services they receive. Minimum wage laws are necessary because they level the playing field so that employers cannot initiate a “race to the bottom” by allowing workers to compete against each other to offer ever lower wages, often leaving families in the impossible position of having to bid well below what would otherwise be a reasonable standard of living in order to survive.
Increases to minimum wages and benefits, such as mandatory sick leave are, by far, the best incentive to get people to work. Mandatory sick leave would also help the prospects of health care reform, as parents would no longer be forced to resort to emergency room care because the doctor’s office is closed during working hours, thus decreasing costs for all.
One major obstacle in getting TANF recipients into the working world is the quality of skills they bring to the table. Indeed, a recent survey of the vocabulary of TANF recipients in public housing puts it below the level of the average seven year old. Not seventh grader, seven year old.
State based efforts to move TANF participants to a level of basic – or even advanced literacy – should be applauded. Indeed, provisions to not only provide remedial education to all who require it should be a mandatory part of TANF reform, not just in states that chose to.
Literacy training must also be provided to fathers if required. Indeed, to facilitate this, the restriction on benefits to intact families must be abolished. Furthermore, compensation for this training should be as rewarding as work, so participation should be compensated at the minimum wage.
In addition to the wage, participants should also receive the same Child Tax Credit as those who work, as well as the same level of health insurance, which could be offered to them as if they were employees of the education provider – thus ending the second class care they receive through the Medicaid program, as well as the need to pay benefits through large, yet underfunded, social welfare bureaucracies at the state level. Public housing should be replaced with residential training programs for both parents and children.
Program participants must be treated as adults. If they are, they can be expected to behave as such. All too often, the fiscal, welfare and immigration policy of the United States seems designed to provide a pool of low wage workers for the food service industry – from the field to the fast food counter. While these jobs may provide some degree of upward mobility, at times they are akin to slavery.
In the 21st Century, we can do better than that. If some products cannot be produced without what amounts to subsistence wages, than perhaps those products should not be produced at all, either at home or abroad. It should not, indeed it must not, be the policy of the United States Government to shield consumers from paying decent wages to those who feed us.
Establishing a decent level of income through paid remedial training, increased minimum wages and increased family support through an enhanced refundable child tax credit will also reduce the need for poor families to resort to abortion services in the event of an unplanned pregnancy.
Indeed, if state governments were to follow suit in increasing child tax benefits as part of coordinated tax reform, most family planning activities would be to increase, rather than prevent, pregnancy. It is my hope that this fact is not lost on the Pro-Life Community, who should score support for this plan as an essential vote in maintaining a perfect pro-life voter rating.
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.
- Alexandria, Virginia, USA
- November 25
- Author of Musings from the Christian Left, Director of the Iowa Center for Fiscal Equity
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