The Tax Reform and Economic Policy Papers of Tom Pallow

Posted below this post are 20 different papers that were written primarily for the top tax counsels and staff on Capitol Hill, primarily in the Senate and on the House Ways and Means Committee.

In August 2010 Tom’s work was discovered and quickly became required reading for the top tax counsels in the Senate for taxes affecting businesses, at the request of then Committee on Finance Chair, Senator Baucus. It is regularly known that Tom’s papers also became regular reading among most top tax experts, particularly on the Finance and Ways and Means committees, and particularly with Democrats.

All of the below paper’s have at least to some degree influenced public policy and discussions in Washington DC, The most important, and crucial first step, tax reform idea of Tom’s, the Employer Tax Carve Out, became an important bipartisan bill in the U.S. Senate in fall 2010. The ETCO has been called “the linchpin” to any tax reform and budget deal by it’s influential cosponsors, Republican Senator Susan Collins of Maine and Democratic Senator Claire McCaskill of Missouri.

An ETCO, with the personal income tax, is simply a shift of the personal income tax burden, off of domestic employers and onto the wealthy who do not employ domestically. This tax carve out for active American employers is achieved through a tax credit for domestic employees, that are W2’d where all FICA taxes are paid, that are worth just less than the employer’s side of employee FICA taxes paid, So a financial gain will not incur simply by employing domestically, only a tax credit and tax carve out against one’s personal income tax bill. With this carve out a much more efficient personal income tax system is created.

Since the vast majority of personal income taxes are paid by the wealthy, and since active domestic employers account for a very small percentage of all income within even the wealthiest income strata, for example within the top 2% of U.S. incomes only 14% of all income is generated from active U.S. employers, yet these domestic job creators are among the fastest growing in the U.S., generating typically around 50% to as much as 80% of all domestic private sector jobs, meanwhile the wealthy non-employers in the U.S., those for example who generate the 86% of income within all of the top 2% of US incomes that are not generated via US employing businesses, they have some of the highest savings rates in the entire economy, about 40% and in savings vehicles that are least often invested tangibly in the U.S., so therefore, this shift in the personal income tax burden, off of domestic employers and onto wealthy non-employers in the US, will create a much more efficient personal income tax system while raising tax revenues without raising overall taxes, by freeing up capital for America’s fastest growing domestic job creators, increasing taxes in the place of the economy where it is least spent tangibly in the U.S., and creating a tax incentive for wealthy non-employers to employ in the U.S., and further, the greater the difference in effective tax rate between the domestic employing and those who do not, the more tax revenues will be generated and the greater will exist an incentive to employ domestically, thus increasing domestic labor compensation!

The truth is that the Employer Tax Carve Out is likely to become law over the next 2.5 years, given that most members of congress are committed to bringing forward some kind of business tax reform, at least right after the 2016 election, and that the ETCO is an essential part of Capitol Hill’s leading business tax reform plan. This leading plan being: To make our C Corporation income tax code more efficient and globally competitive by eliminating or reducing certain tax deductions that are taken mainly by many of America’s largest corporations, in exchange for lowering overall C Corp income tax rates. This shift in the tax burden would be more apt to benefit smaller, and faster growing in the U.S., C Corporations. Thus creating an economic efficiency benefiting domestic growth. Yet this leading business tax reform plan also calls for a similar elimination, or reduction, of certain tax deductions for a reduction of overall income tax rates for pass-through businesses that are taxed as personal income. But if an Employer Tax Carve Out were not also enacted with this reduction of tax rates for pass-through businesses, every American taxpayer, domestic employer or not, could simply claim to be a small business pass-through and receive a lower income tax rate. But with an ETCO, a much more efficient personal income tax system is created!

All of the papers below have influenced policy and debate in Washington DC. The latest post describes the above leading business tax reform plan and the ETCO’s role with this plan, among other things. A great paper for learning the bassics of Tom Pallow’s tax reform and other economic policy work is the paper, “Wrestling and Bouncing Crude Keynesianism Out of Washington DC for Good.” The best paper for details of how ETCOs work, and very importantly, how ETCOs, and Employer Tax Credits that create ETCOs, can be used in nearly all areas of tax codes in ways that will create more employment domestically and in higher compensating manors, read, “Our Tax Reform Submission Paper to The Senate Committee on Finance.” You can also watch Senator Collins discuss the ETCO on Larry Kudlow’s CNBC TV show if you YouTube search, “Senator Collins and Larry Kudlow, Protecting small businesses, job creators from the Fiscal Cliff.”

ETCOs and Estate Taxes, a Great Tax Compromise for 2015, and Our 2015 Submission to the Senate Committee on Finance

The April 15, 2015 Tax Reform Submission Paper to
The Senate Committee on Finance of Tom Pallow and
Third Way Progressives

By Tom Pallow of Third Way Progressives and The Economic of Quality

What is immediately below was not in my paper, “Our Tax Reform Submission Paper to the Senate Committee on Finance,” that I submitted to the Committee on Finance in August of 2013. What follows the new material will be. The new material is a short explanation of the few ways in which Employer Tax Carve Out (ETCO) tax regimes can assist in making estate tax systems more fair and efficient, this because estate taxes are the one area I have yet to discuss in any of my past papers. The new material also explains how a few of the primary features of the recent Rubio-Lee tax plan will make a fantastic foundation for building an Employer Tax Carve Out tax regime that will greatly modernize our outdated business tax system, fashioning it in the most effective and efficient ways to the reality of the repetitively new global economy of the 21st century.

An indirect and positive effect of an ETCO tax regime on federal or state estate tax systems concerns satisfying the desire that overwhelmingly exists across all regions and the political spectrum to preserve family farms, open spaces and other working or business operations that support property of social, cultural or historic significance. We know our estate tax policies have failed when properties are forced to be sold, altered or divided, simply to cover estate tax bills. At the same time, our estate tax system should raise revenues while facilitating the American tradition of all capable adults being productive, including the descendants of the ultra wealthy.

ETCO tax regimes would assist in achieving these goals by more regularizing and enforcing the IRS’s effort to distinguish between Passive and Active income. Of course one of the requirements for being eligible for an ETCO is that income is derived from the Active ownership of a business. This same distinction can work as a seminal distinction within our estate tax systems, with inherited businesses that are still Actively owed and operated within an estate being sparred a tax bill that would destroy or even weaken the viability of that business.

A second and more direct way in which ETCOs could assist our estate tax and overall tax system would be to allow domestic employers to use some or all of their unused Employee Tax Credits, that are exercised to create ETCOs, against any future estate tax bill that their heirs might incur. Since personal income Employee Tax Credits can only be exercised down to the point of the lower ETCO tax rate for US employers, allowing US employers to be able to exercise unused ETCs against an estates latter tax bill would further incentivize even an entire family business to work together to find ways to employ domestically.

Now onto the fantastic opportunity that some of the primary features of the new Rubio-Lee tax plan have given us!

The plans most important feature, that of eliminating the ability of businesses being able to deduct interest payments on the debt they incur in exchange for allowing businesses to be able to expense all of their capital business investments all in one year, this is in reality a great “pro-growth” trade off. However, both personal income and investment income ETCOs would greatly improve this trade off in several ways, and I will get to that. But there is no doubt that, if such a trade off were made, enough businesses would find ways, and especially with an investment income ETCO, to adjust due to what is essentially an increase in borrowing costs, and the ability of business to expense immediately, this frees up more capital to expand when the expansion does look great for the business “owners” who will know best when to expand. Here to, the word “expand” in the last sentence would mean much greater domestic labor market demand with a personal income ETCO tax regime. But nonetheless, the above Rubio-Lee trade off, even without ETCOs, is a brilliant pro-growth idea that will indeed generate enough new and sustained economic growth to generate increased tax revenues. These new revenues will not be enough to pay for all of the tax cuts and increases in tax credits that Senators Rubio and Lee’s plan propose, but they will be able to pay for a few great gifts for the American people that will assist them in creating even more tax revenues, wage growth, and prosperity!

One of the proposals to spend some of these new tax revenues on that are proposed in the Rubio-Lee plan is to lower the top tax rate for C Corporations to 25% and pass-throughs to 25%. These tax cuts would generate enough new domestic economic growth to increase tax revenues, but not enough to pay for these tax cuts, and perhaps not even enough to brake even with revenues from the original accounting trade off that Rubio and Lee make. However, with this same Rubio-Lee accounting trade off and an ETCO tax regime, these rate cuts for all US employers to 25% would be far more than paid for, and with much money to spare. In August of 2013 I sent a below and very detailed tax plan to the Senate Committee on Finance that used less optimistic economic assumptions than Rudio and Lee do, and with a C Corporation top rate was brought down to as low as 20% and the top pass-through rate brought down to 25%, the difference in the rates deriving from how investment income, and C Corporation or Business with Over 500 US Employees income, is fashioned by ETCOs, along with the usual litany of positives that come from personal income ETCOs.

Yet, even as it is easy to show how ETCOs would greatly improve the above two features of the Rubio-Lee plan, the truth is, much of it will not be able to exist without an ETCO!

Below is from page 8 of Senators Rubio and Lee’s, Economic Growth and Family Fairness Tax Reform Plan:

“In order to prevent abusive misallocation of labor income as business income, this plan also creates strong rules that preserve current tax arrangements for partnerships and independent contractors while discouraging abusive reclassifications. We also require that reasonable compensation be paid by pass-through entities to owners that work for the business.”

It is clearly a part of human nature that simply “discouraging” is never enough to restrain “abusive reclassifications”, when such reclassification need to be made easy for other legal reasons mostly having to do with insurance and capital formation, while these “abusive reclassifcations” would also now generate such a financial windfall for the abuser by simply becoming a pass-though and moving from a top tax rate of 39.6% to one of 25%.

Further, “We also require that reasonable compensation be paid by pass-through entities to owners that work for the business.” That type of government micro-managing I believe is no longer possible in the dynamic economy we now have and want to further encourage, along with other problems. (Wait, did a Democrat just express that about a Republican idea; did we ever think we’d see the day!) Another problem with the above solution is that it would eliminate one of the most effective methods of raising capital for small but quickly expanding business, that being a very Active owner of a business taking a pay cut in exchange for a larger share of ownership of the business in the future.
Yet look how easily the above problems would be solved if a personal income tax ETCO were enacted, while at the same time generating far more domestic economic and wage growth and tax revenues. There already exist a very sizable and quickly expanding percentage of tax payers and tax revenues that are, and are derive from, those who are legally organized as some type of pass-through entity yet they do not employ anyone, domestically or otherwise, and with the above Rubio-Lee policy this will only grow. Yet with a personal income ETCO the 25% top tax rate would only apply to Active owning domestic employing business that pay all of both sides of FICA taxes for all employees. Given that the Employee Tax Credit (ETC) that creates the ETCO are always worth less than the employer’s employee side of FICA taxes paid when all FICA taxes are paid along with other such tax credits to employ, it will always still cost businesses and individuals more money to employ than to not employ even with the ETCO, so the ETCO can not be gamed for tax purposes. Again, for details read further below. Therefore, given the Rubio-Lee tax plan structure, if the businesses that were given the tax rate reduction down to 25% from 39.6% where only domestic employers, than the above “abusive reclassification” issue would be solved along with not needing their second solution. Moreover, much more new tax revenues would be raise, and a fantastic tax incentive of as much as a 58.4% lower tax bill, all to employ domestically, will create an increase in the demand for labor in the US thereby increasing domestic economic growth and even global economic growth and thereby raising even more tax revenues!

Another prominent feature of Senators Rubio and Lee’s tax plan that could be adjusted through ETCOs to create an optimal tax efficiency regards the need to eliminate much of the problems of double or even triple taxation of certain incomes concerning an extreme financial disadvantage to an owner of a business that would come from double taxation due to reincorporating under C Corporation status, in other words, the need to create a degree of tax parity between all businesses, or under an ETCO plan, all domestic employers. Senator Rubio and Lee achieve this parity by eliminating the investment income tax altogether, which is somehow all paid for due to the original pro-growth accounting trade off and other growth assumptions much coming from lower cost of capital via the 0% tax rate on investment income they propose. I am much more than skeptical that such a trade off would balance from a federal budget outlook, especially in an economy with interest rates and borrowing costs already so low globally.

But an even more important and structurally problematic policy exists within this parity area of the Rudio-Lee plan. This is due to the fact that Senators Rubio and Lee move in the wrong direction when it comes to solving this parity problem, and of course once again ETCOs are going to greatly improve this area.

When trying to achieve tax parity due to double taxation of C Corporation income, policy makers can either lower the capital gains and/or dividends tax rates or lower the C Corporation tax rate. It is very important to acknowledge why Senators Rudio and Lee are wrong by choosing investment income to lower.

Obviously, once a C Corporation has paid a divided, most all of that capital is now completely out of reach for that C Corps to ever be able to use for any type of expansion. Subsequently, the better tax rate to cut would be the C Corporation income tax rate. In this way the C Corp would have more direct capital to expand, or issue a dividend if it so chose. But the most important point is that the C Corp would have much more readily available capital to invest as they so chose, and who else would know best, in the real word, the physical economy, the place where dividends and capital gains eventually come from anyway. Our course with a C Corporation ETCO tax system this newly available capital for C Corps would be greatly incentivized to employ in the US and in higher compensating manors.

In my very detailed August 2013 submission paper to the Senate Committee on Finance that is below, I proposed a tax plan using much less optimistic economic assumptions as the Rubio-Lee plan, that with some scenarios there exists a possible top tax rate of only 20% for C Corporation income while also lowering the dividend income top tax rate for qualifying “owners” of the C Corporation to 10%. Further elaborations of the tax plan in this paper could drop both rates much further, these reductions coming from further incentives for C Corps and all Businesses with Over 500 Employees to employ in the US in higher compensating manors along with some environmental tax incentives.

Regarding the issue of actually budget scoring any of my ETCO tax plans or the relevant pro-growth features of the Rubio-Lee tax plan, obviously there would exist much disagreement as to how much economic growth and therefore new federal tax revenues would be generated. But what is certain is that, together, they would certainly raise substantial new tax revenues while greatly improving America’s economic, and employment and wage growth and budget problems. Remember, one of the primary purposes of Employer Tax Carve Outs is that they allow personal income tax rates on the wealthy to be raised much closer to historically average rates without adversely affecting the small percentage of the wealthy who are America’s fastest expanding job creators, thus generating and greatly incentivizing far more economic and labor compensation growth and tax revenues. (This last paragraph was added just to this email.)

Moreover, Senators Rubio and Lee’s justifiable concern for keeping the cost of capital low via tax policy is much more efficiently achieved by enacting an ETCO investment income tax policy, and foremost so when it comes to lowering the cost of capital for businesses that want to expand in the US. Once again a detailed investment income ETCO tax plan along with the logic behind the policy exists below. If any of you have any questions at all about any ETCO policies, please feel free to contact me at any time! Also, all my papers can be found in the blog section of my website, ThirdWayProgressives.org.

There is a very great, very obvious and very bi-partisan political compromise that would greatly benefit all American’s sitting right in front of us! I do not know how much of this you all could enact this year. But some of it along with some of the ETCO reforms will need to be enacted this year if anything economically that actually benefits the American people were to be enacted this year, along with a more regular and responsible budget policy! I wish you all the best of luck and God bless, and feel free to contact me at any time!

Tom Pallow
Third Way Progressives
The Economics of Quality
714-673-9085

OUR TAX REFORM SUBMISSION PAPER TO THE SENATE COMMITTEE ON FINANCE
Employer Tax Carve Outs and US Employee Tax Credits, the First Step to 21st Century Prosperity
Submitted by Tom Pallow of Third Way Progressives

Of course, the cleanest, or clearest, slate would be a complete rewrite of Title 26, which is in essence the 1954 IRS Code that was then renamed with modifications in 1986. Fortunately, such a rewrite is not needed even though today’s US economy, as well as the economies of most of the rest of the world, are fundamentally different now than compared to 1954. Since 1954 most of the world has experienced 8 to 12 fold effective increases in foreign economic competition, and especially for the US and most of the more developed nations of the world, declining manufacturing and exporting bases along with persistent trade deficits. Yet, thanks to the great work of the late Ward M Hussey and his team, very fortunately, only a relatively small reorganization and the likely addition of four new Chapters to Subtitle A, and possibly an addition of a new Chapter to Subtitle C are needed to amend Title 26, and therein enact into our tax code an Employer Tax Carve Out and US Employee Tax Credit tax strategy that will thereby modernize our tax code in the most efficient way that is most conducive to the US’s relatively new, highly competitive economy that has experienced an effective 8 to 10 fold increase in foreign economic competition that has coincided with the Kennedy trade round of GATT in 1967 and the end of the Cold War (1).

Most of this paper will regard in concept four new possible Chapters to Subtitle A while building upon a “cleaner slate” in these areas. Most importantly, regardless of how lawmakers decide to reorganize Subtitle A and other parts of the IRS code, and hopefully for this country by the fall of 2013, Congress should be guided by the following description of a specific Employer Tax Carve Out and Employee Tax Credit tax policy that creates a cleaner tax slate and then encompass today’s C Corporation and personal income tax code as well as other related tax reforms. Upon reading below, the four likely new Chapters for Subtitle A will become obvious and pointed out to the reader.
Let us start with Employer Tax Carve Outs and our personal income tax plan.

Employer Tax Carve Outs are achieved through the use of Employee Tax Credits. Employee Tax Credits can be used in this and many other ways throughout the entire economy in ways that will greatly incentivize employment domestically and in higher compensating manors. Employer Tax Carve Outs, due to their extremely simple, transparent, and nearly universal design, accomplish four primary goals. First, and in no particular order, ETCOs protect America’s most prolific job creators from burdensome income tax bills that can leave them uncompetitive with current or future global competitors. Secondly, the deeper the carve out with ETCOs, that is, the greater the difference in effective tax rates between the non-employing wealthy and domestic employers, the greater will be the tax incentive for wealthy non-employers, and especially talented people who find ways to become wealthy regardless, to employ domestically. Third, because such a small percentage of the wealth’s income comes from the direct and active profits of any US employer being taxed as personal income, and also due to the universality of ETCOs, ETCOs allow governments to have the option to raise personal income tax rates on the wealthy to rates much higher than governments otherwise would be able to do in our relatively new, highly competitive global economy without adverse effect on American employers and our economy. Fourth, ETCOs allow for the elimination of many, much more complex, much open to fraud, but much less often used tax credits that now go to the businesses community.

Before closely examining ETCOs and Employee Tax Credits, let us first examine the question of why ETCOs and ETCs at this point in our history.

The most fundamental economic change for the US in our lifetimes has been the effective 8 to 10 fold increase in foreign economic competition that has occurred over the past 45 years, and that has been greatly accelerated by the fall of the communist Soviet Union and the arrival of revolutionary telecommunications technologies. This submission paper will examine the data that proves this change, but first a little history.

When the communist Soviet economy began to slow in the early 1960’s, in a strategic Cold War response, the western democracies conceived of the Kennedy round of GATT. Finally signed in 1967, the Kennedy round created a quantum leap in foreign trade within the western developed economies, and for the first truly organized and collaborated time, trade with the developed west and the developing nations of the world. The next quantum leaps in global trade came with the Uruguay round of GATT in the mid 1980’s and with the WTO in the early 1990’s that fallowed the global fall and discreditation of the socialist and communist economic models. These are models that, unless a nation lives under a lot of oil wealth, quickly lead to repressive dictatorships.

The fall of the communist Soviet Union was of most significance. When virtually all of global communism fell in the late 1980’s, multinational businesses throughout the developed world no longer had to worry about their capital investments in the underdeveloped world ever being nationalized by some emerging socialist government. This change opened up a cheap labor market of nearly 4 billion people to the nearly 2 billion in the western developed world, and with this massive change the global economy truly began. This has been the largest political-economic change in our lifetimes, but we have yet to adjust our tax and many other policies to it!

As you will see in the following data, the period that followed the Kennedy trade agreement in 1967 saw a quantum leap in the level for foreign trade for the US and nearly the entire world. In 1960 US exports were 4.9% of US Gross Domestic Product and US imports were 4.26%. In 1965 exports were 4.8% of US GDP and imports were 4.3%. But by 1975 exports were 8.1% of US GDP and imports were 7.3%. By 1990 exports were 9.2% and imports were 10.6%. By 2010 they were 12.5% and 15.9% of US GDP, which was down from pre-recession levels of just above 17% (2, 3).

Further, although foreign trade as a percentage of GDP began at higher rates than in the US in most of the rest of the world, most of the rest of the world has mirrored the above change. Between just 1992 and 2005, beginning with the first new trade rules that came with the fall of communism, the OECD country average of total foreign trade in all goods and services as a percentage of GDP went from 32.3% to 45%. During the same years the EU 15 nation average went from 36.3% to 50.7% (3), Mexico went from 17.8% to 30.7%, Japan went from 8.8% to 13.6%, and total Chinese foreign trade went from $100 billion US dollars in 1988 to $2.4 trillion in 2008 (4). India’s total foreign trade as a percentage of GDP went from 16% in 1991 to 47% in 2008 (4). Between 1965 and 1999 the world as a whole had an annual increase in gross national product of 3.3%, while exports of goods and services for the world as a whole increased by 5.9% per year. Between 1965 – 99, among developed nations, GNP averaged 3.2% a year while exports increased 5.9% a year. During this same period for the East Asian and Pacific region GNP grow by an average of 7.4% per year while exports grow by 10.1% per year. In Latin America and the Caribbean GDP averaged 3.5% per year while exports grew by 6%. South America alone grew by an average of 4.7% per year while exports grew by 7.2%. Only Sub-Saharan Africa presents an aberration within this data. Their economies grew by an average of only 2.6% per year as exports grew only 2.4% per year (3). These numbers have only increased after 1999.

As expected, mirroring this data, average tariff rates throughout the world have gradually declined over the past 45 years. This decline began in the developed west with the Kennedy trade agreement, and then moved on to the developing world in the mid-80’s through the early 90’s with the Uruguay round of GATT and the WTO.

For example, the average tariff rate in the US in 1965 was 6.7%. By 1975 it was 3.7%. By 1990 it was 2.8%, and by 2010 1.3%. The US’s year to year average tariff rate expresses a very gradual and steady decline. Because of the GATT and WTO trade deals the rest of the developed west nearly mirrors the US’s drop. This is true except for a few agricultural and natural resource driven economies like Australia, Canada, and New Zealand that kept their average tariff rates relatively high up until the mid-80s and early 90’s. (5)

Also beginning in the mid-80s through in the early 1990’s the developing world started to drastically drop their average tariff rates. China dropped from a rate of 42.9% in 1991, to an average of 13.7% between 2000-04, to an average of 4.2% in 2009. Mexico went from 27% in 1982, to 13% in 1991, to 1.9% in 2009. Indonesia dropped from 37% in 1984, to 13% between 1995-99, to 3.1% in 2009. India went from 74.3% in 1981, to 32% between 2000-04, to 7.9% in 2009. South America as a continent averaged 38% in 1985, 13.2% in 1997, then an average, excluding Venezuela, of 4.2% in 2009.

The above data has not been cherry picked. The above examples are indicative of nearly the entire globe. (6,7,8)

The above data that describes the world’s exponential increase in foreign trade is only half of the equation that explains America’s 8 to 12 fold increase in foreign economic competition. As foreign trade has increased, correspondingly the percentage of Gross Domestic Product that is in sectors that are directly engaged in foreign trade, particularly in the most traded sectors of manufacturing and industry, have greatly declined. For example, in 1965 manufacturing as a percentage of US GDP was about 36%, and by 2011 it was only 12.2% (3). Moreover, none of the data presented here captures how much foreign labor outsourcing and foreign importing into the US has been made much, much easier since 1967 due to the world’s explosion in revolutionary telecommunications technologies!

I have focused on the industrial and manufacturing sectors of foreign trade because they are generally much more affected by foreign competition than are the service and government sectors. In 2008, manufacturing alone as 57% of US exports (9). Manufacturing and industry are also the most “value added” of all economic sectors. That is, they generally pay their employees more and purchase more products from the rest of the economy than do most other sectors. Also, and very importantly, the larger foreign trade is as a percentage of a nation’s GDP, and the lower that manufacturing and industry are as a percentage of that nation’s GDP, the greater generally will be that nation’s “effective” foreign competition rate, that is, the more it is effected by global economic competition. Furthermore, as you can see with the above and below data, US manufacturing and industry rate as having some of the highest levels of competitive pressure on earth!

Over this same period, manufacturing as a percentage of GDP has decreased for nearly the entire world, even often in the developing nations. Between 1970 and 2008, manufacturing went from 35% to 20% of GDP in Japan, 32% to 20% in Germany, and 27% to 16% for the world as a whole. Between 1980 and 2008 manufacturing went from 24% to 12% of GDP in the UK, 20% to 11% in France, and 34% to 33% in China, and between 1885 and 2008 it went from 31% to 15% of GDP in Brazil and 24% to 25% in Korea. (5)

These competitive pressures have motivated the US and most other nations of the world to cut taxes on their emerging businesses and Corporations in order to keep and attract business capital and remain competitive.

Below are the top personal income tax rates of various developed nations in 1981 versus 2010 (10):
1981, 2010
The US 70%, 35%
Canada 43%, 29%
France 60%, 40%
Germany 56%, 45%
Japan 75%, 40%
The UK 60%, 50%
Spain 65.9%, 27.13%
Italy 72%, 43%
Australia 60%, 45%
New Zealand 60%, 35.5%

The top corporate income tax rates were also cut by these nation’s central or federal governments between 1981 and 2010 (10):
1981, 2010
The US 46%, 35%
Canada 37.6%, 16.5%
France 50%, 34.4%
Germany 56%, 16.5%
Japan 42%, 30%
The UK 52%, 26%
Spain 33%, 30%
Italy 40%, 27.5%
Australia 46%, 30%
New Zealand 45%, 28%

In 1981 the US’s top capital gains tax rate was 28% and its top tax rate on dividends was 70%. Until very recently both of these rates were 15% (11, 12). Further, the OECD Centre for Tax and Policy Administration creates a complex amalgamation of effective top capital gains tax rates with effective top dividends tax rates, and these rates have also greatly decreased between 1981 and 2011 (10):
1981, 2011
The US 42.9%, 17.8%
Canada 62.8%, 46.4%
France 61%, 52%
Germany 56%, 26.4%
The UK 75%, 42.5%
Spain 65.1%, 19%
Italy 72%, 12.4%
New Zealand 42.9%, 17.8%
Japan did not have a capital gains or dividends tax until 2000, at which point their top amalgamated effective OCED tax rate was 50%. By 2011 this rate had been dropped to 10%.

Our Employer Tax Carve Out Tax Plan

Now that it has been demonstrated that the US economy, as well as virtually all the economies of the rest of the world, have been drastically altered over the past 45 years due to increased levels of foreign economic competition, how in the case of the US this has meant an effective 8 to 12 fold increase in this competition, and how all of this competition has lead to lower tax rates throughout the globe for businesses and the wealthy, we can see some of the reasons why ETCOs and US Employee Tax Credits are in this relatively new environment needed to protect America’s fastest growing and most promising employers, who are also likely in the relatively soon future to be some of America’s largest exporters and highest paying employers. These reasons related to what type of employers ETCOs are protecting and incentivizing, and just how concentrated these employers are, these reasons are also very important.

Let’s examine just the top 2% of all US income earners for now. Only 18% of all the income that is made by all of the top 2% of US income earners is the profits of any businesses that is taxed as personal income that has one or more employees in the US (13, 14, 15). Yet this 18% of income is extremely important. It comprises the immediately available capital for what are generally America’s fastest growing and most dynamic businesses, that are also generally of the greatest importance to America’s economic future. Businesses that are taxed as personal income are responsible for generally 60% to 90% of all new private sector jobs, and closer to 90% when coming out of a recession. Such US employers that are in the top 2% of incomes are the most successful and fastest growing of these US employers, so they are responsible for as much as, and often near to, 55% of the total of new private sector jobs (16). Such businesses in the top 5% of incomes are responsible for generally 55% to 85% of the new private sector jobs (16). Data for these incomes above the top 2% of US income earners is less certain on this question from my data vantage point, but they do appear to keep the same mathematical pattern established with the data points above, relative to measures of active employer, personal income (16).

One common misconception about growing businesses is that they are not adversely affected by high income tax rates and quarterly income taxes because they can write off as a tax deduction the profits they quickly plow into their expansions. But very few businesses ever expand this way. Most often they need to save for a few years before they can then make their next big expansion. This expansion savings pool would be reduced without ETCOs. Therefore, we should not be reducing their immediately available capital in their most important stage of development when the availability of this capital is so very important to all of us, even if it is intended for needed government revenues.

Also, very importantly, these same businesses often become America’s most stable and highest paying employers and America’s most prolific exporters in the following business cycles a decade latter and well beyond. Two great political-economists in American, George Modelski and William R Thompson, wrote, “Leading Sectors and World Powers: The Coevolution of Global Economics and Politics,” in 1996. This is a great overview for this subject of just how important these leading employers are, and particularly in manufacturing. This book will lead you to more current and earlier works that are even more detailed and specific regarding the importance and concentration of these employers.

Due to the reasons stated above, and due to the universality of ETCOs, it could be said that ETCOs make personal income taxes four to five times more efficient when compared to a tax plan scenario with identical income tax brackets and rates, yet without an ETCO (17)!

ETCOs work the following way:
Personal income ETCOs are built on the economic reality that even within the highest income stratum in the US and elsewhere, and even more so entering lower income levels, a relatively small percentage of total income is the profits of any for profit business that in not a C Corporation that has one or more employees employed domestically. For example, this number peaks at about 21% at about the income level of the top 1% of US income earners, which is now at about $400,000 of adjusted gross income (18,19,20). Within all the income that is earned by the top 2% of income earners in the US, or those earning above about $250,000 a year, only about 19% of all that income is the profits of any for profit business that is not a C Corporation that has one or more employees in the US (18, 19, 20). For the top 5% of US income earners, those earning above about $200,000, this number is about 18%, and for the top 10% of incomes, employers earn above 12% of that total (18, 19, 20). Moreover, when an “active” definition of ownership is enacted in order to qualify for the ETCO, the actual cost of the ETCO when statically scored drops down much lower. For example, the extremely beneficial, bipartisan co-sponsored, Collins-McCaskill ETCO that is in S 1960 for businesses with less than 500 employees and with incomes above $1,000,000, which is an income level very close to where employer income peeks as a percentage of total income, would only cost about 14% of what would be raised when statically scored without the ETCO. Yet this ETCO would help generate back via much increase economic growth far more revenues to the federal government than this 14%!

ETCOs are created by using Employee Tax Credits. US Employee Tax Credits are calculated by adding $.07 for every dollar spent in employee net earnings for the first $113,700 in one tax year of W2 1040 based wages and/or salaries that are paid for work done in the US. By only rewarding tax credits for wages and/or salaries paid below $113,700, where social security payroll taxes are paid, the calculating of the tax credits for businesses and the IRS, and the policing of the policy by the IRS, will be made much earlier. Few if any data points in our entire economy and tax system are document more often and by more people than are W2 1040 based FICA taxes paid. Also, the $113,700 cap, which will increase as the social security tax cap increases, will insure that not much of the tax credits will be rewarded for the payment of very high salaries. Further, and very importantly, our US Employee Tax Credits would create an incentive for businesses to claim their employee expenses on their books and not pay employees under the table. Given that FICA taxes have been raised recently due to the Affordable Healthcare Act, and may need to be raised in the future given increasing healthcare and social security costs, the underground economy in labor is going to become an increasing problem.

Regarding the potential problem of businesses claiming ETC’s for people who currently work for them as independent contractors: Remember, ETC’s are worth 7 cents for every dollar of qualifying wages or salary spent. No business would ever spend 7.65 cents of every wage or salary dollar expense for their employer side of FICA taxes only to then receive only 7 cents of tax credit. Also, an independent contractor would no longer be able to employ anyone to work for him or her and thereby be able to use these qualifying employee expenses for ETC’s against their income.

Also, of course, in the final yearly IRS tax bill calculation of an employer, all state and local government tax incentives to employ, along with other such federal tax incentives that Congress designates, that are exercised by employers will be included in an employer’s final tax bill calculation as you will read a bit further below. However, it may be that it is decided by law makers that some tax credits or deductions for employment, like for example employment of disabled veterans or the recently discharged, have such social benefit that they not be included in employer’s final compilation of tax credits and deductions for domestic employment, thus creating a bottom line financial government subsidy for employment for these purposes.

7% for the value of the ETC was chosen because by being below the 7.65% employer side of FICA taxes the ETC would not be a tax shelter or in other words a bottom line financial government subsidy. However, the lower the value of the ETC, the less universal the ETCO will be and the more it will be that extremely small employers, with generally five or less employees, will not be able to take full advantage of the ETCO. So the ETCO’s contribution to the question of how high or low employer FICA tax rates will be a question for economists to answer in the future. However, and very importantly, with cuts to employer FICA tax rates being proposed in the past few years, it is true that it would be best for the value of the ETC to go down along with any such cut. It is also true that the value of ETCs should go up along with any increase in the total employer FICA tax rate, something that may have to occur under Obamacare, and this would increase the ETCO’s universality.

Given the tax plan in this paper, with US ETCs for employers of less than 500 worth 7%, the universality of our ETCO would be quite extensive. Under the exact same features and numbers of this tax plan, if a personal income tax increase were enacted on the non-employing wealthy along with an equal degreed ETCO tax cut for US employer, only about 2.5% of employees who work for a business with less than 500 employees that is taxed as personal income would have their employer’s effective tax rate go up, about 2.5% would stay about the same, while 95% would receive a tax cut. The 2.5% that would go up would be very high income employers with very few US employees, the vast majority of them with less than five US employees.

Below are more of the rules to qualify for Employee Tax Credits and therefore ETCOs:
Employee wages and salaries that qualify for the ETC may not go to any “business owner” nor any dependent of any business owner, be it a C Corporation or otherwise. Nor can they go to any immediate family member, including by marriage, who reside in any home owned by that business owner. Also, ETC qualifying compensation should go to any of the portion above 33% of any single employee’s wages and/or salary who works more than 33% of the year outside of the US. Nor can they go to any “employee” who works less than 18 hours a week on average who simultaneously receives income from more than two other employers who use that employee’s wages or salary for the ETC. If a dispute arises regarding which three employers can use their paid compensation for the ETC for any one particular employee, the three employers who pay the three highest total compensation amounts over the calendar year will be the qualifiers.

A “business owner” is anyone who owns 10% or more of a business, C Corporation or otherwise, who also qualifies as “active” owners under current IRS rules. Also, as part of an active definition of ownership, no one business can have more than five business owners who qualify for the ETC at any one time. There also may have to be enacted what is called the Captivation Rule. The Captivation Rule simply states that a current employee of a business cannot suddenly become their own private business or independent contractor who then lowers their effective tax rate through ETCs when their former employer makes up more than 60% of the total client revenues of the new private business. This rule should have a time limit of no more than 10 years.

Tax credits are never perfectly simple. But overall the ETC is much simpler than most tax credits because they are calculated using W2 1040 based employee expenses which are one of the most documented expenses and figures in all economic data. Moreover, with a few simple rule differences ETCOs can be made with 1099 compensation payments. Meanwhile, ETCOs and ETCs accomplish so much more than any other tax credits or tax strategy.

A private or pass through employer’s tax bill would be arrived at by first going through all existing steps in the tax code. Then, if an employing “business owner,” it would be calculated by using new tax tables at the end of each applicable business schedule. These tables would give two numbers in each income grid square, the first number as though the bracket tax rates, in the case of this papers plan were, 39.6%, 35%, 33%, 28%, 25%, 15% and 10%, and the second number as though the rates were 30%, 25%, 23%, 18%, 15%, 5%, and 0%, respectfully. The business could then deduct $.07 for every dollar of qualifying US ETC employee wages and/or salaries spent, plus all local, state, and perhaps other federal incentives to employ, from the dollar amount of the first number in the grid square, to no lower than the second dollar amount number in the grid square.

In order to alter ETCs and phase out the ETCO at 500 employees, as the fantastic, bipartisan co-sponsored, Collins-McCaskill ETCO does, the following should occur. As a business adds their 501st and 502nd employee and so on, what would normally be the qualifying employee expenses for the ETCs for the 501st and 502nd employee and so on without the employee cap, would be subtracted in an exact dollar amount from the existing total dollar amount of qualifying employee expenses for the ETCs of the business’s first 500 employees. At this point the same above tax table calculation would be made.

Remember, ETCOs, due to their extremely simple, transparent, and nearly universal design, accomplish four primary goals. ETCOs protect America’s most prolific job creators from burdensome income tax bills that can leave them uncompetitive with current or future global competitors. Also, the deeper the carve out with ETCOs, that is, the greater the difference in effective tax rate between the non-employing wealthy and domestic employers, the greater will be the tax incentive for wealthy non-employers, and especially talented people who find ways to become wealthy regardless, to employ domestically. Further, because such a small percentage of the wealth’s income comes from the direct and active profits of any employer that is taxed as personal income, and also due to the universality of ETCOs, ETCOs allow governments to have the option to raise personal income tax rates on the wealthy to rates much higher than governments otherwise would be able to do in our relatively new, highly competitive global economy without adverse effect on American employers and our economy. Lastly, ETCOs allow for the elimination of many, much more complex, much more open to fraud, but much less used tax credits that now go to the businesses community.

Moreover, enacting ETCOs into our tax code creates a code that rest on a more just and moral foundation than does our existing tax code. Most everyone who has done, or who has attempted to do both, will tell you that, generally speaking, it takes more work to make the same income through employing others than it does by being employed by another. Furthermore, all other things being equal, the person who is employing others here in the US is more beneficial and important to other Americas than is a person earning an equal amount who does not employ; one has found a way to make a living for themselves and all those who they employ, the other, only themselves. Lastly, virtually the only issue that all economists throughout the spectrum of economists agree on is that monetary incentive work, and that the simpler and greater that monetary incentive, the more influential the incentive will be. Remember, the deeper the ETCO, that is, the greater the difference in effective tax rates between the non-employing wealthy and employers, the greater will be this monetary incentive, and the more private sector jobs and government revenues will be generated!

Before explaining specifically this submission paper’s tax plan for personal income, a somewhat cleaner tax slate needs to be cleared regarding personal income tax deductions. Obviously, for three or more years now tax policy makers in Washington DC have been focused on “pro-growth” tax reform. On the C Corporation side of tax reform, most of the rationale behind this pro-growth tax reform is the idea that large, not as quickly growing, less in need, and more politically connected C Corps get most of the tax deductions that then bring their effective tax rates very low, meanwhile, America’s fastest growing, most in need of capital to expand, and least politically connected C Corps are stuck with much higher tax rates that are close to the statutory maximum of 35%. Reducing the amount of tax deductions and then lowering C Corp tax rates for all would be a positive adjustment to our tax code. Although as you will see, our ETCO and ETC tax policy for C Corps and for employers of over 500 would be much more direct, efficient, and beneficial to our nation. On the personal income tax side the rationale behind this pro-growth tax reform is that wealthy non-employers are more likely then are wealthy employers, who often desperately need capital to expand, to spend money in ways that are not related to employment but in ways that can be used for a tax deduction. By reducing the tax deductions that are more proportionally used by wealthy non-employers, tax rates could be cut a bit for all incomes, employer or non-employer, and employers would then get a tax cut because they are less likely to be exercising these tax deductions to begin with. Obviously, on the personal income tax side enacting ETCOs would be much more efficient and pro-growth than would be the above tax strategy. Moreover, unlike on the C Corp side, on the personal income side there really are not a whole lot of tax deductions that can be reduced without adverse effect, even for America’s wealthy.

The most costly to the federal government itemized deduction for the wealthy is the charitable deduction. It would not make political, economic, social, or moral sense to limit charitable deductions in any way. Even when it comes to non-cash donations, the low hanging fruit of these tax deduction reductions has already been picked, and new and much better ways of generating more government revenues by only reforming our tax code await us. Also, given the new tax laws in the Affordable Care Act, these “new and much better ways” are better than reducing any existing healthcare tax deductions, even for the wealthy. Further, regarding savings tax deductions, they could definitely be consolidated and simplified, but regarding federal revenues to be raised, the new and much better ways are definitely much better in this area.

Really, only the home mortgage interest deduction for second homes could be cut to some degree, and the simplest way to reduce it would be to cut the total amount of mortgage debt that could be deducted from the current $1.1 million cap. But before anyone gets too carried away with a reduction here, please realize that with our new economy, where much work can now be done via cyberspace, and given how, especially in many of our rural areas, seasonal work especially due to tourism that we hope will become an ever larger portion of our economy, but also due to other economic forces, it would be very beneficial to have at tax code that allows for both labor and management to move seasonally, i.e. have two homes. Given this reality, and the cost of housing throughout our nation, it would not be beneficial to take this cap below $800,000. However, lowering the cap to that point would raise federal revenues, and likely not inspire as many “magamansions”, which have greatly expanded over the past two decades and that evidence shows has helped to some degree to lead to higher home prices during this period. The total homes mortgage interest deduction is said to cost the federal government about $100 billion a year. Under this paper’s calculations, the above cut to the mortgage interest deduction cap would save the federal government about $10 billion a year.

Very fortunately, $10 billion goes very, very far when it comes to ETCOs. Not only could this $10 billion “pay” for an ETCO for the employers who are hit with January 1, 2013’s personal income tax increase on joint filers earning over $450,000 and singles over $400,000, but about $13 billion a year, when statically score, could pay for the below personal income tax and ETCO tax plan. Furthermore, $13 billion is when statically scored. Remember, that when the assumptions of a fairly respected Heritage Foundation study were used when analyzing a personal income tax plan with an ETCO that is much similar to the plan below, versus the exact same tax plan without the ETCO, it showed that over a 10 year period the ETCO plan raised as much as four to five times the government revenues, this again, because employment was incentive and allowed to grow (17)! In other words, due to more efficient tax incentives and more economic growth domestically, the tax plan in this paper, over at least the medium and long runs, will certainly raise far more government revenues, without ever raising any tax rates at all, only lowering certain tax rates! Below are the current 2013 personal income tax brackets and rates with the corresponding flour cap tax rates for our ETCO tax plan.

Non-employer Rate for Single Filers, and Married Joint Filers, Employer tax rate with ETCO
10%, $0 to $8,925, $0 to $17,850, O%
15%, $8,925 to $36,250, $17,850 to $72,500, 5%
25%, $36,250 to $87,850, $72,500 to $146,400, 15%
28%, $87,850 to $183,250, $146,400 to $223,050, 18%
33%, $183,250 to $398,350, $223,050 to $398,350, 23%
35%, $398,350 to $400,000, $398,350 to $450,000, 25%
39.6%, $400,000 and up, $450,000 and up, 30%

Remember, our plan’s reduction of the mortgage interest deduction debt cap gave us about $10 billion a year to work with. The above ETCO plan would cost only about $3 billion a year above that, but this is when statically scored. The C Corporation tax side is far more riddled with inefficient tax deductions and tax loopholes, so if Congress insists that an ETCO plan like this be statically scored, then some revenues from tax deduction reductions on the C Corp side should be brought over to the personal income tax side for an even deeper ETCO. Better yet, some revenues from the C Corp side should be used for tax incentives to employ in America in higher compensating ways for businesses that are taxed as personal income that have over 500 employees. How this is done will be explained with the discussion of our C Corporation tax plan, that will now begin.

Our C Corporation and Employers of Over 500 Tax Plan

Now that we have examined ETCOs, let us further examine US Employee Tax Credits and how they can go a long way to modernizing our entire tax code for the competitive global economy of the 21st century. More specifically to start with, this submission will suggest a revolutionarily clean tax slate by suggesting a very important and new tax distinction to be made between businesses with less than 500 US employees and business with over 500 US employees, be they C Corporation or taxed as personal income. In fact, with ETCOs, ETCs, and the personal income tax code, different tax schedules at the least will have to exist for non-employers, employers with less than 500 US employees, and employers with over 500 US employees. While for C Corporations an important distinction in the tax code will need to be made between those with less than 500 US employees and those with over 500 US employees. Further, employers with less than 500 US employees, both C Corporation and otherwise, would share much of the same tax laws, as would employers with over 500 US employees, both C Corporation and otherwise.

It is best to start understanding this area of this modern tax code by first examining what happens to US Employee Tax Credits as businesses begin to have more than 500 US employees, and we will essentially start on the C Corporation side.

As businesses begin to employ more and more over 500 US employees, Employee Tax Credits begin to work less as Employer Tax Carve Outs and more as incentives for businesses to employ more often in the US and in higher compensating ways. In this area of our tax code concerning C Corps and businesses with over 500 US employees, our tax plan has three primary tax incentives. One is intended to incentivize employment in the US, and it is referred to as the Employment Tax Incentive. The second is intended to incentivize higher employee compensation levels in the US, and it is referred to as the Compensation Tax Incentive. The third tax incentive is retained within our world-wide tax system and it achieves both an employment incentive and a compensation incentive simultaneously.

To start on the C Corporation side, C Corps with less than 500 US employees should have an ETCO and Employee Tax Credits that are in every way, but tax rate, identical to ETCOs and ETCs for businesses with less than 500 US employees that are taxed as personal income. This policy exists in an effort to create as much parity between the C Corp code and the personal income code within the realities of the extra costs to governments of governing C Corps. This effort to keep relative parity between C Corps and private businesses will become more evident as the tax rates for this overall tax plan are explained. Moreover, there are many C Corps in the US that do not employ at all. Many of these are dormant C Corps that are essentially out of business but still involved in the tax system. Yet many are also high income earners, who either for good future planning reasons, or for legal or illegal tax avoidance reasons, have chosen to file as C Corps. If Congress and the President were to enact C Corp tax reform that reduces tax deductions and thereby lowers tax rates, these non-employing C Corps should not benefit with a tax rate reduction when the same monies could go towards incentivizing similar income level C Corps to compensate in greater ways their existing US employees! Furthermore, for all the other positive features of ETCOs, the above policy should also be enacted.

Let us examine the first tax incentive for employers of over 500 that is intended to increase employment in the US, the Employment Tax Incentive.

As C Corps begin to employ over 500 US employees, the 7 cent on the dollar US ETC that creates the ETCO that is explained in the ETCO portion of this paper above, is reduced to a 4 cent on the dollar ETC. It becomes a 4% ETC because of what this number is attempting to achieve. A more accurate number for what this number is attempting to achieve is about 3.4% (Which please always remember has nothing to do with the coincidence that 3.4% is almost half of 7%). What this number is attempting to approximate is the rate at which the ETC will need to be to compensate the businesses in America that have the top 50% of US employment costs to US profits ratio. That is, the point at which, as an equal dollar amount of C Corp tax deductions are reduced from our tax code, assuming that they are equally and proportionately reduced among businesses, half of all US businesses with over 500 US employees would have their effective tax rate go down, and the other half would go up. The 4% is a more generous number, but these ETCs will have a simple cap on how low, and how high, they can be exercised. So this slightly more generous than need be tax incentive will have an expenditure limit on what it costs the government or a business. With the tax plan in this paper, the floor cap for the tax rate will be 300 basis points lower and the ceiling cap will be 300 basis points higher for a total tax incentive of 600 basis points of tax rate.

The tax plan that is being proposed in this submission paper does not intend on its own to do much slate clearing in the area of tax deduction reductions on the C Corp side. Although in the past Third Way Progressives has always very much supported extensive R&D tax credits and early depreciation of capital expenses. On the C Corp side, this submission’s tax plan will assume the 12 tax deductions reductions or loophole eliminations that President Obama proposed on July 30, 2013. This is enough, the President’s plan says, to reduce the top C Corp tax rate to 28% and the top rate for manufactures to 25%. This paper’s plan will assume the exact same level of tax deduction reductions and lowering of C Corp tax rates as does President Obama’s plan, but of course the C Corp tax rate reductions in our plan will be much more strategically designed for the realities of our highly competitive global economy. However, it would be great if Congress and the President could come up with more tax deduction reductions on the C Corp side, outside of R&D tax credits and early depreciation. In this way this entire plan’s ETCs and ETCOs could be made even deeper, even on the personal income tax side.

Under our plan, the top C Corp tax rate for non-employers should remain at 35%. Yet with the less than 500 employees US ETC of 7% even for C Corps and therefore the ETCO that is created there, the top C Corp tax rate for virtually all employers will very quickly be 30%. From this point our Employment Tax Incentive for employing more often in the US would take C Corp employers to top tax rates to between 33% and 27%. The Employment Tax Incentive and ETC credits must be taken, or the tax rate for the business will default to the ceiling cap of 33%.

From this point would begin our second of three tax incentives in this area, this one designed for the purpose of incentivizing businesses in the US to compensate their domestic employees at higher rates. The Compensation Tax Incentive sounds more complex than the last one, but it is more efficient per federal expensed dollar. The fairest, simplest, and probably for the reason of being simple, the most efficient and hard to game method for achieving this tax incentive is to start by making a large sample probability distribution of the mean of the median and the mean level of total US employment compensation for businesses in America with over 500 US employees. This distribution should be made by first eliminating from any of the calculations any employee incomes that are over the dollar amount that demarcates the top 1% of US income earners.

From here it is quite simple. The distribution is divided into 100 percentiles. With the 1st percentile exactly two standard deviations, while employing the 68-95-99.7 Rule, below the mean of the distribution, and the 100th percentile exactly two standard deviations above the mean. When an employer of over 500 has a mean of the median and the mean of their total employment compensation that moves into the 51st percentile, than it will begin to be able to deduct basis points off of their tax rate. This incentive will gradually and incrementally reduce an employer’s tax rate until the 100th percentile. How far the tax rate can be reduced is up to how much policy makers chose, although some tax rate should be left over, even for the most generous employers, for environmental tax incentives.

But again, for the C Corporation tax plan in this submission we are using the amount of tax deduction reductions that has been proposed by President Obama on July 30, 2013. This plan brought the top tax rate for all C Corps, including non-employers, to 28% and manufactures to 25%. Given that manufactures make up about 30% of all of the profits of C Corps, and given the fact that the President’s plan does reward non-employers, and just to make the math for us a little easier here although the number is not far off, let’s say that the President’s plan and our plan here will both reduce the equivalent of 850 basis points off of the top tax rate for C Corps in America. The President’s plan does this by lowering the top rate for C Corps from 35% to 28% and for manufactures to 25%. Our plan has already dropped the top tax rate for C Corp employers down to 30%, then in a somewhat below revenue neutral way because the ETC is worth 4% and not 3.4%, we created a tax incentive that could raise or lower a C Corps tax rate by as much as 3 percentage points. This leaves our plan with about 3.5 percentage points to work with, but these 350 basis points can go a long way when it comes to ETCs! For one, it can become a reward of up to 700 bases points off of a business’s top tax rate for how well they compensate their employees relative to the rest of America’s employers. You remember, that mean of the median and the mean thing. 14 basis points are than deducted off of a C Corp’s top tax rate as they move each percentile from the 51st percentile of the distribution up to the 100th percentile and 700 basis points.

Moreover, with just a little more work at reducing tax deductions on C Corps, the Compensation Tax Incentive could be greatly enhanced. Further, while this tax incentive is not perfect, it is certainly better than what exist today or the option of lowering C Corp tax rates equally whether a C Corp employs at all or in terrible ways relative to others. Moreover, this mean of the median and the mean of total US compensation could also be measured on a state by state basses or by regions. This would complicate the process a bit but add much more accuracy to this tax incentive. Also, further elaborations of our overall tax plan allow for this same tax incentive to be used by businesses with less than 500 employees, both C Corp and otherwise. In order to do this for employers of under 500 in a way that avoids gaming and fraud, and for much larger and more important reasons that you will relatively soon learn about, Employee Tax Credits have to be calculated and used as one moves up or down the 51st to 100th percentile, with the value of the ETCs being worth more as an employer moves closer to the 100th percentile. This is a simple calculation that the IRS can provided on one simple graph.

Nonetheless, with our tax plan in this submission paper, a C Corp with over 500 US employees that has accumulated many US Employee Tax Credits and is compensating their US employees in exceptional ways could lower their top tax rate to 20%!

Our third and last tax incentive for larger employers works though our world-wide tax plan that will be described in just a bit. This last tax incentive is one of the reasons that we keep calculating an employer’s US Employee Tax Credit throughout the entire tax process, and this tax incentive is designed to measure both US employment and levels of US compensation.

Yet first, let us clarify what we have learned so far regarding the specific tax plan in this submission paper and what could easily be four new Chapters to Subtitle A of Title 26. Our personal income tax rates for employer and non-employers were shown in the personal income tax portion of this paper above. Below is this paper’s C Corporation tax rates:
Non-employer C Corp rate, C Corp Employer Rate
Up to $50,000- 15%, 10%
$50,001 – $75,000- 25%, 15%
$75,001 – $100,000- 34%, 15%
$100,001 – $335,000- 39%, 26%
$335,001 – $10 million- 34%, 30%
Over $10 million – $15 million- 35%, 30%
Over $15 million – $18,333,333- 38%, 30%
Over $18,333,333- 35%, 30%

From this point a common misconception could often be made. The C Corp employer tax rates above are derived at by first an employing C Corp being able to exercise 7% US Employee Tax Credits that are exercised up until 500 US employees where they are then phased into a 4 cents on the dollar ETC. With our plan, at the point of reaching 500 US employees, American C Corps should all have a possible top tax rate of 30%. From this point, as the Employment Tax Incentive is exercised, a little fewer than half of these C Corps will then have their possible top tax rate go up, and to as high as 33%. Meanwhile, a little more than half of these C Corps will have their possible top tax rate go down, and to as low as 27%. But at this point, the Compensation Tax Incentive is not exercised. At this point, any other tax deductions and tax loopholes that exist should be exercised, and the Compensation Tax Incentive of up to 700 basis points is not exercised until after. Therefore, given that today the average effective tax rate for C Corps in America is about 17% when the top statutory tax rate is 35%. Hence, given that this paper’s C Corp tax plan, as well as President Obama’s plan, only reduces tax deductions and loopholes for C Corps by the equivalent of 8.5%, when 18% of tax deductions and loopholes still exist to be had, a possible lowest top tax rate will be far lower than 20%, perhaps as low as 2% or more. That being derived at via the lowest rate of 27% after exercising the Employment Tax Incentive, then deducting whatever C Corp tax deductions still exist, then minus the 700 basis points for excellent US employee compensation.

One of the great things that we could do with more revenue pulled out of our current C Corp tax deductions and loopholes, would be to allow employers of over 500 that are tax as personal income to also be able to partake in the Employment Tax Incentive and the Compensation Tax Incentive. Remember, these employers of over 500 that are tax as personal income are having their ETCO erased as they employ over 500 employees and their top tax rate is going back up to 39.6%. So a reward for employing in American in the highest compensating ways that could reduce 700 basis points off of their top tax rate, or hopefully even lower, this could go a long way to improving the lives of the American people. At a cost to the federal government of only about $3 to $4 billion a year, this would certainly be worth a try, and certainly be better than our existing tax policy.

If Congress really wanted to get ambitious this year they could enact a Compensation Tax Incentive for employers of less than 500, both C Corp and personal income. This cannot be enacted for businesses with less than 20 employees, and a slightly different distribution of the mean of the median and the mean of employment compensation is needed. But while costing only about $2 to $3 billion a year to the federal government, this would be a very inexpensive but effective tax incentive.

Also, all employers of over 500, C Corp and personal income, could engage in our third tax incentive in this area that rewords employment and compensation through our world-wide tax plan. Yet employers of less than 500, C Corp and personal income, should be treated differently regarding their world-wide income.

All of the tax rates generated both above and below could also be calculated once for a five or even 10 year period as opposed to annually.

Our World-Wide Tax System

The optimum policy for the US and for most other nations of the world would be to use a world-wide tax system, with the caveat that the US tax for foreign profits would be set at a much lower rate than the C Corp or personal income rates. Most of us already acknowledge this need, but let us suppose that the US’s top C Corporation statutory tax rate is brought down to 30% after reducing tax deductions on the C Corp side. Let us suppose further that a US C Corp must pay US taxes on profits made in Ireland. Ireland has a top statutory tax rate of 12.5%. If income tax deferrals were ended, this US C Corp would have to pay a 12.5% tax to Ireland, and then it could credit that tax bill paid to Ireland against income that is then taxed at a top rate of 30% for an effective US tax bill payment of about 17.5%. The problem with this extra 17.5% payment is that it might be so large as to cause this US C Corp to move completely out of the US and to Ireland, or to some other much more tax friendly nation. Therefore, the US tax rate for foreign earnings for a US employer of over 500 should be set at no more than 9%. Moreover, very similar tax incentives as the Employment Tax Incentive and the Compensation Tax Incentive should allow a US employer to be able to lower their foreign income tax rate quite substantially depending upon how well they are treating their employees in the US relative to that multinationals total global business expenses.

How specifically this incentive is operationalized within our tax code is started much the same way as with the Compensation Tax Incentive, however the sample distribution is different and the percentiles are organized differently. The sample distribution is different in that it is a distribution of total business expenses outside of the US to total US Employee Tax Credits accumulated. The higher the number, the closer an employer will be to the 100th percentile and a tax rate of 2%. Remember, to this point a US multinational with over 500 US employees has had their US ETCs increased by both their larger US employment costs and by how much greater over the norm they compensate their US employees. We can therefore structure our world-wide overseas tax rate to reward those multinationals that do employ the most and in the best ways in the US, and in relation to how much of their workforce they keep in the US. Moreover, this is a ratio of total business expenses, of ever kind outside of the US, to total US ETCs, so no conflicts will arise with foreign governments, especially those who enact ETCO and ETC tax policies, and in this way the policing of our tax policy will only be made much easier. The percentiles also work differently when compared to the Compensation Tax Incentive in that they begin to reduce a tax rate by 7 basis points beginning with the 2nd percentile and a tax rate of 9% to the 100th percentile and a tax rate of only 2%. This tax incentive can be known as the World-wide US Employee Tax Incentive.

Perhaps Congress and the President will chose to enact this tax incentive but with slightly different extreme tax rates than 9% and 2%. Keep in mind, the above tax policy, done in almost any way, would be far better than what exist today in our code or any other known proposed plan of today regarding overseas taxes, but Congress should certainly not deviate to far from either extreme tax rate. This policy also has the advantage in that a world-wide tax system makes most other forms of international tax avoidance, like transfer pricing, much easier to detect for the IRS, so even more federal revenues would be raised. You will also find that an ETCO and ETC tax policy makes many areas of IRS tax policing much easier. It does this by actually reducing the numbers of receipts and other financial numbers that an employer must keep track of. Remember, the ETCOs and ETCs can replace many existing employer tax credits in ways that make everyone happier. But with ETCOs and ETCs, the fewer receipts and financial numbers that employers do have to collect for the IRS, are calculated in different ways that are much more beneficial to the employer, the government, and especially our citizens!

Also, because the tax plan in this paper is committing to a world-wide tax system, some of the past writings by Third Way Progressives concerning having to average in foreign multinationals in a “delicate” manor regarding our system of taxing US employers foreign earnings are no longer needed or relevant, which is a strong addition to simplifying and strengthening our tax code.

FICA Taxes

In past Third Way Progressives policy discussion papers a FICA tax plan for new employers has been discusses. This FICA tax plan was created for a more advanced ETCO and ETC tax policy, perhaps in ETCO and ETC tax reform 2.0 or 3.0. Certainly it could not be enacted until Potential Employer Banks are created. Here again, this is simply an ETCO and ETC tax concept that was always believed to more likely be part of ETCO and ETC tax reform 2.0 or 3.0. Yet PEBs are great ideas that would make are economy much more efficient and make employing in the US much easier. Potential Employer Banks would allow potential US employers to save for a few or more years monies that would otherwise be taxes paid, that could then become business expenses with a number of ETCs spent in the US. But again, with ETCOs and ETCs let’s get the fundamental and big stuff enacted first, but if Congress wants to get fully ambitious, then we are right there with them. Third Way Progressives older FICA tax plan needs PEBs and a little more, and it was advertized a few years ago when FICA tax cuts for employees and employers was becoming a popular concept in Washington DC, and it was also due to TWP using in a “Hey, you like that, you certainly will like all these other ETCO and ETC policies” marketing strategy. That said, this paper must address a very important aspect of FICA tax policy.

For IRS efficiency reasons, and for reasons to make employing much more seamless and less bureaucratic for employers in ways that do not distort and disrupt the employment and employer growth dynamics in economically stunting ways, it appears from this vantage point that it would probably be best to attach Affordable Care Act payments by employers and their employees to the FICA tax system. Very importantly in this regard keep in mind, the top value of the US ETC is dictated by the rate of the employer payment to FICA. If FICA tax rates on the employer and employee side were increased to pay for Obamacare, then the value of all US ETCs could also be increased. In this way ETCOs could be made much more universal, that is, even US employers of a few people would be able to see a much more dramatic, yet still not open to gaming, tax reward for employing in the US. Also very fortunately, any FICA tax rate increase can be phased in gradually and without any harm to the ability for employers to hire in the US by phasing in the FICA tax rate increase with a phase in increase to the value of US ETCs. With this policy, very small employers could also be given the option to either choose a higher FICA tax rate and have a higher value US ETCs, or have the old and lower employer FICA tax rate and the old and lower US ETC value. In this way, we will be making it as easy as possible for employers to grow, which from now on should always be one of the primary features of all tax law!

Our Capital Gains and Investment Income Tax Plan

Our capital gains tax plan works under the same principle as does our Employer Tax Carve Out and Employee Tax Credit tax systems, in fact, once again, US ETCs will serve an important function. Our capital gains and dividends tax plan is essentially an Employer Tax Carve Out regarding investment income.

Our capital gains tax plan carves out from taxes and greatly incentivizes long term gains derived from four investment types. These four investment types are the primary investment methods for businesses in America to acquire needed capital to expand. These four investment types are: One, all venture capital funds and projects. Two, all stocks bought at IPO or secondary offering. Three, all bonds bought at first issue. Four, the direct underwriting of any of the above three investments, and also in ways that would be taxed under today’s Carried Interest rule. Moreover, all investments that would qualify for the lower carve out tax rate with these four investment types are also subject to US ETC requirements that will be explained in a bit.

Very importantly, these four investment types represent anywhere from 3% to 20% of all capital gains in the financial markets, but most of the time they are only 3% to 12% of all financial market gains (21, 22). Therefore, the tax level on the 97% to 88% of capital gains that are more speculative, and what could be considered more “paper trades”, can stay at the same rate or go up, and capital gains from the four investment types with our ETC requirement can be taxed at a lower tax rate.

This policy would increase government revenues, while steering capital to US job creators, while also curtailing destructive speculative investment bubbles. Plus, it would reword those financial investments that require the most research and risk for the investor, and it rewords those investments that generate the most return to society. The cost of capital in the financial markets would be greatly reduced for growing businesses in the US due to this tax incentive that would drive more investment monies into these four investment types. The risk of destructive speculative investment bubbles would be reduced because, due to the tax incentive, monies would be moved away from investments where price volatility is greater and economic overexpansion is much more likely, into investments that are adding jobs in the US and therefore are monies that are more likely to become consumer spending, and therefore are much less volatile and susceptible of creating economic overexpansions.

The above four investments cannot qualify for a lowered capital gains tax rate if the business floating the stock or bond does not have at least 5% of its US expenses, or the venture capital project does not have at least 5% of that investment, being employee costs that would qualify for our US Employee Tax Credits as explained in the personal income tax section of our plan. Moreover, a year and three years after the initial stock, bond, or V.C. investment the company invested in would have to have a higher US payroll than it had at the time of the initial investment. In this way, our plan would insure increased job growth in the US, and not just an increase in the underwriting of financial instruments.

In order to achieve access by ordinary investors to the purchasing of IPO’s and bonds at first issue, stocks should still be considered to be bought at IPO and bonds at first issue until the moment either is sold for the third time by an institutional trader or five open financial market days after the first purchase, or until the moment either is sold for the first time by a non-institutional trader. Moreover, it would be beneficial to ordinary investors, institutional investors and their industry, and the economy as a whole, for the federal government to enforce the existence of a minimum level of IPO and first issue purchases for the non-wealthy investing public.

Under this papers tax plan, all tax brackets and rates for ordinary dividends and qualified dividends would remain the same. But other methods of scoring this plan could bring such top tax rates down to as low as 10%, and other environmental tax incentives could take these rates even lower.

Our Environmental Tax Incentives

The final component of our tax plan is much like the investment income portion of our tax plan in that, due to the fact that there is presently little talk in Washington DC regarding reform in these two tax areas, our tax reform plans in these two areas will probably only be addressed during tax reform 2.0, and we hope not, but maybe even tax reform 3.0. Regardless, just like with our investment income tax plan, the below environmental tax incentives would go a far way to increasing the proliferation and power of more green technologies while greatly helping to create a much more environmentally sustainable economy, and not just for the US, but for the rest of the world!

Under our first environmental tax incentive plan, all private and public businesses, both foreign and domestic, would be allowed to lower their top tax rate on personal and corporate income by as much as 35 percentage points but to no lower than 0. Congress would be empowered to dictate to the EPA which manufacturing sectors and goods, and what types of production techniques that the EPA can then proclaim to be using “best practices” and/or “standard practices” in. Congress could dictate what is pollution regarding what is generated during the production of a product, and/or while a product is in use, and/or when a product is discarded.

It would be up to the EPA to propose “best practices” and “standard practices”. Yet it would be up to Congress and the President to make law regarding what products and techniques these best and standard practices can lower a tax rate through the use of and by how much these tax rates can be lowered. Our philosophy regarding environmental taxes is that they are most efficiently and effectively structured when they use primarily a reward approach as opposed to a reward and punishment approach or just a punishment approach.

There is a second environmental feature of our tax plan, which also can be assisted by the US ETC. This is what we call an Environmental Fair Tax. One of the tax proposals that have gained much popularity in conservative political circles is the Fair Tax. This tax is essentially a national sales tax that claims to allow for the elimination of the income and payroll taxes. Third Way Progressives oppose this tax because it is regressive, and because of its regressivity that would therefore slow the economy by reducing consumer demand, the plan’s numbers would not add up. Even more importantly, the sales tax rate that the Fair Tax advocates propose is a rate of 23%, although that rate would probably have to be much higher. However, past experiences throughout the world have shown that, when a sales tax goes above about 12%, the underground economy to avoid the sales tax seriously begins to organize, and that therefore, government revenues anticipated are never collected.

That said, a revenue neutral, national sales tax with an environmental objective that had a rate below 12% would be a very positive policy. That is, the federal government could piggyback on the state and local sales tax systems, and enact an increased sales tax on those products that are deemed environmentally inferior. This sales tax revenue would be used to reimburse states and localities that have lowered their sales taxes on products that have been deemed environmentally superior by the federal government.

Our US ETC comes into play in that, many will complain that increased sales taxes on products like trucks or certain other heavy equipment used by businesses will be an increased burden on American job creators. However, by allowing the US ETC to count against some of such a sales tax, the burden on American job creators would be reduced and a greater tax incentive to employ in the US would be created.

It should now be obvious to readers what the four suggested new Chapters for Subtitle A of Title 26 should be: One, personal income taxes for employers with less than 500 US employees. Two, personal income taxes for employers with over 500 US employees. Three, C Corporation taxes for employers with less than 500 US employees. Four, C Corporation taxes for employers with over 500 US employees. The possible amendments to Subtitle C concern the possible FICA tax changes in this paper related to the Affordable Care Act. Hopefully the rest of this paper is just as obvious, if not, please feel free to contact Tom Pallow during EST business hours at 202-903-1133 and he will personally answer any questions you might have regarding any ideas in this paper or any of the ideas that can be found at ThirdWayProgressives.org.

(1) “Wresting and Bouncing Crude Keynesianism Out of Washington DC for Good” ThirdWayProgressives.org.
(2) US Census Bureau, Foreign Trade, Historical Series, US International Trade in Goods and Services: 1960 – present.
(3) Globalization and International Trade by National and Region, “Globalization and International Trade”- World Bank Group
(4) World Trade Developments – .wto.org/english/res_e/statis_e/its2009…/its09_highlights1_e.pdf
(5) US Historical Tariff Collections by Federal Government: Historical Statistics of the US 1789-1945 and Office of Management and Budget US Whitehouse; Table 1-1
(6) World Bank Trade: World Trade Indicators, TAAG Tables
(7) 2011 Index of Economic Freedom: Trade Freedom, The Heritage Foundation
(8) World Bank, Trends in Average Applied Tariff Rates, GoeCommons
(9) US Bureau of the Census, 2008.
10 OECD – Centre for Tax Policy and Administration, OECD Tax Database.
11 Tax Policy Center, Brookings Institute, Tax Facts, Capital Gains and Taxes paid on Capital Gains 1954 – 2008.
12 Tax Foundation – Tax Data – Federal Individual Income Tax: Exemptions and Treatment of Dividends, 1913-2006.
13 Emmanual Saez and Thomas Piketty, “The Evolution of the Top Incomes: A Historical and International Perspective,” National Bureau of Economic Research, working paper no. 11955, January 2006.
14 The World Top Incomes Database, Facudo Alvaredo, Tony Atkinson, Thomas Piketty, January 2011.
15 US Census Bureau, Statistics of US Businesses: 2008 : All industries US.
16 Bureau of Labor Statistics
17 The four to five times more efficient is derived by using the same economic assumptions as the below study, yet using the ETCO personal income tax plan that is in the Summary of Our Overall Tax Reform Plan that can be found in the Weekly Blog section of the website ThirdWayProgressives.org: Obama Tax Hikes: The Economic and Fiscal Effects, Published on September 20, 2010 by William Beach , Rea Hederman, Jr. , John Ligon, Guinevere Nelland Karen Campbell, Ph.D. Center for Data Analysis Report #10-07.
18 Emmanual Saez and Thomas Piketty, “The Evolution of the Top Incomes: A Historical and International Perspective,” National Bureau of Economic Research, working paper no. 11955, January 2006.
19 The World Top Incomes Database, Facudo Alvaredo, Tony Atkinson, Thomas Piketty, January 2011.
20 US Census Bureau, Statistics of US Businesses: 2008 : All industries US.
21 “Recent Changes in US Family Finances” Federal Reserve Bulletin.
22 Jay R Ritter, University of Florida, “Initial Public Offerings.”
August 5, 2013 – 11:36 PM
By adminWrestling and Bouncing Crude

Foreign Tax Evasion, Our Bright Budget and Economic Future, and Dem’s Best Last Shot for Nov 4

By Tom Pallow of Third Way Progressives

With the rising problems in the Middle East, it is now more important than ever that we begin to fix and reverse our nation’s budget and economic problems. Not doing so will only further embolden those in this world who hate the US, think we are now weak, and therefore believe that this is the best time to attack! Yes, we are now actually in a time in our nation’s history where the courage and hard work of tax and economic counsels on Capitol Hill will save American lives!

A little more of this paper will be about Employer Tax Carve Outs and how important and beneficial it would be for all Americans if Democrats help enact ETCOs, like that in Collins/McCaskill S 1960, and other tax reforms as soon as we can while beginning now to talk on the campaign trail about tax inversions, tax reform, and ETCOs. But most of this paper will be what I believe is a great outline of a very specific and very workable and bipartisan, comprehensive tax reform plan, with a very specific emphasis on issues related to forms of foreign tax evasion, like tax inversions, income stripping, transfer pricing, and intellectual property tax avoidance, and the like, also with an emphasis on how Employer Tax Carve Outs, and Employee Tax Credits which create ETCOs, can help the US and our OECD partners in these problematic areas.

With Americans being beheaded, very porous US borders, and an economic “recovery” of low paying and part-time jobs, Americans will now vote for real problem solvers of any party, I believe the below, tax reform plan would play an intricate role in helping to solve our nation’s budget and economic problems, while also being of great political benefit to agreeing politicians!

When addressing the problems of Foreign Tax Evasion, problems like Earnings Stripping, Transfer Pricing, Tax Inversions, and Intellectual Property Tax Avoidance, there are three very important realities to kept in mind. First off, for the US, all forms of foreign tax evasion only affects the area of our federal tax code that collects usually less than 10% of all federal revenues, this primarily being from the C Corporation portion of Title 26, so therefore, any minor political disagreements over how the issues of FTE are resolved in any less or more comprehensive tax reform legislation should not be used as an excuse for Congress to not move on overall business tax reforms that will, with Employer Tax Carve Outs, positively affect at least 45% of our federal revenues and as much as 60%. Secondly, there already exists much bipartisan political agreement regarding a few of the most prominent questions regarding FTE, and some newly proposed legislation regarding FTE will also improve our code. Thirdly, ETCOs, and Employee Tax Credits that help create ETCOs, can greatly improve the efficiency and fairness of our nation’s, as well as the world’s, international tax system.

Very quickly, ETCOs in their simplest form allow governments to raise revenues through the personal income tax system without raising taxes. This is possible by shifting the tax burdened off of domestic employers and onto wealthy non-employers. With such a shift America’s fastest growing domestic job creators, an area of the economy with one of the fastest rates of velocity of money, get to keep more of their capital so that they can invest more in the US and increase the demand for labor domestically. Also with ETCOs, taxes are raised on wealthy non-employers, where the lowest velocity of money exists, and with ETCOs a new tax incentive exists for the wealthy and all to find ways to become wealthy by employing domestically!

The primary keys for allowing this all to work are the fact that relatively few people employ fellow citizens and the fact that ETCOs are created by using Employee Tax Credits that are always worth less than the employer’s side of all FICA taxes paid which also must be paid in order to take advantage of ETCs. So therefore, ETCOs are not government subsidies, and they will be very easy for the IRS to police because they will be worked through our FICA tax system that, despite it’s problems, is one of the most well documented groupings of tax or economic data either with the public or private sector.

Most importantly, ETCOs simply allow governments in the world’s now hyper competitive global economy, with a 12 fold increase in economic competition for the US since 1967 alone, to raise personal income taxes on their wealthy without adversely affecting potential domestic job and income growth and domestic global business competitive advantage. With ETCOs the math of the personal economics of the wealthy always works to create a more efficient, wise, and prosperous tax policy. That is, with a peak of about 16% at about the point of the top 1% of US incomes, and dropping quickly going higher or lower, the fact is that very few personal income tax revenues are generated from the active profits of a business that is taxed as personal income that has one or more employees in the US, and these numbers have remained historically and universally very stable (1). ETCO will allow the US, the rest of the OECD, and more, to raise taxes in the area of the economy where the lowest velocity of money exists, with wealthy non-employers, while giving more capital to the economy’s most dynamic and fastest growing domestic job creators. ETCOs allow for much more sound government budgets, increases in private sector job growth, and the ability for governments to increase government investments that will have the effect of increasing the ability of the economies of the world to grow, increasing prosperity, and making the US and the world more egalitarian and safe!!!

Now on to the specifics of forms of Foreign Tax Evasion, and a plan to fix these problems while incorporating ETCOs and ETCs. But as you read them keep this in mind: One of the most prominent questions regarding FTE that is agreed upon among most on Capitol Hill regardless of party is that, regarding reducing the number and severity to federal revenues of forms of FTE that occur primarily for tax purposes, that the most efficient and effective method for accomplished the successful legal reversal of these forms of tax avoidance is by bringing the effective tax rates for business, and especially employment, done in the US to about equal to the tax rates for business and employment done with most of our foreign economic competitors.

With the above in mind, let us first look in detail at the issue of Earnings Stripping. “Earnings Stripping usually refers to the payment of excessive deductible interest by a U.S. corporation to a related person ( or entity ) when such interest is tax exempt (or partially tax exempt) in the hands of the related person” (2). In more plain English what US Corporations are doing to avoid taxes with Earnings Stripping most commonly is, through a related and foreign person or business in a low tax rate nation, on the US parent’s tax books and those of that related foreign entity, it will be posted that the US parent Corporation is “borrowing” a substantial amount of money from the related foreign entity. By doing this the US parent could then write off from their taxes as an expense the “interest” that is paid to the foreign entity for this “borrowing”. These interest payments can also be taken as profit in the foreign nation and therefore with a lower income tax rate.

Senator Schumer has proposed “taking away deductions companies can take when making loans between subsidiaries, repealing a current standard for debt that companies use for additional breaks, and allowing interest expense to make up no more than 25 percent of the subsidiary’s adjusted taxable income, down from the current 50 percent threshold. Schumer’s bill also repeals the interest expense deduction carryforward and excess limitation carryforward so that companies can’t use the deductions in future years, and mandates that U.S. subs get IRS approval for transactions from the IRS for 10 years after the inversion. Schumer had proposed reaching back to companies that have inverted since 1994, but the version introduced Wednesday doesn’t include a date”(3).

All of the above, Senator Schumer ideas, would help reduce Earnings Stripping to an extent, and they should be enacted. However, alongside these tax law changes, a much more effective and efficient policy regarding Earnings Stripping would be to also enact an ETCO and Employee Tax Credit tax system and use this system as a legal tax tool against Earnings Stripping. This can be done by only allowing such “borrowing” with foreign entities to be written off as an expense if there is a near, within 20%, relative and corresponding, to the last 5 years, increase in US Employee Tax Credits accumulated by the US Corporation, of course, for investments in the US. Also, the closer to 20%, the less the tax deduction could be written off. Such a tax policy would mean that, through the Employment Incentive and the Compensation Incentive that exist within ETC’s for C Corporations and businesses in the US with over 500 employees, new and/or higher paying jobs must be growing in the US with that US business through this borrowing in order for the borrowing from the foreign entity to be able to be written off as an expense. Such a policy will better help allow for real business investments while greatly helping to reduce Earnings Stripping. For much detail on my C Corporation and Over 500 Employee tax system read my submission paper to the Senate Committee on Finance that can be found on my website, ThirdWayProgressives.org in the Weekly Blog section.

ETCOs and ETCs can also help police and make more efficient tax laws regarding the FTE problem of Transfer Pricing. Transfer Pricing is a tax avoidance scheme wherein, generally speaking, a multi-national business will overstate their business expenses in high tax rate nations they do business in, thereby lowering their profits stated in their high tax rate nations and thereby lower their total global tax bill, while understating on their tax books their business expenses with legally related foreign entities in foreign nations with lower income tax rates, thereby further reducing their total global tax bill.

ETCOs and ETCs can help in this entire area by making it easier to coordinate and lock real business expenses to the nation where the value of the product and/or service was generated. Creating the ability for the IRS to tie the amount to which a business expense can be deducted to the level of domestic employment and the rates of domestic employee compensation will make this area of our international tax code more truthful, fairer, more egalitarian, and much less subject to fraud! Such a policy can function in the real world by simply only allowing income to be counted as foreign income if there is a corresponding increase in investments in that foreign nation with that investment having a ratio of “phantom” ETCs to all other business spending in that nation, that is at the same ratio as that firm’s like spending in the US, within 30% and less so approaching 30%. “Phantom” ETCs are the calculation of foreign labor expenses as though this foreign nation had an ETCO and ETC tax policy identical to the US’s. Such an overall policy would be fairer to all involved, and it also fits perfectly with the OECD mandate of connecting taxes and tax jurisdictions to where the value of products and/or service are generated (4).

So how can ETCOs and ETCs help to prevent Tax Inversions? Tax Inversions are generally defined as a domestic business in a high tax rate nation buying a foreign entity in a nation with a low tax rate, then moving the headquarters of that conglomerate from the high tax rate nation to the low tax rate nation for tax purposes. ETCOs and ETCs can help prevent such Tax Inversions by connecting the deductablity of this type of headquarters change to the relative amount of Employee Tax Credits that are acquired in the US versus what ETCs would be acquired in the new foreign country if their government also had an identical ETCO and ETC tax policy to the US’s. More specifically, the legality of the deductiblity of such a headquarters change could only be considered deductible if a corresponding investment were to occur in the foreign nation with “phantom” ETCs within a 30% range of what ratio is typical of US ETCs earned in the US to total business deductions in the US for the US parent. This policy could use a sliding scale wherein such a headquarter change would become considered more foreign income if a proportionate amount of “phantom” ETCs are created in the foreign nation minus as much as 30%. Such a policy would greatly reduce Tax Inversions while allowing for the true dynamism of a free market global economy to also flourish.

I will have more on why we should count ETCs versus simply only counting employee expenses, and before I discuss Intellectual Property tax evasion, or “Patent Boxes”, let me first cover the controversy of a World-Wide tax system versus a Territorial tax system.

Regarding this extremely important debate, again keep in mind that the most important aspect of successful international tax policy is to maintain an income tax on the profits generated from domestic employment that is about the same as those rates for our foreign economic competitor, and that the maintenance of these rates can best be achieved with an ETCO and ETC tax system, that can flourish in either a World-Wide or Territorial tax system.

I will argue that for now, at this point in our nation’s history, an ETCO modified World-Wide system will clearly be the best international tax system for us to reform into for now, as well as being a model that the rest of the world will want to emulate most of.

An ETCO modified World-Wide tax system could essentially have a lowest top tax rate for all US businesses with over 500 employee of 20% for income generated in the US, and then a tax on foreign income of from 1% to 5% depending upon how many US ETCs that a business is able to generate relative to that business’s total foreign labor expenses. Obviously a C Corporation, or over 500 Employee, tax rate of roughly 20% to 25% would be competitive with our major foreign economic competitors. A comprehensive tax reform plan much like this can be found in my submission paper to the Senate Committee on Finance that can be found in the blog section at ThirdWayProgressives.org.

However, why still keep the World-Wide system?

There are several reasons, but perhaps the greatest is that:
Even if every government in the world were to enact all of the specifics and that which has been outlined by the OECD regarding reversing tax base erosion, profit shifting, and FTE, and all of the good legislative ideas of all members of the US Congress regarding reversing FTE were enacted and enforced, there would still exist incentives everywhere in the world, and even in the most tax regulated and inforced OECD nations, to want to attract new business investment by competing on being the lowest tax government. This incentive will always exist for all governments, as well as of course for all private business entities. Therefore, even though the recent OECD reports on foreign tax evasion demand that all OECD nations share all business deduction with total transparency with all governments involved (4), there will always exist a financial motivation, especially for the private businesses, but as well as for all governments, to want to claim income, or have income claimed, within the jurisdiction with the lowest effective tax rate. With a constant motivation to create and accept inconsistencies in tax books in ways that lower tax revenues for governments far away, if the US were to move relatively quickly into an ETCO tax regime but with a Territorial tax system, such a move would create a risk that I believe would better be mitigated by using an ETCO modified World-Wide tax system.

The risk with a Territorial system exists for several reasons. For one, Territorial tax systems themselves are something that still, in reality, have not been proven to be sufficiently efficient given that, considering only relevant periods of analysis, they have only occurred predominantly throughout the world in our hyper competitive global economy and only over the past few decades in an era of global race to the bottom policies on tax rates, and especially for large multi-national businesses, and especially what supports this “unproven” theory is the record high level of global savings relative to the entire global economy, much of it existing due to lower effective tax rates and perhaps even likely, tax avoidance due to the prevalence of global trade and Territorial tax systems. Also, it still could be that over time the compliance costs for the IRS and for US businesses of a World-Wide tax system will be well worth those costs given that no one could seriously argue that a World-Wide tax system would not make IRS policing much easier. For one, if in a World-Wide system a business entity doing business and employing in both the US and a foreign nation has to pay some kind of US tax for income made in the foreign nation, then the ability to prosecute a person for tax evasion related to any aspect of global taxation, will be made much easier when compared to most similar situations within a Territorial tax system, and even if this amount of tax is relatively small.

Then there exists the fairness argument for a World-Wide tax system. That is, under the plan that I propose, a top income tax rate for US businesses with over 500 employees could have a top tax rate of 20% for US generated income, but then would have to begin to also pay an income tax at a rate of 1% to 5%, and likely closer to 1%, on income made in a foreign nation with sufficient investments there. This 1% to 5% tax could be considered the fair price for the US government now protecting and policing the parent firms new trade now done across US borders. This small extra income tax can help pay for policing and regulating the global economy that the US does more than any other nation. Meanwhile however, this tax rate is so small as to not hamper the dynamic growth and improvement abilities of a free-market global economy while keeping total US tax rates competitive globally.

Back to the better policing argument for an ETCO and ETC modified World-Wide tax system, ETCOs and ETCs make tax policing and accuracy much easier for the IRS as well as for all tax administrations. ETCs are calculated using, despite it’s problems, one of the most well documented forms of documentation in the world of economics and tax, that being US FICA taxes, furthermore, in order for tax payers to acquire ETCs they must fully pay their employee FICA taxes. Also, fellow OECD members will likely want to emulate our ETCO and ETC tax laws which will also make all IRS policing much easier. Lastly, the 1% to 5% tax rate that is paid by US businesses on foreign income earned works as an added tax incentive to employ more and in higher compensating ways in the US. Remember that, the more a business acquires US ETCs relative to the rest of the firm’s total foreign labor expenses world-wide, the more likely that firm will have a 1% tax rate on foreign income or closer to 1%.

Just for total clarity here: Under such a system a foreign parent doing business in the US is taxed almost identically to and mirroring US businesses. They would be taxed on their US generated income by taxing their US income using a lowest top tax rate of 21%, with exactly the same ETCOs and ETCs as US businesses with US income, with the exception that a Phantom World-Wide tax at a rate of 1% to 5% will be paid by the foreign business on their income in the US that would be closer to 1% the higher the percentage of the foreign parent’s worldwide portfolio were US ETCs.

So an ETCO and ETC Modified World-Wide tax system with lowest top rates of 20% to 25% would work ideally for the US right now! A similar comprehensive tax plan can be found a ThirdWayProgressives.org. in my “Submission to the Senate Committee on Finance” paper.

Regarding the issue of intellectual property and foreign tax avoidance, once again ETCOs and ETCs can greatly help. The primary way in which multi-nationals use intellectual property to avoid taxes is by engaging in a form of Transfer Pricing wherein typically a US parent company, connected typically to a foreign entity that is selling it’s product outside the US, then transfers the intellectual property of the US parent to the foreign subsidiary, and then uses this as a tax rule justification for moving the parent’s profits that are generated in the US under a higher income tax, to profits made through the foreign subsidiary with the lower income tax.

ETCOs and ETCs can greatly improve tax law in this problematic area by locking much more accurately and transparently law regarding the US tax liability of profits acquired through the ownership of intellectual property to the nation or state where the labor that generated that IP and profits did in fact come from, and once again the accuracy in calculating this measure of “labor” can be improved by using ETCs acquired by individual firms. This accuracy occurs because ETCs foster greater documentation regarding labor. The recent OECD reports on reversing foreign tax evasions also mandates that, regarding tax evasions involving intellectual property, as they do with virtually all areas of tax, the OECD reports mandate that profits attempt to be booked as profits in the jurisdiction where the value of production was generated (5). Locking the generation of value of products to labor expenses, and by adding as a measure of these labor expenses ETCs, and along with some IP law changes and new tax regulations, can greatly tighten the tax definition of “intellectual property labor” while greatly improving our international tax code. There are many reasons why an ETCO and ETC Modified World Wide tax system would work best for all in the area of IP. The security issues addresses above and fairness to the nation’s where the intellectual property was generated are chief among them.

There are also law changes outside of the area of tax but regarding intellectual property law that would also have the effect of better connecting profits related to intellectual property to the jurisdiction where that intellectual property was produced. These IP law changes are related to new industrial policy ideas and more open patent and IP models, some of them are much like those in President Obama’s Manufacturing Institutes, and more of these great ideas can also be found in the “Wrestling ……..” paper that can be found at my website ThirdWayProgressives.org.

Due to the new war with isis, we will need new federal revenues. Also, due to our nation’s persistent federal budget and economic problems that would be greatly reversed with an ETCO and ETC tax regime, and due to the reality that not fixing our budget and economic problems will only embolden those who wish us harm because they perceive us as weak, and because an improved economy will help with domestic moral, it is imperative that Washington begin to talk about tax reform and especially ETCO tax reform! Moreover, ETCO tax reform would be extremely politically popular for Democrats, and it might be one of the only issues for Democrats to pull out at the last hour to win this November 4th.

Right now more than anything American votes want to vote for problem solvers. ETCOs would solve a major problem by allowing governments to raise personal income tax rates on their wealthy, the place where the slowest velocity of money exists except for employers, and also the tax that raises by far the most government revenues, to much higher rates than governments otherwise would be able to raise in the hyper-competitive global economy we now live in without adversely effecting domestic job and economic growth and competitiveness. Therefore, Democrats should immediately begin to promote ETCO tax reform.

Democrats should try this fall to make Tax Inversions, tax reform, and ETCO tax reform a major campaign issue. But if Democrats fail to retain the Senate this year, then in the lamb duck session, centrist Democrats and Republicans should compromise on an ETCO tax reform plan as part of legislation for avoiding the budget ceiling that will come this December. As part of this compromise, the medical device tax should be eliminated. After all, given how much more efficient an ETCO tax regime would raise government revenues compared to our current tax system, why in the world would we continue a tax that is only going to make one of the fastest growing industries in the world, one that saves lives hourly, one that the US is still a world leader in, and one that is high employee compensating, less competitive to do business in in the US!

But American’s deserve bold work by Washington! Washington should at the very least enact an ETCO along with an end to the medical device tax, and this compromise should be part of a budget deal that raises the debt ceiling until at least October 2015 and perhaps even unlit late 2016. But as part of this, December 2014 budget deal, not only would an income tax shift occur, from domestic employers onto wealthy non-employers, thus not being a tax increase, but this tax shift in itself would raise much federal revenues, and the repeal of the harmful medical device tax would also be more than paid for, but also in this December 2014 budget compromise deal should included in writing a real commitment to engage in 2015 in further tax reforms, like those in this paper, and perhaps healthcare reforms, a highway bill, and perhaps even immigration reforms. Also, ETCO’s make easier for employers, minimum wage increases!

If these reforms were not to occur in 20015, then Democrats can run in 2016 on a personal income tax increase on the wealthy with an ETCO. Moreover, Tax Inversions and ETCOs would even be a great campaign issue for Dems in 2014, if they gave it a shot. With this political effort and the understandings that would come from it, Republicans should come to see sometime in 2015 or sooner that their best strategy for not losing big in the 2016 election would be to have extensive tax and healthcare reforms, a highway bill, and perhaps even immigration reforms, in 2015, thereby removing taxes and perhaps these other issues as winning issue from Dems in 2016. Also keep in mind that ETCO would help with immigration reforms by creating an incentive for employers to pay all FICA taxes. And again, ETCO’s make easier for employers, minimum wage increases!

Democrats could greatly help all Americans and greatly improve our nation’s government budgets and economies, and lead the world, by letting the Republicans take taxes as an issue away in the above manor. Historically, this has been the way such political situation in the US have played out. You can now do all you can to help make this happen, and this time this should help save American lives!!!

(1) Tax plan found at ThirdWayProgressives.org in the “Submission Paper to the Senate Committee on Finance.”
(2) Report to The Congress on Earnings Stripping, Transfer Pricing and U.S. Income Tax Treaties, Department of the Treasury 2007, page 33.
(3) Politico’s Morning Tax email, 9/11/14
(4) OECD Report: OECD/G20 Base Erosion and Profit Shifting Project 2013
(5) OECD Report: OECD/G20 Base Erosion and Profit Shifting Project 2014

The Coming Obamacare Recession, The Economic Disaster that Will Follow, and The Only Way to Avoid It!

By Tom Pallow of Third Way Progressives

Congress deserves real praise for, after far too long, beginning to take on it’s responsibility of setting and appropriating federal budgets. It feels great to work together and achieve an outcome that is better than what would have occurred had Congress not worked together. This “outcome that is better” will come via Congress not causing another type of government shut down, thus avoiding a reduction in economic confidence throughout the world, and Congress proving that it can actually work together, thus giving hope that the US just might be able to solve it’s long building economic, budget, and healthcare problems.

Yes, praise is deserved for this budget deal, but only for a brief moment. The truth is that our nation is in virtually every way the terrible shape that most people would generally imagine an 8% approval rating for Congress would reflect. This “economic recovery” is the worst economic recovery in history(1,14)! Our recent budget deal can be compared to an 0 and 6 sports team scoring a 0 – 0 tie against one of the worst teams in the league. Importantly, the primary purpose of this paper is to, following the sports analogy, show you convincingly that the teams we are about to face on our schedule are, by far and away, much tougher than any team we have faced in some years. Further, that once again all of us working together across party line will be many more times beneficial for everyone than not, and the sooner the better!

11 major economic downturns have occurred like clockwork on average every 10 years dating back to 1908. They have occurred in 1908-13, 1920-21, 1929-34, 1937-38, 1949 and 50, 1958 and 60-61, 1970 and 71, 1979-82, 1990-91, 2001, and 2007- in many ways still now (2). Prior to 1908, but changed due to the creation of the Federal Reserve and the progressive income tax in 2013, major economic downturns occurred on average every 5 years. This 5 year financial and economic growth cycle still exists, but it has lost some of it’s power due to these 1913 policy changes among others.

In every decade since 1913 the 5 year economic cycle has reemerges about the 5th year of each decade as an economic and GDP growth rate slowdown, and at times even a full two or more quarter recession in mid decade, the last two of these being in the 1970’s and 1950’s.

In a bit I will present the data that lays out why we are on track to have a 5 year economic cycle recession this mid decade. I will also lay out why one of the most overriding factors that will bring us into this recession will be the consumer demand that will be pulled out of our economy via the IRS finds and new and higher healthcare payments that the young and the poor will have to make due to Obamacare. The bottom line will be the fact that the poor and the young, who generally spend nearly every dollar they earn, will be reducing their consumer purchasing due to IRS finds and new and higher healthcare policy costs that will be monies that will now likely virtually only go into the shoring up of the balance sheets of some of our economies largest and strongest institutions, those being the federal government and our largest healthcare insurance companies. Of course, this will slow our economic growth! In this paper I will try to estimate how much, but more importantly, I will propose a way to reverse it.

Furthermore, generally, the weaker the economic growth of each 10 year cycle decade, the worse will be the larger 10 year cycle economic downturn. Two 5 year economic cycles are obviously working in coordination with the larger 10 year cycle. The next 10 year economic downturn is scheduled for around 2020. Examples of such decades with relatively weak mid decade economic growth rates that lead to very sharp 10 year cycle recessions are the 1970’s and 2000’s. Another devastating recession of such magnitude, given our current monetary, along with our federal and state budget positions, would not only inflict great pain on the American people, but as I will latter show, could bring on new geopolitical problems.

I know there are economists out there who entirely discount the predictability of economic growth cycles. But anyone would be a fool if they ignored something so devastating that has occurred with certainty 11 times in a row, this being the 10 year major economic downturn cycle, and if one really examines the data, many times more than 11 times with the 5 year economic cycle prior to that. It has been my experience with economists who discount a degree of predictability with economic cycles, that it is generally the economists who are most in the dark as to why economic cycles exist who are most certain that they are not predictable.

Discounting something so harmful that has occurred 11 times in a row would be foolish, and not fixing Obamacare as soon as possible so that we have a more efficient, extensive, and higher quality healthcare system would be foolish as well. Some will ask why we should take on such big challenges right away. As I lay out data, it will argue why it is most important that we begin now to set the field so that we can overcome the coming economic slowdown and create a much better outcome. I will also lay out what I believe our best game plan will be.

The 5 year, mid decade economic cycle is extremely reliable and pronounced. Let us examine the past six full 10 year cycles dating back to 1948 and that decade’s mid decade economic slowdown. Once again, the 10 year cycle of largest economic downturns, dating back to 1908 occurred in 1908-13, 1920-21, 1929-34, 1937-38, 1949 and 50, 1958 and 60-61, 1970 and 71, 1979-82, 1990-91, 2001, and 2007- to in many ways still now (2).

Lets start with the economic recovery that began in the first quarter of 1950 and that ended with a, 5 year cycle recession in the 4th quarter of 1953. This economic recovery had an average GDP growth rate of 7.6%. It then bottomed in the 1st quarter of 1954 with a minus 6.2% GDP growth rate. Then that recession ended in the 3rd Q of 1954. This economic expansion experienced a 136% decline in GDP growth rate from it’s peak of 17.2% in the 2nd Q of 1950, to minus 6.2% in Q1 1954. The same economic expansion experienced a 125% decline in GDP growth rate when compared to the average of the Q4 1953 to Q2 1954 recession. It had a 146% decline from the expansions GDP growth rate average of 7.6% to the recession average of minus 3.5%.(2)

The 1960’s economic expansion that began in Q2 1961 and came to much slower growth in Q3 1966 with a 1.3% GDP growth rate, experienced a 99% decline in GDP growth rate from it’s highest rate to it’s lowest of .1% in 3Q 67. The decline was 55% from this expansion’s average of 5.55% to the slowdown, Q3 66 to Q1 68, average of 2.47%.(2)

The economic expansion that began in Q2 1971 had a GDP growth rate decline of 142% from it’s quarterly peak of 11.5% to the economic trough of minus 4.8% in Q2 1975. The expansion that went from Q2 71 to Q4 73 averaged a 6.12% GDP growth rate, while the downturn from Q4 73 to Q2 75 averaged minus 1.57%, for a decline of 126%.(2)

The economic expansion that began in Q1 1983 and moved into a slower rate with a 1.6% GDP growth rate in Q3 86, had an average growth rate of 6.9% before it experienced an average GDP growth rate of only 2.4% between Q3 86 and Q4 87, a decline of 65%. Meanwhile, this early and mid 1980’s expansion experienced a top GDP growth rate of 9.3% in Q3 83, but a lowest rate of only 1.6% in Q3 86, a decline of 83%.(2)

The GDP growth rate averaged 3.25% between Q3 1991 and Q1 95. It then grew by only 1% and .9.95% in the first two quarters of 1995 respectively, a decline of 71%. From highest GDP growth rate in this early 90’s expansion to the lowest GDP growth rate in the first two quarters of 1995, there was a decline of 84%.(2)

The economy averaged a GDP growth rate of 2.92% between Q1 2002 and Q2 06, before averaging just 1.17% for a year beginning in Q3 06, a decline of 60%. GDP growth then increased, averaging 2.43% for three quarters, before entering the Great Recession. GDP growth rates, from their highest to lowest quarters, in the early to mid 2000s went from 6.7% in Q4 03 to .1% in Q4 06, a decline of 98%. (2)

All and all, with the six full, 10 year economic cycles since 1948, the 5 year economic cycle has created an average decline in GDP growth rates in mid decades of 107% when measuring from best quarter to worst quarter. When comparing the average GDP growth rates of early to mid decade economic expansions to the average growth rates during the 5 year cycle slow down period, the average decline for the six full 10 year economic cycles is 87%!

Given our current economic recovery’s record low average GDP growth rate of 2.35% for Q4 2009 to Q4 2013, if history repeats at an historically average level, we can expect a GDP growth rate of only about .3% or worse in the next year or so! Moreover, unlike the last decade when the mid decade economic growth was fueled by a housing and a sub-prime housing refinance boom that allowed millions of people to almost continuously spend the growing equity in their homes, the paltry economic recovery that we are now experiencing will have to deal with the headwinds of IRS finds and new and higher Obamacare costs that will be pulling consumer demand out of our economy in one of the most direct ways. I will now show why these headwinds will be stronger than a .3% GDP growth rate!

First off, in order to predict the negative effect on GDP growth due to the new and larger insurance policy costs for consumers due to Obamacare, one has to rely on some estimated numbers that have been counted only a few times and for a short period of time. This means that with some of these numbers there exists large variation and overall disagreement. That said, I will walk you through how, only with the most optimistic number combinations, do we perhaps almost have a chance to ovoid a 5 year cycle recession in the next few years!

Given that Obamacare dictates a higher than average level of coverage, with the inclusion of “10 essential elements” to have a qualified plan, Obamacare insurance will generally cost consumers more than their pre-Obamacare policies. Two questions to be answered are how expensive on average, and how much more expensive on average? Another important question will be, how many people will have to pay the higher Obamacare policy costs? The last major question will regard how much federal and state governments will be paying for these Obamacare policies? The last question itself will likely sets off several important questions that will need to be answered by our government relatively soon.

As to the question of how much more costly on average Obamacare policies will be, in September 2013 the Department of Health and Human Services released a volume of data concerning Obamacare. The Manhattan Institute, and then later some researchers from the Manhattan Institute and the Heritage Foundation, made estimates of Obamacare insurance increases or decreases for 47 states(3). Their average increase for 27 year olds was estimated to be 63.9% above what last years pre-Obamacare healthcare policies cost. For those age 50, the increase was estimated to be 38.9%, and for families of four the increase was estimated to be 8.8%. Only five states are expected to to have decreases in policy costs with Obamacare for the above three groups.(3)

For those who might question the degree of pessimism in these Manhattan Institute and Heritage Foundation numbers that were published in October, most evidence to date shows that their data is most often too optimistic! Most reports in the media are showing this to be so. For example, from the New York Post, and keep in mind that with the M.I. and H.F. data the State of New York is supposed to experience decreases of 28.8%, 28.8%, and 6.7% with the above three groups respectively in the cost of Obamacare policies versus last years policies; yet, “The National Federation of Independent Businesses, an organization that represents nearly 11,000 entrepreneurs across the state, says it has yet to find a single member whose health-care costs are going down under the ObamaCare program.”(4) That warned, for my calculation of how this will all slow GDP growth, I will stay with what appears to be optimistic numbers and assume these M.I. and H.F. numbers.

As to the actual costs of these new Obamacare plans, of course that data is not yet available, at least for me. But we can take the cost of average healthcare policy from 2013 and extrapolate from other data. A Kaiser Foundation survey of employer sponsored policies, employer sponsored policies being the vast majority of what we need to analyses, said that the average Family Policy cost $16,351 in 2013 and the average individual worker policy cost $4,565 in 2013.(5)

From here we must attempt to predict an accurate mix of family and individual policies that will see an increase due to Obamacare. Past experience and census data predict that family policies would consist of about 17% of the total (6). As to any other further mathematical divisions regarding who is and will be experiencing an increase in healthcare costs due to Obamacare, it would be very difficult and likely inaccurate given the data that I have access to, or probably even with all the data that now exists outside of Health and Human Services. Therefore, I will simply take an average of the increases in healthcare costs for 27 year olds and 50 year olds using the M.I. and H.F. data, and calculate this against the 2013 cost of individual worker plans. I will then do the same for Family policies and weigh them as 17% of the total increase in costs of policies.

When the above math is done, I get an average policy cost increase from 2013 to 2014 due to Obamacare of $2,192, not calculating any government subsidy, and weight averaging family and individual plans. To continue, I have read that the Department of Health and Human Services expects that the federal government will be covering about 50% of any such policy increases through government subsidies(7). But before we subtract this 50% from the amount that will be pulled from consumer demand throughout the economy, let as try to calculate the number of people who will be getting more expensive policies via Obamacare versus their old policies. Because this is the most contentious and deviant number, and a number that will also have a large effect on our GDP growth rate. For this number some estimates are as high as 90 million, while the CBO claims that it will be as low as 7 million. But these CBO estimate do not include the changes to employer sponsored policies that will begin in Obamacare next year(8). Moreover, it is predicted by just about everyone that about 16 million people will go from having no health insurance in 2013 to paying for insurance through Obamacare as the IRS finds for not buying a policy increase over the next few years(9).

Back to the employer sponsored plans that will be lost and then increased over the next year. It seems that under current law, and reasonable estimates, a good estimate would be that about 25 million people who now have employer sponsored policies will have more expensive policies in Obamacare once they are dropped off of their current or 2013 policies over the next year(8&10). Plus there are another 5 million who have lost insurance in the individual market who will also have nearly identical policy cost increases. Further, I will be very generous and forgiving by assuming that the government will be paying for 75% of the costs of the Obamacare policies that will be paid by the 16 million who will be acquiring insurance after not having insurance in 2013.

Well finally, the important bottom line, and when using almost all of the most forgiving numbers! Under these calculations we can expect a total of $50.416 billion per year by next year to be pulled virtually entirely out of consumer spending only to be used to shore up the balance sheets of the federal government and America’s health insurance companies. This $50.416 billion is more than .3% of the government GDP estimate for the first quarter of 2015 which is $16.129 trillion. A decrease in consumer spending of $50.416 billion over this period could predict a GDP growth rate in that quarter of just below 0, and this is when using the most forgiving numbers! And again, this drop to .3% GDP is arrived at when calculating average economic expansion GDP growth rates, to the average GDP growth rates during the slowdown periods of two quarters or more, which would therefore also predict a full recession in 2015! Generally, once a recession is recognized, a physiological effect tends to work it’s way through the domestic economy and into the global economy, thereby slowing the economy even further, which will mean a recession with GDP growth rates well below just below 0!

Of course, the best thing we could do is start this year to enact policies that reverse this coming decrease in consumer spending and also enact policies that lower the cost of health insurance in Obamacare and otherwise. But before I lay out these policy fixes, let us first look at what might happen if we do not enact any policy fixes.

Not only would we likely have a mid decade recession in 2015, but looking further into the GDP growth rate data we can easily predict a very sever recession around 2020, an economic downturn comparable to the Great Recession, the 78-82 downturn, or perhaps even the Great Depression! What is very clear especially after 1948 with the GDP growth rate data is that, two out of the two,10 year economic cycles that had extraordinarily low average GDP growth rates for their decade, while not counting the quarters that had negative GDP growth rates, those decades being the 1970s and 2000s, experienced the two most sever recession since 1948(2).

For the 10 year cycle economic expansion of the 1950’s, that running from Q1 1950 through Q4 1958,and excluding the quarters with negative GDP growth rates, that 10 year cycle expansion experienced an average GDP growth rate of 4.8%. The 1960’s same average for Q2 1961 through Q4 1969 was 4.795%. Then the 1970’s same average for Q3 1970 through Q2 1980 dropped all the way to 3.375%. Then with the same average for the 1980’s, for the only time since 1948, the average went up from the last decade’s average growth rate, up to 5.45%. Then with the 1990’s economic expansion, Q1 1991 through Q1 2001, the rate averaged 3.72%. This average rate was above the 1970s but well below the 1980s. Then, while even dating back to the 1920s, GDP growth rates have been gradually declining, the rates have really begun to drop over the last 15 years! The expansion between Q1 2002 through Q1 2008 averaged only 2.92%, and the expansion beginning in Q4 2009 through now has averaged only 2.353%.(2)

I do not need to go through any mathematical exorcises to show you how much the average GDP growth rates of the 1970s, 2000s, and 2010s stick out in being unusually weak! Nor should I need to go through all the many ways that the recessions of 1978 – 80 and the Great Recession were far more severe than all other post 1948 recessions! Further, it would be foolish to assume that we could make up for our decade’s current low 2.353% average with high GDP growth rates after our likely 2015 recession. Except for the 1990s, with every 10 year expansion cycle since 1948, the first, five year cycle expansion had higher average GDP growth rates than the second, five year cycle expansion that came after each mid decade economic slowdown. The average for the six decade averages of each first, five year cycle expansion is 5.122%, while the average for the same six decade’s second, five year cycle expansion is only 4.044%.(2)

Even without the coming decline in consumer spending, the above data predicts that we are very likely to experience an extremely severe recession around 2020, something akin to the Great Recession or even worse! With the weak economic growth for the rest of this decade and a recession the size of the Great Recession around 2020, our federal debt will be brought into levels that could be dangerous to our long term economic and geopolitical viability!

I know that Paul Krugman has been promoting a chart showing over 300 years of English and British national government debt and the same 300 years of long term government bond yields rates (11). For Krugman, the purpose of this chart is to support his argument that there does not exist a relationship between high government debts and higher government borrowing costs. This is one of Krugman’s methods for arguing that our federal debt should not be worried about. Unfortunately for all of us, less than 10% of Krugman’s chart covers the post Bretton Woods era, with floating exchange rates and currencies not tied to gold in anyway. Furthermore with Krugman’s chart, the post Bretton Woods data completely contradicts this point for Krugman.

With weak economic growth this decade, and a recession like the Great Recession around 2020, and Fed Funds rates already so low that further lowering will do little to stimulate the economy, and with quantitative easing having very limited effect, our federal debt will necessarily boom, and with this scenario, nations that do not have our best interest in mind could work to movie our currency and borrowing positions into very painful positions!

So, for many many reasons, we must begin now to use constructive fiscal policies to reverse this coming economic downturn. We need to use fiscal policies because Federal Funds rates are now already to low to make much of a difference by being lowered and excess quantitative easing will eventually create inflation. Further, good fiscal policies would be much more effective than further QEs!

The most effective fiscal policies, for a too weak economy in a global economy, are those policies that raise government revenues from those areas of the economy where the lowest velocity of money exists, but policies that also appropriate government expenditures in ways that most increase private sector, generally followed by public sector, economic productivity and growth, while immediately increasing consumer demand. The economic term, Velocity of Money, is most often defined by how quickly quantities of money are traded for goods or services, the greater the total dollars traded, the higher the velocity of money.

We all know that high income earners and the wealthy generally have the highest saving rates. Therefore, the place in the economy where the lowest velocity of money exists is within the wealthy and high income earners who do not actively own businesses that employ in the US(12). This fact is why the Collins/McCaskill Employer Tax Carve Out, like the one in S. 1960, is so important to enact! In fact, one of the areas in the US economy that has the fastest velocity of money is with high active income earning US employers. They are nearly always the fastest growing job creators in the entire US economy, and by large amounts(12)! For much more on Employer Tax Carve Outs, read my last two papers that can be found at ThirdWayProgressives.org in the Weekly Blog section.

So by enacting a Collins/McCaskill style Employer Tax Carve Out, we could set the stage to raise federal revenues in the most efficient way. If we could pass an ETCO sometime this spring, at the latest by just after most primaries, to be credited against the personal income tax increase of last year, then we as Democrats this fall could run on increased personal income tax rates on non-US employing high active income earners, to pay for Obamacare costs for the poor and middle class among other things. Again, we would be moving money from the area of the economy where the lowest amount of spending on goods and services exists, to the area of the economy where sending on goods and services is being most reduced, thus increasing economic growth! And best of all, the American people would easily understand the logic of this argument, and they would strongly support it! For example, some of the increased federal revenues could be used to decrease the number of Americans who will be incentivized to stop working due to an Obamacare tax credit that phases out to quickly.

The above strategy would be far more effective politically, but much more importantly, it would be much healthier for our country than would our current and weak Democratic political strategy for 2014 of trying to pass immigration reform, knowing that the likely outcome will only become Democrats claiming that Republicans are racist because they do not vote for immigration reform! But also, if immigration reform can be enacted this year, then great, but make sure that the ETCO is incorporated because it will raise more federal revenues while making the enforcement and transparency of our immigration system much more accurate and easier because ETCOs create a greater economic incentive for “employers” to pay within the FICA tax system and to pay their side of FICA taxes.

And of course, an Employer Tax Carve Out makes the politics and economic logic of an increase in the minimum wage much much easier!!

Now that Republicans are aware that, while being a much more efficient method for raising government revenues within the personal income tax system which at this time collects over 45% of our federal revenues, ETCOs, at this point in our history, will politically benefit Democrats more than Republicans because ETCOs allow governments to raise personal income tax rates to rates much higher than would otherwise exist in our now highly competitive and global economy without adversely effecting domestic job and economic growth, due to Republicans now being aware of this, it is important to accept that the Republicans will deserve something in return for enacting ETCOs. For more on the explosion of global trade and economic competition throughout the world that has occurred over the past 45 years and particularly after the fall of the Soviet Union, read my preceding two papers in the Weekly Blog section of ThirdWayProgressives.org.

There are several things Democrats could offer in return. The OK for the Keystone pipeline would be a great one! If this pipeline is not built in the US, we will have no controls over how this oil is eventually delivered entirely through Canada while potentially threatening the Great Lakes watershed and much more. This pipeline would create jobs in the US as well as efficiencies in the energy market. It would generate enough new federal revenues to be able to pay for an Employer Tax Carve Out!!! Further, President Obama promised an answer on the question of the Keystone pipeline sometime in 2013, and with the changes to the pipeline they made in the Nebraska watershed, environmentalist are running out of reasons to oppose it. Democrats like Mary Landreu could also run on the fact that they helped enacting an ETCO and the Keystone pipeline.

Regarding any bipartisan compromise and the current Debt Ceiling debate: It looks to me like a really great compromise could now be made through clearing the way for the Keystone pipeline in exchange for ETCO tax reform and a Debt Ceiling increase! President Obama with the pipline remains rightfully committed to a public review process that is supposed to go into this summer. So if the President remains committed to that full process, then for now the Debt Ceiling should be increased for only the estimated time for completion of that public review process. This period of time will give Congress the time to really nail down tax reform! And it would occur after most primaries. But then, the sooner this compromise could be made the better. To me, this seems like a great deal for the country and everyone!!

There are also healthcare reforms that should be enacted that Republicans support, and some healthcare reforms that need to be enacted simply to, frankly save Obamacare, and to lower the cost of Obamacare policies. In this latter category, allowing for the ability to purchase health insurance across state lines within Obamcare would be great! Given that Obamacare demands a high quality insurance policy, states would not have to worry about their citizens buying sub-par health insurance from other states. Moreover, states that are running their own state Obamacare exchanges the most efficiently and effectively would attract private health insurance jobs to their state, and this competition would improve the entire Obamacare system. Furthermore, through these bureaucratic consolidations for private health insurers in Obamacare, the cost of policies in Obamacare would go down, once again, thus increasing consumer demand and economic growth. Also within this category of healthcare reforms is the tax reform of collecting Obamacare costs for employers and employees through the FICA tax system. This reform would stop the perverse and very laborious to police incentives not to have over 50 employees and not to employ over 30 hours a week. Plus this reform would create a sharper Employer Tax Carve Out, and it could easily be phased in with the ETCO(13)!

Regarding the above first category, even as a Democrat and a third way progressive, I will continue to argue that a healthcare system with Obamacare and private options in Medicare and Medicaid, much the way Paul Ryan has proposed, would help create a more efficient and capable healthcare system. It would help improve the entire healthcare market in the short and long term if people were able to, throughout their entire life, be able to purchase the extraordinary when it comes to healthcare. This reform would improve the healthcare markets ability to incentivize the creation of and disseminate new healthcare technologies that save lives and improve the entire system. Also, there is the Medical Devise Tax, one of the most ill-conceived taxes is decades, that needs to be repealed. Within this first category could also be a well written Medical Savings Account system.

I don’t know how you all will be able to make this compromise, but it must be done, and within the compromise must be the ETCO! The ETCO must be there because it will allow us to raise the revenues we need in the most efficient way that can then be used to increase consumer demand where it is most being reduced. Enacting a Collins/McCaskill style ETCO this spring could also be made easier by “paying for it” by reducing the tax deductions for the wealthy for the value of non-cash charitable donations and medical expenses to some degree. As could be reduced the degree to which mortgage payments for second homes could be written off, as well as could be cut the home business deduction for the wealthy regarding actual living spaces. Or better yet, the ETCO could simply be scored accurately, and it would cost nothing over time! Or, the ETCO could be “paid for,” simply by an extremely small part of the federal revenues that would be raised via the OK of the Keystone pipeline, or the ability to purchase insurance across state lines within Obamacare, or a private option in Medicare and Medicaid, and there would be plenty left over with any of these last three cases to extend unemployment insurance and rid ourselves of one of our most ill-conceived taxes in decades, the medical device tax!

It is time that we work together across party line and solve these long building problems that actually have the ability to do great, and potentially lasting, harm to our nation and to the world as a whole by 2020! Remember, this is why you came to Washington DC, and now is the time to do it! At this time in world history, democracy and the world need the US to be the strongest team! This year we can once again prove that we are, and we and the world will be made much better off!!!

(1) “The Worst Economic Recovery in History,” Edward Lazear, The Wall Street Journal, April 2012
(2) US Bureau of Economic Analysis. The US B of EA did have an interactive database for this data, but another great interactive database can be found at TradingEconomics.com.
(3) “How Will You Fare in the Obamacare Exchange?” By Drew Gonshorowski, The Heritage Foundation
(4) “Here are the Big Losers in Obamacare” By Carl Campanile, Bruce Golding,and Beth Defalco. New York Post, Jan 2, 2014
(5) “Employer Health Benefits Survey” The Kaiser Family Foundation, August 20 2013.
(6) “Family Structure and Children’s Living Arrangements” Forum of Child and Family Statistics
(7) Healthcare.gov
(8) “The GOP claims that more Americans have lost insurance than gained it under Obamacare” By Glenn Kessler, The Washington Posts
(9) “Double Down: Obamacare Will Increase Avg. Individual Market Insurance Premiums by 99% for Men and 62% for Woman.” By Avik Roy, Forbes, 9/25/13.
(10) “Another 25 Million Obamacare Victims” by Betsy McCaughey. The New York Post, Jan. 14, 2014.
(11) “Paul Krugman Trolls Deficit Hawks with One Amazing Chart” Huffington Business, Jan. 14, 2014.
(12) ThirdWayProgressives.org
(13) ThirdWayProgressives.org, “Our Tax Reform Submission Paper to the Senate Committee on Finance”
(14) For the worst economic recovery at least since 1948: This paper, that can be found at ThirdWayProgressives.org in the Weekly Blog section.

Our Tax Reform Submission Paper to the Senate Committee on Finance

Employer Tax Carve Outs and US Employee Tax Credits, the First Step to 21st Century Prosperity
Submitted by Tom Pallow of Third Way Progressives

Of course, the cleanest, or clearest, slate would be a complete rewrite of Title 26, which is in essence the 1954 IRS Code that was then renamed with modifications in 1986. Fortunately, such a rewrite is not needed even though today’s US economy, as well as the economies of most of the rest of the world, are fundamentally different now than compared to 1954. Since 1954 most of the world has experienced 8 to 12 fold effective increases in foreign economic competition, and especially for the US and most of the more developed nations of the world, declining manufacturing and exporting bases along with persistent trade deficits. Yet, thanks to the great work of the late Ward M Hussey and his team, very fortunately, only a relatively small reorganization and the likely addition of four new Chapters to Subtitle A, and possibly an addition of a new Chapter to Subtitle C are needed to amend Title 26, and therein enact into our tax code an Employer Tax Carve Out and US Employee Tax Credit tax strategy that will thereby modernize our tax code in the most efficient way that is most conducive to the US’s relatively new, highly competitive economy that has experienced an effective 8 to 10 fold increase in foreign economic competition that has coincided with the Kennedy trade round of GATT in 1967 and the end of the Cold War (1).

Most of this paper will regard in concept four new possible Chapters to Subtitle A while building upon a “cleaner slate” in these areas. Most importantly, regardless of how lawmakers decide to reorganize Subtitle A and other parts of the IRS code, and hopefully for this country by the fall of 2013, Congress should be guided by the following description of a specific Employer Tax Carve Out and Employee Tax Credit tax policy that creates a cleaner tax slate and then encompass today’s C Corporation and personal income tax code as well as other related tax reforms. Upon reading below, the four likely new Chapters for Subtitle A will become obvious and pointed out to the reader.

Let us start with Employer Tax Carve Outs and our personal income tax plan.

Employer Tax Carve Outs are achieved through the use of Employee Tax Credits. Employee Tax Credits can be used in this and many other ways throughout the entire economy in ways that will greatly incentivize employment domestically and in higher compensating manors. Employer Tax Carve Outs, due to their extremely simple, transparent, and nearly universal design, accomplish four primary goals. First, and in no particular order, ETCOs protect America’s most prolific job creators from burdensome income tax bills that can leave them uncompetitive with current or future global competitors. Secondly, the deeper the carve out with ETCOs, that is, the greater the difference in effective tax rates between the non-employing wealthy and domestic employers, the greater will be the tax incentive for wealthy non-employers, and especially talented people who find ways to become wealthy regardless, to employ domestically. Third, because such a small percentage of the wealth’s income comes from the direct and active profits of any US employer being taxed as personal income, and also due to the universality of ETCOs, ETCOs allow governments to have the option to raise personal income tax rates on the wealthy to rates much higher than governments otherwise would be able to do in our relatively new, highly competitive global economy without adverse effect on American employers and our economy. Fourth, ETCOs allow for the elimination of many, much more complex, much open to fraud, but much less often used tax credits that now go to the businesses community.

Before closely examining ETCOs and Employee Tax Credits, let us first examine the question of why ETCOs and ETCs at this point in our history.

The most fundamental economic change for the US in our lifetimes has been the effective 8 to 10 fold increase in foreign economic competition that has occurred over the past 45 years, and that has been greatly accelerated by the fall of the communist Soviet Union and the arrival of revolutionary telecommunications technologies. This submission paper will examine the data that proves this change, but first a little history.

When the communist Soviet economy began to slow in the early 1960’s, in a strategic Cold War response, the western democracies conceived of the Kennedy round of GATT. Finally signed in 1967, the Kennedy round created a quantum leap in foreign trade within the western developed economies, and for the first truly organized and collaborated time, trade with the developed west and the developing nations of the world. The next quantum leaps in global trade came with the Uruguay round of GATT in the mid 1980’s and with the WTO in the early 1990’s that fallowed the global fall and discreditation of the socialist and communist economic models. These are models that, unless a nation lives under a lot of oil wealth, quickly lead to repressive dictatorships.

The fall of the communist Soviet Union was of most significance. When virtually all of global communism fell in the late 1980’s, multinational businesses throughout the developed world no longer had to worry about their capital investments in the underdeveloped world ever being nationalized by some emerging socialist government. This change opened up a cheap labor market of nearly 4 billion people to the nearly 2 billion in the western developed world, and with this massive change the global economy truly began. This has been the largest political-economic change in our lifetimes, but we have yet to adjust our tax and many other policies to it!

As you will see in the following data, the period that followed the Kennedy trade agreement in 1967 saw a quantum leap in the level for foreign trade for the US and nearly the entire world. In 1960 US exports were 4.9% of US Gross Domestic Product and US imports were 4.26%. In 1965 exports were 4.8% of US GDP and imports were 4.3%. But by 1975 exports were 8.1% of US GDP and imports were 7.3%. By 1990 exports were 9.2% and imports were 10.6%. By 2010 they were 12.5% and 15.9% of US GDP, which was down from pre-recession levels of just above 17% (2, 3).

Further, although foreign trade as a percentage of GDP began at higher rates than in the US in most of the rest of the world, most of the rest of the world has mirrored the above change. Between just 1992 and 2005, beginning with the first new trade rules that came with the fall of communism, the OECD country average of total foreign trade in all goods and services as a percentage of GDP went from 32.3% to 45%. During the same years the EU 15 nation average went from 36.3% to 50.7% (3), Mexico went from 17.8% to 30.7%, Japan went from 8.8% to 13.6%, and total Chinese foreign trade went from $100 billion US dollars in 1988 to $2.4 trillion in 2008 (4). India’s total foreign trade as a percentage of GDP went from 16% in 1991 to 47% in 2008 (4). Between 1965 and 1999 the world as a whole had an annual increase in gross national product of 3.3%, while exports of goods and services for the world as a whole increased by 5.9% per year. Between 1965 – 99, among developed nations, GNP averaged 3.2% a year while exports increased 5.9% a year. During this same period for the East Asian and Pacific region GNP grow by an average of 7.4% per year while exports grow by 10.1% per year. In Latin America and the Caribbean GDP averaged 3.5% per year while exports grew by 6%. South America alone grew by an average of 4.7% per year while exports grew by 7.2%. Only Sub-Saharan Africa presents an aberration within this data. Their economies grew by an average of only 2.6% per year as exports grew only 2.4% per year (3). These numbers have only increased after 1999.

As expected, mirroring this data, average tariff rates throughout the world have gradually declined over the past 45 years. This decline began in the developed west with the Kennedy trade agreement, and then moved on to the developing world in the mid-80’s through the early 90’s with the Uruguay round of GATT and the WTO.

For example, the average tariff rate in the US in 1965 was 6.7%. By 1975 it was 3.7%. By 1990 it was 2.8%, and by 2010 1.3%. The US’s year to year average tariff rate expresses a very gradual and steady decline. Because of the GATT and WTO trade deals the rest of the developed west nearly mirrors the US’s drop. This is true except for a few agricultural and natural resource driven economies like Australia, Canada, and New Zealand that kept their average tariff rates relatively high up until the mid-80s and early 90’s. (5)

Also beginning in the mid-80s through in the early 1990’s the developing world started to drastically drop their average tariff rates. China dropped from a rate of 42.9% in 1991, to an average of 13.7% between 2000-04, to an average of 4.2% in 2009. Mexico went from 27% in 1982, to 13% in 1991, to 1.9% in 2009. Indonesia dropped from 37% in 1984, to 13% between 1995-99, to 3.1% in 2009. India went from 74.3% in 1981, to 32% between 2000-04, to 7.9% in 2009. South America as a continent averaged 38% in 1985, 13.2% in 1997, then an average, excluding Venezuela, of 4.2% in 2009. The above data has not been cherry picked. The above examples are indicative of nearly the entire globe. (6,7,8)

The above data that describes the world’s exponential increase in foreign trade is only half of the equation that explains America’s 8 to 12 fold increase in foreign economic competition. As foreign trade has increased, correspondingly the percentage of Gross Domestic Product that is in sectors that are directly engaged in foreign trade, particularly in the most traded sectors of manufacturing and industry, have greatly declined. For example, in 1965 manufacturing as a percentage of US GDP was about 36%, and by 2011 it was only 12.2% (3). Moreover, none of the data presented here captures how much foreign labor outsourcing and foreign importing into the US has been made much, much easier since 1967 due to the world’s explosion in revolutionary telecommunications technologies!

I have focused on the industrial and manufacturing sectors of foreign trade because they are generally much more affected by foreign competition than are the service and government sectors. In 2008, manufacturing alone as 57% of US exports (9). Manufacturing and industry are also the most “value added” of all economic sectors. That is, they generally pay their employees more and purchase more products from the rest of the economy than do most other sectors. Also, and very importantly, the larger foreign trade is as a percentage of a nation’s GDP, and the lower that manufacturing and industry are as a percentage of that nation’s GDP, the greater generally will be that nation’s “effective” foreign competition rate, that is, the more it is effected by global economic competition. Furthermore, as you can see with the above and below data, US manufacturing and industry rate as having some of the highest levels of competitive pressure on earth!

Over this same period, manufacturing as a percentage of GDP has decreased for nearly the entire world, even often in the developing nations. Between 1970 and 2008, manufacturing went from 35% to 20% of GDP in Japan, 32% to 20% in Germany, and 27% to 16% for the world as a whole. Between 1980 and 2008 manufacturing went from 24% to 12% of GDP in the UK, 20% to 11% in France, and 34% to 33% in China, and between 1885 and 2008 it went from 31% to 15% of GDP in Brazil and 24% to 25% in Korea. (5)

These competitive pressures have motivated the US and most other nations of the world to cut taxes on their emerging businesses and Corporations in order to keep and attract business capital and remain competitive.

Below are the top personal income tax rates of various developed nations in 1981 versus 2010 (10):
1981, 2010
The US 70%, 35%
Canada 43%, 29%
France 60%, 40%
Germany 56%, 45%
Japan 75%, 40%
The UK 60%, 50%
Spain 65.9%, 27.13%
Italy 72%, 43%
Australia 60%, 45%
New Zealand 60%, 35.5%

The top corporate income tax rates were also cut by these nation’s central or federal governments between 1981 and 2010 (10):
1981, 2010
The US 46%, 35%
Canada 37.6%, 16.5%
France 50%, 34.4%
Germany 56%, 16.5%
Japan 42%, 30%
The UK 52%, 26%
Spain 33%, 30%
Italy 40%, 27.5%
Australia 46%, 30%
New Zealand 45%, 28%

In 1981 the US’s top capital gains tax rate was 28% and its top tax rate on dividends was 70%. Until very recently both of these rates were 15% (11, 12). Further, the OECD Centre for Tax and Policy Administration creates a complex amalgamation of effective top capital gains tax rates with effective top dividends tax rates, and these rates have also greatly decreased between 1981 and 2011 (10):
1981, 2011
The US 42.9%, 17.8%
Canada 62.8%, 46.4%
France 61%, 52%
Germany 56%, 26.4%
The UK 75%, 42.5%
Spain 65.1%, 19%
Italy 72%, 12.4%
New Zealand 42.9%, 17.8%
Japan did not have a capital gains or dividends tax until 2000, at which point their top amalgamated effective OCED tax rate was 50%. By 2011 this rate had been dropped to 10%.

Our Employer Tax Carve Out Tax Plan

Now that it has been demonstrated that the US economy, as well as virtually all the economies of the rest of the world, have been drastically altered over the past 45 years due to increased levels of foreign economic competition, how in the case of the US this has meant an effective 8 to 12 fold increase in this competition, and how all of this competition has lead to lower tax rates throughout the globe for businesses and the wealthy, we can see some of the reasons why ETCOs and US Employee Tax Credits are in this relatively new environment needed to protect America’s fastest growing and most promising employers, who are also likely in the relatively soon future to be some of America’s largest exporters and highest paying employers. These reasons related to what type of employers ETCOs are protecting and incentivizing, and just how concentrated these employers are, these reasons are also very important.

Let’s examine just the top 2% of all US income earners for now. Only 18% of all the income that is made by all of the top 2% of US income earners is the profits of any businesses that is taxed as personal income that has one or more employees in the US (13, 14, 15). Yet this 18% of income is extremely important. It comprises the immediately available capital for what are generally America’s fastest growing and most dynamic businesses, that are also generally of the greatest importance to America’s economic future. Businesses that are taxed as personal income are responsible for generally 60% to 90% of all new private sector jobs, and closer to 90% when coming out of a recession. Such US employers that are in the top 2% of incomes are the most successful and fastest growing of these US employers, so they are responsible for as much as, and often near to, 55% of the total of new private sector jobs (16). Such businesses in the top 5% of incomes are responsible for generally 55% to 85% of the new private sector jobs (16). Data for these incomes above the top 2% of US income earners is less certain on this question from my data vantage point, but they do appear to keep the same mathematical pattern established with the data points above, relative to measures of active employer, personal income (16).

One common misconception about growing businesses is that they are not adversely affected by high income tax rates and quarterly income taxes because they can write off as a tax deduction the profits they quickly plow into their expansions. But very few businesses ever expand this way. Most often they need to save for a few years before they can then make their next big expansion. This expansion savings pool would be reduced without ETCOs. Therefore, we should not be reducing their immediately available capital in their most important stage of development when the availability of this capital is so very important to all of us, even if it is intended for needed government revenues.

Also, very importantly, these same businesses often become America’s most stable and highest paying employers and America’s most prolific exporters in the following business cycles a decade latter and well beyond. Two great political-economists in American, George Modelski and William R Thompson, wrote, “Leading Sectors and World Powers: The Coevolution of Global Economics and Politics,” in 1996. This is a great overview for this subject of just how important these leading employers are, and particularly in manufacturing. This book will lead you to more current and earlier works that are even more detailed and specific regarding the importance and concentration of these employers.

Due to the reasons stated above, and due to the universality of ETCOs, it could be said that ETCOs make personal income taxes four to five times more efficient when compared to a tax plan scenario with identical income tax brackets and rates, yet without an ETCO (17)!

ETCOs work the following way:

Personal income ETCOs are built on the economic reality that even within the highest income stratum in the US and elsewhere, and even more so entering lower income levels, a relatively small percentage of total income is the profits of any for profit business that in not a C Corporation that has one or more employees employed domestically. For example, this number peaks at about 21% at about the income level of the top 1% of US income earners, which is now at about $400,000 of adjusted gross income (18,19,20). Within all the income that is earned by the top 2% of income earners in the US, or those earning above about $250,000 a year, only about 19% of all that income is the profits of any for profit business that is not a C Corporation that has one or more employees in the US (18, 19, 20). For the top 5% of US income earners, those earning above about $200,000, this number is about 18%, and for the top 10% of incomes, employers earn above 12% of that total (18, 19, 20). Moreover, when an “active” definition of ownership is enacted in order to qualify for the ETCO, the actual cost of the ETCO when statically scored drops down much lower. For example, the extremely beneficial, bipartisan co-sponsored, Collins-McCaskill ETCO that is in S 1960 for businesses with less than 500 employees and with incomes above $1,000,000, which is an income level very close to where employer income peeks as a percentage of total income, would only cost about 14% of what would be raised when statically scored without the ETCO. Yet this ETCO would help generate back via much increase economic growth far more revenues to the federal government than this 14%!

ETCOs are created by using Employee Tax Credits. US Employee Tax Credits are calculated by adding $.07 for every dollar spent in employee net earnings for the first $113,700 in one tax year of W2 1040 based wages and/or salaries that are paid for work done in the US. By only rewarding tax credits for wages and/or salaries paid below $113,700, where social security payroll taxes are paid, the calculating of the tax credits for businesses and the IRS, and the policing of the policy by the IRS, will be made much earlier. Few if any data points in our entire economy and tax system are document more often and by more people than are W2 1040 based FICA taxes paid. Also, the $113,700 cap, which will increase as the social security tax cap increases, will insure that not much of the tax credits will be rewarded for the payment of very high salaries. Further, and very importantly, our US Employee Tax Credits would create an incentive for businesses to claim their employee expenses on their books and not pay employees under the table. Given that FICA taxes have been raised recently due to the Affordable Healthcare Act, and may need to be raised in the future given increasing healthcare and social security costs, the underground economy in labor is going to become an increasing problem.

Regarding the potential problem of businesses claiming ETC’s for people who currently work for them as independent contractors: Remember, ETC’s are worth 7 cents for every dollar of qualifying wages or salary spent. No business would ever spend 7.65 cents of every wage or salary dollar expense for their employer side of FICA taxes only to then receive only 7 cents of tax credit. Also, an independent contractor would no longer be able to employ anyone to work for him or her and thereby be able to use these qualifying employee expenses for ETC’s against their income.

Also, of course, in the final yearly IRS tax bill calculation of an employer, all state and local government tax incentives to employ, along with other such federal tax incentives that Congress designates, that are exercised by employers will be included in an employer’s final tax bill calculation as you will read a bit further below. However, it may be that it is decided by law makers that some tax credits or deductions for employment, like for example employment of disabled veterans or the recently discharged, have such social benefit that they not be included in employer’s final compilation of tax credits and deductions for domestic employment, thus creating a bottom line financial government subsidy for employment for these purposes.

7% for the value of the ETC was chosen because by being below the 7.65% employer side of FICA taxes the ETC would not be a tax shelter or in other words a bottom line financial government subsidy. However, the lower the value of the ETC, the less universal the ETCO will be and the more it will be that extremely small employers, with generally five or less employees, will not be able to take full advantage of the ETCO. So the ETCO’s contribution to the question of how high or low employer FICA tax rates will be a question for economists to answer in the future. However, and very importantly, with cuts to employer FICA tax rates being proposed in the past few years, it is true that it would be best for the value of the ETC to go down along with any such cut. It is also true that the value of ETCs should go up along with any increase in the total employer FICA tax rate, something that may have to occur under Obamacare, and this would increase the ETCO’s universality.

Given the tax plan in this paper, with US ETCs for employers of less than 500 worth 7%, the universality of our ETCO would be quite extensive. Under the exact same features and numbers of this tax plan, if a personal income tax increase were enacted on the non-employing wealthy along with an equal degreed ETCO tax cut for US employer, only about 2.5% of employees who work for a business with less than 500 employees that is taxed as personal income would have their employer’s effective tax rate go up, about 2.5% would stay about the same, while 95% would receive a tax cut. The 2.5% that would go up would be very high income employers with very few US employees, the vast majority of them with less than five US employees.

Below are more of the rules to qualify for Employee Tax Credits and therefore ETCOs:

Employee wages and salaries that qualify for the ETC may not go to any “business owner” nor any dependent of any business owner, be it a C Corporation or otherwise. Nor can they go to any immediate family member, including by marriage, who reside in any home owned by that business owner. Also, ETC qualifying compensation should go to any of the portion above 33% of any single employee’s wages and/or salary who works more than 33% of the year outside of the US. Nor can they go to any “employee” who works less than 18 hours a week on average who simultaneously receives income from more than two other employers who use that employee’s wages or salary for the ETC. If a dispute arises regarding which three employers can use their paid compensation for the ETC for any one particular employee, the three employers who pay the three highest total compensation amounts over the calendar year will be the qualifiers.

A “business owner” is anyone who owns 10% or more of a business, C Corporation or otherwise, who also qualifies as “active” owners under current IRS rules. Also, as part of an active definition of ownership, no one business can have more than five business owners who qualify for the ETC at any one time. There also may have to be enacted what is called the Captivation Rule. The Captivation Rule simply states that a current employee of a business cannot suddenly become their own private business or independent contractor who then lowers their effective tax rate through ETCs when their former employer makes up more than 60% of the total client revenues of the new private business. This rule should have a time limit of no more than 10 years.

Tax credits are never perfectly simple. But overall the ETC is much simpler than most tax credits because they are calculated using W2 1040 based employee expenses which are one of the most documented expenses and figures in all economic data. Moreover, with a few simple rule differences ETCOs can be made with 1099 compensation payments. Meanwhile, ETCOs and ETCs accomplish so much more than any other tax credits or tax strategy.

A private or pass through employer’s tax bill would be arrived at by first going through all existing steps in the tax code. Then, if an employing “business owner,” it would be calculated by using new tax tables at the end of each applicable business schedule. These tables would give two numbers in each income grid square, the first number as though the bracket tax rates, in the case of this papers plan were, 39.6%, 35%, 33%, 28%, 25%, 15% and 10%, and the second number as though the rates were 30%, 25%, 23%, 18%, 15%, 5%, and 0%, respectfully. The business could then deduct $.07 for every dollar of qualifying US ETC employee wages and/or salaries spent, plus all local, state, and perhaps other federal incentives to employ, from the dollar amount of the first number in the grid square, to no lower than the second dollar amount number in the grid square.

In order to alter ETCs and phase out the ETCO at 500 employees, as the fantastic, bipartisan co-sponsored, Collins-McCaskill ETCO does, the following should occur. As a business adds their 501st and 502nd employee and so on, what would normally be the qualifying employee expenses for the ETCs for the 501st and 502nd employee and so on without the employee cap, would be subtracted in an exact dollar amount from the existing total dollar amount of qualifying employee expenses for the ETCs of the business’s first 500 employees. At this point the same above tax table calculation would be made.

Remember, ETCOs, due to their extremely simple, transparent, and nearly universal design, accomplish four primary goals. ETCOs protect America’s most prolific job creators from burdensome income tax bills that can leave them uncompetitive with current or future global competitors. Also, the deeper the carve out with ETCOs, that is, the greater the difference in effective tax rate between the non-employing wealthy and domestic employers, the greater will be the tax incentive for wealthy non-employers, and especially talented people who find ways to become wealthy regardless, to employ domestically. Further, because such a small percentage of the wealth’s income comes from the direct and active profits of any employer that is taxed as personal income, and also due to the universality of ETCOs, ETCOs allow governments to have the option to raise personal income tax rates on the wealthy to rates much higher than governments otherwise would be able to do in our relatively new, highly competitive global economy without adverse effect on American employers and our economy. Lastly, ETCOs allow for the elimination of many, much more complex, much more open to fraud, but much less used tax credits that now go to the businesses community.

Moreover, enacting ETCOs into our tax code creates a code that rest on a more just and moral foundation than does our existing tax code. Most everyone who has done, or who has attempted to do both, will tell you that, generally speaking, it takes more work to make the same income through employing others than it does by being employed by another. Furthermore, all other things being equal, the person who is employing others here in the US is more beneficial and important to other Americas than is a person earning an equal amount who does not employ; one has found a way to make a living for themselves and all those who they employ, the other, only themselves. Lastly, virtually the only issue that all economists throughout the spectrum of economists agree on is that monetary incentive work, and that the simpler and greater that monetary incentive, the more influential the incentive will be. Remember, the deeper the ETCO, that is, the greater the difference in effective tax rates between the non-employing wealthy and employers, the greater will be this monetary incentive, and the more private sector jobs and government revenues will be generated!

Before explaining specifically this submission paper’s tax plan for personal income, a somewhat cleaner tax slate needs to be cleared regarding personal income tax deductions. Obviously, for three or more years now tax policy makers in Washington DC have been focused on “pro-growth” tax reform. On the C Corporation side of tax reform, most of the rationale behind this pro-growth tax reform is the idea that large, not as quickly growing, less in need, and more politically connected C Corps get most of the tax deductions that then bring their effective tax rates very low, meanwhile, America’s fastest growing, most in need of capital to expand, and least politically connected C Corps are stuck with much higher tax rates that are close to the statutory maximum of 35%. Reducing the amount of tax deductions and then lowering C Corp tax rates for all would be a positive adjustment to our tax code. Although as you will see, our ETCO and ETC tax policy for C Corps and for employers of over 500 would be much more direct, efficient, and beneficial to our nation. On the personal income tax side the rationale behind this pro-growth tax reform is that wealthy non-employers are more likely then are wealthy employers, who often desperately need capital to expand, to spend money in ways that are not related to employment but in ways that can be used for a tax deduction. By reducing the tax deductions that are more proportionally used by wealthy non-employers, tax rates could be cut a bit for all incomes, employer or non-employer, and employers would then get a tax cut because they are less likely to be exercising these tax deductions to begin with. Obviously, on the personal income tax side enacting ETCOs would be much more efficient and pro-growth than would be the above tax strategy. Moreover, unlike on the C Corp side, on the personal income side there really are not a whole lot of tax deductions that can be reduced without adverse affect, even for America’s wealthy.

The most costly to the federal government itemized deduction for the wealthy is the charitable deduction. It would not make political, economic, social, or moral sense to limit charitable deductions in any way. Even when it comes to non-cash donations, the low hanging fruit of these tax deduction reductions has already been picked, and new and much better ways of generating more government revenues by only reforming our tax code await us. Also, given the new tax laws in the Affordable Care Act, these “new and much better ways” are better than reducing any existing healthcare tax deductions, even for the wealthy. Further, regarding savings tax deductions, they could definitely be consolidated and simplified, but regarding federal revenues to be raised, the new and much better ways are definitely much better in this area.

Really, only the home mortgage interest deduction for second homes could be cut to some degree, and the simplest way to reduce it would be to cut the total amount of mortgage debt that could be deducted from the current $1.1 million cap. But before anyone gets too carried away with a reduction here, please realize that with our new economy, where much work can now be done via cyberspace, and given how, especially in many of our rural areas, seasonal work especially due to tourism that we hope will become an ever larger portion of our economy, but also due to other economic forces, it would be very beneficial to have at tax code that allows for both labor and management to move seasonally, i.e. have two homes. Given this reality, and the cost of housing throughout our nation, it would not be beneficial to take this cap below $800,000. However, lowering the cap to that point would raise federal revenues, and likely not inspire as many “magamansions”, which have greatly expanded over the past two decades and that evidence shows has helped to some degree to lead to higher home prices during this period. The total homes mortgage interest deduction is said to cost the federal government about $100 billion a year. Under this paper’s calculations, the above cut to the mortgage interest deduction cap would save the federal government about $10 billion a year.

Very fortunately, $10 billion goes very, very far when it comes to ETCOs. Not only could this $10 billion “pay” for an ETCO for the employers who are hit with January 1, 2013’s personal income tax increase on joint filers earning over $450,000 and singles over $400,000, but about $13 billion a year, when statically score, could pay for the below personal income tax and ETCO tax plan. Furthermore, $13 billion is when statically scored. Remember, that when the assumptions of a fairly respected Heritage Foundation study were used when analyzing a personal income tax plan with an ETCO that is much similar to the plan below, versus the exact same tax plan without the ETCO, it showed that over a 10 year period the ETCO plan raised as much as four to five times the government revenues, this again, because employment was incentive and allowed to grow (17)! In other words, due to more efficient tax incentives and more economic growth domestically, the tax plan in this paper, over at least the medium and long runs, will certainly raise far more government revenues, without ever raising any tax rates at all, only lowering certain tax rates! Below are the current 2013 personal income tax brackets and rates with the corresponding flour cap tax rates for our ETCO tax plan.

Non-employer Rate for Single Filers, and Married Joint Filers, Employer tax rate with ETCO
10%, $0 to $8,925, $0 to $17,850, O%
15%, $8,925 to $36,250, $17,850 to $72,500, 5%
25%, $36,250 to $87,850, $72,500 to $146,400, 15%
28%, $87,850 to $183,250, $146,400 to $223,050, 18%
33%, $183,250 to $398,350, $223,050 to $398,350, 23%
35%, $398,350 to $400,000, $398,350 to $450,000, 25%
39.6%, $400,000 and up, $450,000 and up, 30%

Remember, our plan’s reduction of the mortgage interest deduction debt cap gave us about $10 billion a year to work with. The above ETCO plan would cost only about $3 billion a year above that, but this is when statically scored. The C Corporation tax side is far more riddled with inefficient tax deductions and tax loopholes, so if Congress insists that an ETCO plan like this be statically scored, then some revenues from tax deduction reductions on the C Corp side should be brought over to the personal income tax side for an even deeper ETCO. Better yet, some revenues from the C Corp side should be used for tax incentives to employ in America in higher compensating ways for businesses that are taxed as personal income that have over 500 employees. How this is done will be explained with the discussion of our C Corporation tax plan, that will now begin.

Our C Corporation and Employers of Over 500 Tax Plan

Now that we have examined ETCOs, let us further examine US Employee Tax Credits and how they can go a long way to modernizing our entire tax code for the competitive global economy of the 21st century. More specifically to start with, this submission will suggest a revolutionarily clean tax slate by suggesting a very important and new tax distinction to be made between businesses with less than 500 US employees and business with over 500 US employees, be they C Corporation or taxed as personal income. In fact, with ETCOs, ETCs, and the personal income tax code, different tax schedules at the least will have to exist for non-employers, employers with less than 500 US employees, and employers with over 500 US employees. While for C Corporations an important distinction in the tax code will need to be made between those with less than 500 US employees and those with over 500 US employees. Further, employers with less than 500 US employees, both C Corporation and otherwise, would share much of the same tax laws, as would employers with over 500 US employees, both C Corporation and otherwise.

It is best to start understanding this area of this modern tax code by first examining what happens to US Employee Tax Credits as businesses begin to have more than 500 US employees, and we will essentially start on the C Corporation side.

As businesses begin to employ more and more over 500 US employees, Employee Tax Credits begin to work less as Employer Tax Carve Outs and more as incentives for businesses to employ more often in the US and in higher compensating ways. In this area of our tax code concerning C Corps and businesses with over 500 US employees, our tax plan has three primary tax incentives. One is intended to incentivize employment in the US, and it is referred to as the Employment Tax Incentive. The second is intended to incentivize higher employee compensation levels in the US, and it is referred to as the Compensation Tax Incentive. The third tax incentive is retained within our world-wide tax system and it achieves both an employment incentive and a compensation incentive simultaneously.

To start on the C Corporation side, C Corps with less than 500 US employees should have an ETCO and Employee Tax Credits that are in every way, but tax rate, identical to ETCOs and ETCs for businesses with less than 500 US employees that are taxed as personal income. This policy exists in an effort to create as much parity between the C Corp code and the personal income code within the realities of the extra costs to governments of governing C Corps. This effort to keep relative parity between C Corps and private businesses will become more evident as the tax rates for this overall tax plan are explained. Moreover, there are many C Corps in the US that do not employ at all. Many of these are dormant C Corps that are essentially out of business but still involved in the tax system. Yet many are also high income earners, who either for good future planning reasons, or for legal or illegal tax avoidance reasons, have chosen to file as C Corps. If Congress and the President were to enact C Corp tax reform that reduces tax deductions and thereby lowers tax rates, these non-employing C Corps should not benefit with a tax rate reduction when the same monies could go towards incentivizing similar income level C Corps to compensate in greater ways their existing US employees! Furthermore, for all the other positive features of ETCOs, the above policy should also be enacted.

Let us examine the first tax incentive for employers of over 500 that is intended to increase employment in the US, the Employment Tax Incentive.

As C Corps begin to employ over 500 US employees, the 7 cent on the dollar US ETC that creates the ETCO that is explained in the ETCO portion of this paper above, is reduced to a 4 cent on the dollar ETC. It becomes a 4% ETC because of what this number is attempting to achieve. A more accurate number for what this number is attempting to achieve is about 3.4% (Which please always remember has nothing to do with the coincidence that 3.4% is almost half of 7%). What this number is attempting to approximate is the rate at which the ETC will need to be to compensate the businesses in America that have the top 50% of US employment costs to US profits ratio. That is, the point at which, as an equal dollar amount of C Corp tax deductions are reduced from our tax code, assuming that they are equally and proportionately reduced among businesses, half of all US businesses with over 500 US employees would have their effective tax rate go down, and the other half would go up. The 4% is a more generous number, but these ETCs will have a simple cap on how low, and how high, they can be exercised. So this slightly more generous than need be tax incentive will have an expenditure limit on what it costs the government or a business. With the tax plan in this paper, the floor cap for the tax rate will be 300 basis points lower and the ceiling cap will be 300 basis points higher for a total tax incentive of 600 basis points of tax rate.

The tax plan that is being proposed in this submission paper does not intend on its own to do much slate clearing in the area of tax deduction reductions on the C Corp side. Although in the past Third Way Progressives has always very much supported extensive R&D tax credits and early depreciation of capital expenses. On the C Corp side, this submission’s tax plan will assume the 12 tax deductions reductions or loophole eliminations that President Obama proposed on July 30, 2013. This is enough, the President’s plan says, to reduce the top C Corp tax rate to 28% and the top rate for manufactures to 25%. This paper’s plan will assume the exact same level of tax deduction reductions and lowering of C Corp tax rates as does President Obama’s plan, but of course the C Corp tax rate reductions in our plan will be much more strategically designed for the realities of our highly competitive global economy. However, it would be great if Congress and the President could come up with more tax deduction reductions on the C Corp side, outside of R&D tax credits and early depreciation. In this way this entire plan’s ETCs and ETCOs could be made even deeper, even on the personal income tax side.

Under our plan, the top C Corp tax rate for non-employers should remain at 35%. Yet with the less than 500 employees US ETC of 7% even for C Corps and therefore the ETCO that is created there, the top C Corp tax rate for virtually all employers will very quickly be 30%. From this point our Employment Tax Incentive for employing more often in the US would take C Corp employers to top tax rates to between 33% and 27%. The Employment Tax Incentive and ETC credits must be taken, or the tax rate for the business will default to the ceiling cap of 33%.

From this point would begin our second of three tax incentives in this area, this one designed for the purpose of incentivizing businesses in the US to compensate their domestic employees at higher rates. The Compensation Tax Incentive sounds more complex than the last one, but it is more efficient per federal expensed dollar. The fairest, simplest, and probably for the reason of being simple, the most efficient and hard to game method for achieving this tax incentive is to start by making a large sample probability distribution of the mean of the median and the mean level of total US employment compensation for businesses in America with over 500 US employees. This distribution should be made by first eliminating from any of the calculations any employee incomes that are over the dollar amount that demarcates the top 1% of US income earners.

From here it is quite simple. The distribution is divided into 100 percentiles. With the 1st percentile exactly two standard deviations, while employing the 68-95-99.7 Rule, below the mean of the distribution, and the 100th percentile exactly two standard deviations above the mean. When an employer of over 500 has a mean of the median and the mean of their total employment compensation that moves into the 51st percentile, than it will begin to be able to deduct basis points off of their tax rate. This incentive will gradually and incrementally reduce an employer’s tax rate until the 100th percentile. How far the tax rate can be reduced is up to how much policy makers chose, although some tax rate should be left over, even for the most generous employers, for environmental tax incentives.

But again, for the C Corporation tax plan in this submission we are using the amount of tax deduction reductions that has been proposed by President Obama on July 30, 2013. This plan brought the top tax rate for all C Corps, including non-employers, to 28% and manufactures to 25%. Given that manufactures make up about 30% of all of the profits of C Corps, and given the fact that the President’s plan does reward non-employers, and just to make the math for us a little easier here although the number is not far off, let’s say that the President’s plan and our plan here will both reduce the equivalent of 850 basis points off of the top tax rate for C Corps in America. The President’s plan does this by lowering the top rate for C Corps from 35% to 28% and for manufactures to 25%. Our plan has already dropped the top tax rate for C Corp employers down to 30%, then in a somewhat below revenue neutral way because the ETC is worth 4% and not 3.4%, we created a tax incentive that could raise or lower a C Corps tax rate by as much as 3 percentage points. This leaves our plan with about 3.5 percentage points to work with, but these 350 basis points can go a long way when it comes to ETCs! For one, it can become a reward of up to 700 bases points off of a business’s top tax rate for how well they compensate their employees relative to the rest of America’s employers. You remember, that mean of the median and the mean thing. 14 basis points are than deducted off of a C Corp’s top tax rate as they move each percentile from the 51st percentile of the distribution up to the 100th percentile and 700 basis points.

Moreover, with just a little more work at reducing tax deductions on C Corps, the Compensation Tax Incentive could be greatly enhanced. Further, while this tax incentive is not perfect, it is certainly better than what exist today or the option of lowering C Corp tax rates equally whether a C Corp employs at all or in terrible ways relative to others. Moreover, this mean of the median and the mean of total US compensation could also be measured on a state by state basses or by regions. This would complicate the process a bit but add much more accuracy to this tax incentive. Also, further elaborations of our overall tax plan allow for this same tax incentive to be used by businesses with less than 500 employees, both C Corp and otherwise. In order to do this for employers of under 500 in a way that avoids gaming and fraud, and for much larger and more important reasons that you will relatively soon learn about, Employee Tax Credits have to be calculated and used as one moves up or down the 51st to 100th percentile, with the value of the ETCs being worth more as an employer moves closer to the 100th percentile. This is a simple calculation that the IRS can provided on one simple graph.

Nonetheless, with our tax plan in this submission paper, a C Corp with over 500 US employees that has accumulated many US Employee Tax Credits and is compensating their US employees in exceptional ways could lower their top tax rate to 20%!

Our third and last tax incentive for larger employers works though our world-wide tax plan that will be described in just a bit. This last tax incentive is one of the reasons that we keep calculating an employer’s US Employee Tax Credit throughout the entire tax process, and this tax incentive is designed to measure both US employment and levels of US compensation.

Yet first, let us clarify what we have learned so far regarding the specific tax plan in this submission paper and what could easily be four new Chapters to Subtitle A of Title 26. Our personal income tax rates for employer and non-employers were shown in the personal income tax portion of this paper above. Below is this paper’s C Corporation tax rates:

Non-employer C Corp rate, C Corp Employer Rate
Up to $50,000- 15%, 10%
$50,001 – $75,000- 25%, 15%
$75,001 – $100,000- 34%, 15%
$100,001 – $335,000- 39%, 26%
$335,001 – $10 million- 34%, 30%
Over $10 million – $15 million- 35%, 30%
Over $15 million – $18,333,333- 38%, 30%
Over $18,333,333- 35%, 30%

From this point a common misconception could often be made. The C Corp employer tax rates above are derived at by first an employing C Corp being able to exercise 7% US Employee Tax Credits that are exercised up until 500 US employees where they are then phased into a 4 cents on the dollar ETC. With our plan, at the point of reaching 500 US employees, American C Corps should all have a possible top tax rate of 30%. From this point, as the Employment Tax Incentive is exercised, a little fewer than half of these C Corps will then have their possible top tax rate go up, and to as high as 33%. Meanwhile, a little more than half of these C Corps will have their possible top tax rate go down, and to as low as 27%. But at this point, the Compensation Tax Incentive is not exercised. At this point, any other tax deductions and tax loopholes that exist should be exercised, and the Compensation Tax Incentive of up to 700 basis points is not exercised until after. Therefore, given that today the average effective tax rate for C Corps in America is about 17% when the top statutory tax rate is 35%. Hence, given that this paper’s C Corp tax plan, as well as President Obama’s plan, only reduces tax deductions and loopholes for C Corps by the equivalent of 8.5%, when 18% of tax deductions and loopholes still exist to be had, a possible lowest top tax rate will be far lower than 20%, perhaps as low as 2% or more. That being derived at via the lowest rate of 27% after exercising the Employment Tax Incentive, then deducting whatever C Corp tax deductions still exist, then minus the 700 basis points for excellent US employee compensation.

One of the great things that we could do with more revenue pulled out of our current C Corp tax deductions and loopholes, would be to allow employers of over 500 that are tax as personal income to also be able to partake in the Employment Tax Incentive and the Compensation Tax Incentive. Remember, these employers of over 500 that are tax as personal income are having their ETCO erased as they employ over 500 employees and their top tax rate is going back up to 39.6%. So a reward for employing in American in the highest compensating ways that could reduce 700 basis points off of their top tax rate, or hopefully even lower, this could go a long way to improving the lives of the American people. At a cost to the federal government of only about $3 to $4 billion a year, this would certainly be worth a try, and certainly be better than our existing tax policy.

If Congress really wanted to get ambitious this year they could enact a Compensation Tax Incentive for employers of less than 500, both C Corp and personal income. This cannot be enacted for businesses with less than 20 employees, and a slightly different distribution of the mean of the median and the mean of employment compensation is needed. But while costing only about $2 to $3 billion a year to the federal government, this would be a very inexpensive but effective tax incentive.

Also, all employers of over 500, C Corp and personal income, could engage in our third tax incentive in this area that rewords employment and compensation through our world-wide tax plan. Yet employers of less than 500, C Corp and personal income, should be treated differently regarding their world-wide income.

All of the tax rates generated both above and below could also be calculated once for a five or even 10 year period as opposed to annually.

Our World-Wide Tax System

The optimum policy for the US and for most other nations of the world would be to use a world-wide tax system, with the caveat that the US tax for foreign profits would be set at a much lower rate than the C Corp or personal income rates. Most of us already acknowledge this need, but let us suppose that the US’s top C Corporation statutory tax rate is brought down to 30% after reducing tax deductions on the C Corp side. Let us suppose further that a US C Corp must pay US taxes on profits made in Ireland. Ireland has a top statutory tax rate of 12.5%. If income tax deferrals were ended, this US C Corp would have to pay a 12.5% tax to Ireland, and then it could credit that tax bill paid to Ireland against income that is then taxed at a top rate of 30% for an effective US tax bill payment of about 17.5%. The problem with this extra 17.5% payment is that it might be so large as to cause this US C Corp to move completely out of the US and to Ireland, or to some other much more tax friendly nation. Therefore, the US tax rate for foreign earnings for a US employer of over 500 should be set at no more than 9%. Moreover, very similar tax incentives as the Employment Tax Incentive and the Compensation Tax Incentive should allow a US employer to be able to lower their foreign income tax rate quite substantially depending upon how well they are treating their employees in the US relative to that multinationals total global business expenses.

How specifically this incentive is operationalized within our tax code is started much the same way as with the Compensation Tax Incentive, however the sample distribution is different and the percentiles are organized differently. The sample distribution is different in that it is a distribution of total business expenses outside of the US to total US Employee Tax Credits accumulated. The higher the number, the closer an employer will be to the 100th percentile and a tax rate of 2%. Remember, to this point a US multinational with over 500 US employees has had their US ETCs increased by both their larger US employment costs and by how much greater over the norm they compensate their US employees. We can therefore structure our world-wide overseas tax rate to reward those multinationals that do employ the most and in the best ways in the US, and in relation to how much of their workforce they keep in the US. Moreover, this is a ratio of total business expenses, of ever kind outside of the US, to total US ETCs, so no conflicts will arise with foreign governments, especially those who enact ETCO and ETC tax policies, and in this way the policing of our tax policy will only be made much easier. The percentiles also work differently when compared to the Compensation Tax Incentive in that they begin to reduce a tax rate by 7 basis points beginning with the 2nd percentile and a tax rate of 9% to the 100th percentile and a tax rate of only 2%. This tax incentive can be known as the World-wide US Employee Tax Incentive.

Perhaps Congress and the President will chose to enact this tax incentive but with slightly different extreme tax rates than 9% and 2%. Keep in mind, the above tax policy, done in almost any way, would be far better than what exist today in our code or any other known proposed plan of today regarding overseas taxes, but Congress should certainly not deviate to far from either extreme tax rate. This policy also has the advantage in that a world-wide tax system makes most other forms of international tax avoidance, like transfer pricing, much easier to detect for the IRS, so even more federal revenues would be raised. You will also find that an ETCO and ETC tax policy makes many areas of IRS tax policing much easier. It does this by actually reducing the numbers of receipts and other financial numbers that an employer must keep track of. Remember, the ETCOs and ETCs can replace many existing employer tax credits in ways that make everyone happier. But with ETCOs and ETCs, the fewer receipts and financial numbers that employers do have to collect for the IRS, are calculated in different ways that are much more beneficial to the employer, the government, and especially our citizens!

Also, because the tax plan in this paper is committing to a world-wide tax system, some of the past writings by Third Way Progressives concerning having to average in foreign multinationals in a “delicate” manor regarding our system of taxing US employers foreign earnings are no longer needed or relevant, which is a strong addition to simplifying and strengthening our tax code.

FICA Taxes

In past Third Way Progressives policy discussion papers a FICA tax plan for new employers has been discusses. This FICA tax plan was created for a more advanced ETCO and ETC tax policy, perhaps in ETCO and ETC tax reform 2.0 or 3.0. Certainly it could not be enacted until Potential Employer Banks are created. Here again, this is simply an ETCO and ETC tax concept that was always believed to more likely be part of ETCO and ETC tax reform 2.0 or 3.0. Yet PEBs are great ideas that would make are economy much more efficient and make employing in the US much easier. Potential Employer Banks would allow potential US employers to save for a few or more years monies that would otherwise be taxes paid, that could then become business expenses with a number of ETCs spent in the US. But again, with ETCOs and ETCs let’s get the fundamental and big stuff enacted first, but if Congress wants to get fully ambitious, then we are right there with them. Third Way Progressives older FICA tax plan needs PEBs and a little more, and it was advertized a few years ago when FICA tax cuts for employees and employers was becoming a popular concept in Washington DC, and it was also due to TWP using in a “Hey, you like that, you certainly will like all these other ETCO and ETC policies” marketing strategy. That said, this paper must address a very important aspect of FICA tax policy.

For IRS efficiency reasons, and for reasons to make employing much more seamless and less bureaucratic for employers in ways that do not distort and disrupt the employment and employer growth dynamics in economically stunting ways, it appears from this vantage point that it would probably be best to attach Affordable Care Act payments by employers and their employees to the FICA tax system. Very importantly in this regard keep in mind, the top value of the US ETC is dictated by the rate of the employer payment to FICA. If FICA tax rates on the employer and employee side were increased to pay for Obamacare, then the value of all US ETCs could also be increased. In this way ETCOs could be made much more universal, that is, even US employers of a few people would be able to see a much more dramatic, yet still not open to gaming, tax reward for employing in the US. Also very fortunately, any FICA tax rate increase can be phased in gradually and without any harm to the ability for employers to hire in the US by phasing in the FICA tax rate increase with a phase in increase to the value of US ETCs. With this policy, very small employers could also be given the option to either choose a higher FICA tax rate and have a higher value US ETCs, or have the old and lower employer FICA tax rate and the old and lower US ETC value. In this way, we will be making it as easy as possible for employers to grow, which from now on should always be one of the primary features of all tax law!

Our Capital Gains and Investment Income Tax Plan

Our capital gains tax plan works under the same principle as does our Employer Tax Carve Out and Employee Tax Credit tax systems, in fact, once again, US ETCs will serve an important function. Our capital gains and dividends tax plan is essentially an Employer Tax Carve Out regarding investment income.

Our capital gains tax plan carves out from taxes and greatly incentivizes long term gains derived from four investment types. These four investment types are the primary investment methods for businesses in America to acquire needed capital to expand. These four investment types are: One, all venture capital funds and projects. Two, all stocks bought at IPO or secondary offering. Three, all bonds bought at first issue. Four, the direct underwriting of any of the above three investments, and also in ways that would be taxed under today’s Carried Interest rule. Moreover, all investments that would qualify for the lower carve out tax rate with these four investment types are also subject to US ETC requirements that will be explained in a bit.

Very importantly, these four investment types represent anywhere from 3% to 20% of all capital gains in the financial markets, but most of the time they are only 3% to 12% of all financial market gains (21, 22). Therefore, the tax level on the 97% to 88% of capital gains that are more speculative, and what could be considered more “paper trades”, can stay at the same rate or go up, and capital gains from the four investment types with our ETC requirement can be taxed at a lower tax rate.

This policy would increase government revenues, while steering capital to US job creators, while also curtailing destructive speculative investment bubbles. Plus, it would reword those financial investments that require the most research and risk for the investor, and it rewords those investments that generate the most return to society. The cost of capital in the financial markets would be greatly reduced for growing businesses in the US due to this tax incentive that would drive more investment monies into these four investment types. The risk of destructive speculative investment bubbles would be reduced because, due to the tax incentive, monies would be moved away from investments where price volatility is greater and economic overexpansion is much more likely, into investments that are adding jobs in the US and therefore are monies that are more likely to become consumer spending, and therefore are much less volatile and susceptible of creating economic overexpansions.

The above four investments cannot qualify for a lowered capital gains tax rate if the business floating the stock or bond does not have at least 5% of its US expenses, or the venture capital project does not have at least 5% of that investment, being employee costs that would qualify for our US Employee Tax Credits as explained in the personal income tax section of our plan. Moreover, a year and three years after the initial stock, bond, or V.C. investment the company invested in would have to have a higher US payroll than it had at the time of the initial investment. In this way, our plan would insure increased job growth in the US, and not just an increase in the underwriting of financial instruments.

In order to achieve access by ordinary investors to the purchasing of IPO’s and bonds at first issue, stocks should still be considered to be bought at IPO and bonds at first issue until the moment either is sold for the third time by an institutional trader or five open financial market days after the first purchase, or until the moment either is sold for the first time by a non-institutional trader. Moreover, it would be beneficial to ordinary investors, institutional investors and their industry, and the economy as a whole, for the federal government to enforce the existence of a minimum level of IPO and first issue purchases for the non-wealthy investing public.

Under this papers tax plan, all tax brackets and rates for ordinary dividends and qualified dividends would remain the same.

Our Environmental Tax Incentives

The final component of our tax plan is much like the investment income portion of our tax plan in that, due to the fact that there is presently little talk in Washington DC regarding reform in these two tax areas, our tax reform plans in these two areas will probably only be addressed during tax reform 2.0, and we hope not, but maybe even tax reform 3.0. Regardless, just like with our investment income tax plan, the below environmental tax incentives would go a far way to increasing the proliferation and power of more green technologies while greatly helping to create a much more environmentally sustainable economy, and not just for the US, but for the rest of the world!

Under our first environmental tax incentive plan, all private and public businesses, both foreign and domestic, would be allowed to lower their top tax rate on personal and corporate income by as much as 35 percentage points but to no lower than 0. Congress would be empowered to dictate to the EPA which manufacturing sectors and goods, and what types of production techniques that the EPA can then proclaim to be using “best practices” and/or “standard practices” in. Congress could dictate what is pollution regarding what is generated during the production of a product, and/or while a product is in use, and/or when a product is discarded.

It would be up to the EPA to propose “best practices” and “standard practices”. Yet it would be up to Congress and the President to make law regarding what products and techniques these best and standard practices can lower a tax rate through the use of and by how much these tax rates can be lowered. Our philosophy regarding environmental taxes is that they are most efficiently and effectively structured when they use primarily a reward approach as opposed to a reward and punishment approach or just a punishment approach.

There is a second environmental feature of our tax plan, which also can be assisted by the US ETC. This is what we call an Environmental Fair Tax. One of the tax proposals that have gained much popularity in conservative political circles is the Fair Tax. This tax is essentially a national sales tax that claims to allow for the elimination of the income and payroll taxes. Third Way Progressives oppose this tax because it is regressive, and because of its regressivity that would therefore slow the economy by reducing consumer demand, the plan’s numbers would not add up. Even more importantly, the sales tax rate that the Fair Tax advocates propose is a rate of 23%, although that rate would probably have to be much higher. However, past experiences throughout the world have shown that, when a sales tax goes above about 12%, the underground economy to avoid the sales tax seriously begins to organize, and that therefore, government revenues anticipated are never collected.

That said, a revenue neutral, national sales tax with an environmental objective that had a rate below 12% would be a very positive policy. That is, the federal government could piggyback on the state and local sales tax systems, and enact an increased sales tax on those products that are deemed environmentally inferior. This sales tax revenue would be used to reimburse states and localities that have lowered their sales taxes on products that have been deemed environmentally superior by the federal government.

Our US ETC comes into play in that, many will complain that increased sales taxes on products like trucks or certain other heavy equipment used by businesses will be an increased burden on American job creators. However, by allowing the US ETC to count against some of such a sales tax, the burden on American job creators would be reduced and a greater tax incentive to employ in the US would be created.

It should now be obvious to readers what the four suggested new Chapters for Subtitle A of Title 26 should be: One, personal income taxes for employers with less than 500 US employees. Two, personal income taxes for employers with over 500 US employees. Three, C Corporation taxes for employers with less than 500 US employees. Four, C Corporation taxes for employers with over 500 US employees. The possible amendments to Subtitle C concern the possible FICA tax changes in this paper related to the Affordable Care Act. Hopefully the rest of this paper is just as obvious, if not, please feel free to contact Tom Pallow during EST business hours at 202-903-1133 and he will personally answer any questions you might have regarding any ideas in this paper or any of the ideas that can be found at ThirdWayProgressives.org.

(1) “Wresting and Bouncing Crude Keynesianism Out of Washington DC for Good” ThirdWayProgressives.org.
(2) US Census Bureau, Foreign Trade, Historical Series, US International Trade in Goods and Services: 1960 – present.
(3) Globalization and International Trade by National and Region, “Globalization and International Trade”- World Bank Group
(4) World Trade Developments – .wto.org/english/res_e/statis_e/its2009…/its09_highlights1_e.pdf
(5) US Historical Tariff Collections by Federal Government: Historical Statistics of the US 1789-1945 and Office of Management and Budget US Whitehouse; Table 1-1
(6) World Bank Trade: World Trade Indicators, TAAG Tables
(7) 2011 Index of Economic Freedom: Trade Freedom, The Heritage Foundation
(8) World Bank, Trends in Average Applied Tariff Rates, GoeCommons
(9) US Bureau of the Census, 2008.
10 OECD – Centre for Tax Policy and Administration, OECD Tax Database.
11 Tax Policy Center, Brookings Institute, Tax Facts, Capital Gains and Taxes paid on Capital Gains 1954 – 2008.
12 Tax Foundation – Tax Data – Federal Individual Income Tax: Exemptions and Treatment of Dividends, 1913-2006.
13 Emmanual Saez and Thomas Piketty, “The Evolution of the Top Incomes: A Historical and International Perspective,” National Bureau of Economic Research, working paper no. 11955, January 2006.
14 The World Top Incomes Database, Facudo Alvaredo, Tony Atkinson, Thomas Piketty, January 2011.
15 US Census Bureau, Statistics of US Businesses: 2008 : All industries US.
16 Bureau of Labor Statistics
17 The four to five times more efficient is derived by using the same economic assumptions as the below study, yet using the ETCO personal income tax plan that is in the Summary of Our Overall Tax Reform Plan that can be found in the Weekly Blog section of the website ThirdWayProgressives.org: Obama Tax Hikes: The Economic and Fiscal Effects, Published on September 20, 2010 by William Beach , Rea Hederman, Jr. , John Ligon, Guinevere Nelland Karen Campbell, Ph.D. Center for Data Analysis Report #10-07.
18 Emmanual Saez and Thomas Piketty, “The Evolution of the Top Incomes: A Historical and International Perspective,” National Bureau of Economic Research, working paper no. 11955, January 2006.
19 The World Top Incomes Database, Facudo Alvaredo, Tony Atkinson, Thomas Piketty, January 2011.
20 US Census Bureau, Statistics of US Businesses: 2008 : All industries US.
21 “Recent Changes in US Family Finances” Federal Reserve Bulletin.
22 Jay R Ritter, University of Florida, “Initial Public Offerings.”

Wrestling and Bouncing Crude Keynesianism Out of Washington DC for Good

By Tom Pallow of Third Way Progressives

Paul Krugman wrote a July 2010 article titled, “I’m Gonna Haul Out The Next Guy Who Calls Me “Crude” And Punch Him In The Kisser.” Seriously he did, and “Crude” refers to Crude Keynesianism.

Tonight before bed, I will pray very hard, that Krugman takes me up on his offer!

It’s not that I am a violent person. In fact, because I have broken up more fist fights than virtually any of you have ever personally witnessed, I can argue that I am much less violent than most. You see, I’m 6’2″, 300 lbs, a former college football player, pro-wrestler, national level natural bodybuilder, and less than just two years ago I was getting paid to throw people out of DC nightclubs so that I could lobby Capitol Hill during the day. If Krugman approached me he would quickly see that I could easily body slam him just like I used to do with much bigger wrestlers back in my pro-wrestling days in California.

But this is where it would get very interesting! I would never physically touch Krugman. But through intimidation of one kind or another, I would, just like in the good, old school, pro-wresting days, challenge him to a Loser Leaves Town Match! But in a macro-economic, throw-down, type of contest, of course.

OK, seriously now, Krugman is only 66.7% a Crude Keynesian. This is because there are four basic macro-economic questions that governments must answer: The amount of revenue a government spends, what a government spends that revenue on, how to administer that spending, and how a government raises revenue. Krugman is fantastic at answering this first question concerning the amount of funds a government should spend during various macro-economic circumstances given traditional tax and spending methods. He might even be the best at this, and for this he is obviously worthy of a Nobel Prize. The question of how governments administer spending, I have never seen Krugman address this question, so I will not judge him in this area. But as far as the other 66.7% of what macro-economists or political-economists should understand, he is surely the most prominent Crude Keynesian.

Krugman and Crude Keynesianism have had far too much influence on the Murray/Reid budget that just passed the Senate. I am now going to explain why it is so important to body slam and bounce these ideas out of Washington DC for good!

The use of the term Crude Keynesianism is most associated with the brilliant Columbia economist Jeffrey Sachs who recently has been using the term to criticize the thinking that is most associated with Paul Krugman.

(From just outside the ring: “Pallow, aka, Mr. Quality, from just outside the ring is watching Krugman, aka, The Crude Keynesian, and Jeff Sachs fight it out!!”)

Sachs describes Crude Keynesianism and Krugman thusly: To quote him, “There are four elements of Crude Keynesianism and, indeed, of Krugman’s position:”

“1) The belief that multipliers on tax cuts and transfers are stable, predictable, and large.
2) The belief that America’s employment and growth problems are overwhelmingly cyclical, not structural, and therefore remediable by short-term and aggregate demand management.
3) The belief that a growing debt burden is a minor nuisance as long as the economy is in recession.
4) The belief that for practical purposes, the most urgent need is to raise aggregate demand rather than to focus on the quality and type of public spending.”

These are indeed Paul Krugman’s Crude Keynesian positions, and they are very wrong for this time in US and world history!

Since the 1930s there has not been a better time than today for some type of classical Keynesian economic stimulus. That is, having the federal government borrow, then spend or transfer those funds to increase consumer demand, then as the economy has clearly picked up, increase progressive income taxes on the wealthy to pay for that stimulus. But Crude Keynesianism will continue to be very ineffective today because the world has changed very much since the 1930s!

I agree with the Crude Keynesians in that our economy today resembles very much that of the 1930’s in that it is very “top heavy”. That is, due to tax policies and other factors, there exists far too little consumer spending by the vast majority in the poor and middle classes relative to the amount of available capital and savings that is mostly owned by the wealthy. Due to Keynes’s Marginal Propensity to Save, where the wealthy, who now collect a larger portion of total income, save a higher proportion of their total income as they get wealthier, due to this, interest rates throughout most of the entire world are historically low because this supply of savings and capital is very high relative to the demand for it. The developed economies of the world are also slow primarily because consumer demand by the poor and middle classes are below the historic norm relative to total wealth. Of course, tax policy being much less progressive since the early 1980’s has played the biggest roll in this outcome, although that too is an outcome of the new, highly competitive global economy!

(“Sachs has just tagged Mr. Quality into the ring! This is the battle we have all been waiting for!!!”)

Let us focus first on the second element of Crude Keynesianism, because this is where that thinking really begins to fall completely apart in today’s world. What many economist fail to realize, especially those who spend far too long in isolated ivory towers, is that the US economy, and indeed the entire world economy, has drastically and permanently changed since Krugman’s favorite period of analysis, the 1930’s. This drastic change is the effective 8 to 12 fold increase in foreign trade and competition that has occurred for the US since 1967, and this change has been mirrored by virtually all other nations of the world along the near same time sequence.

When the communist Soviet economy began to slow in the early 1960’s, in a strategic Cold War response, the western democracies conceived of the Kennedy round of GATT. Finally signed in 1967, the Kennedy round created a quantum leap in foreign trade within the western developed economies, and for the first truly organized and collaborated time, trade with the developed west and the developing nations of the world. The next quantum leaps in global trade came with the Uruguay round of GATT in the mid 1980’s and with the WTO in the early 1990’s that fallowed the global fall and discreditation of the socialist and communist economic models. These are models that, unless a nation lives under a lot of oil wealth, quickly lead to repressive dictatorships.

The fall of the communist Soviet Union was of most significance. When virtually all of global communism fell in the late 1980’s, multinational businesses in the developed world no longer had to worry about their capital investments in the underdeveloped world ever being nationalized by some emerging socialist government. This change opened up a cheap labor market of nearly 4 billion people to the 2 billion in the western developed world, and with this the global economy truly began. This has been the largest political-economic change in our lifetimes, but we have yet to adjust our policies to it!

In 1965 US exports were 4.8% of US GDP and imports were 4.3%. But by 2010 they were 12.5% and 15.9% of US GDP, and the 15.9% was down from pre-recession levels of just above 17% (1). Meanwhile, accompanying this, in 1965 manufacturing as a percentage of US GDP was about 36%, and by 2011 it was only 12.2% (2). In reality this creates an effective 8 to 12 fold increase in global trade and foreign competition for the US given how substantial manufacturing is as a portion of all foreign trade and how much manufacturing is affected by it.

Further, although foreign trade as a percentage of GDP began at higher rates than in the US in most of the rest of the world, most of the rest of the world has mirrored the above change. Between just 1992 and 2005, beginning with the first new trade rules that came with the fall of communism, the OECD country average of total foreign trade in all goods and services as a percentage of GDP went from 32.3% to 45%. During the same years the EU 15 nation average went from 36.3% to 50.7%, Mexico went from 17.8% to 30.7%, Japan went from 8.8% to 13.6% (3), and total Chinese foreign trade went from $100 billion US dollars in 1988 to $2.4 trillion in 2008 (4). India’s total foreign trade as a percentage of GDP went from 16% in 1991 to 47% in 2008 (5).

Over this same period, manufacturing as a percentage of GDP has decreased for nearly the entire world, even often in the developing nations. Between 1970 and 2008, manufacturing went from 35% to 20% of GDP in Japan, 32% to 20% in Germany, and 27% to 16% for the world as a whole. Between 1980 and 2008 manufacturing went from 24% to 12% of GDP in the UK, 20% to 11% in France, and 34% to 33% in China, and between 1885 and 2008 it went from 31% to 15% of GDP in Brazil and 24% to 25% in Korea (6).

I have focused on the industrial and manufacturing sectors of foreign trade because they are generally much more affected by foreign competition than are the service and government sectors. In 2008, manufacturing alone as 57% of US exports (23). Manufacturing and industry are also the most “value added” of all economic sectors. That is, they generally pay their employees more and purchase more products from the rest of the economy than do most other sectors. Also, the larger foreign trade is as a percentage of a nation’s GDP, and the lower manufacturing and industry are as a percentage of that nation’s GDP, the greater generally will be that nations “effective” foreign trade rate, that is, the more it is affected by global competition. Furthermore, as you can see with the above data, US manufacturing and industry rate as having one of the highest levels of competitive pressure on earth!

Moreover, the above numbers do not in any way measure the threat of foreign outsourcing that has not yet occurred, but could now very easily occur due to all the numerous revolutionary telecommunications technologies that did not exist in 1965 or 1992. This effective 8 to 12 fold increase in global trade and competition is as significant an economic change as was the rapid movement from an agricultural to an industrial economy that occurred at the turn of the last century that then brought on the Progressive Era and the progressive income tax in 1913.

But this most significant economic change of our lifetimes has already had ramifications for our public policy. Since this highly competitive foreign trade has become an ever increasing and important portion of virtually all of the world’s economies, corporate tax rates and personal income tax rates on the wealthy, throughout virtually the entire globe, have greatly decreased over the last several decades so that the businesses of these nations can have needed capital to remain economically competitive and as a way for those nations to attract business capital.

Below are the top personal income tax rates of various developed nations in 1981 versus 2010 (7):
1981, 2010

The US: 70%, 35%
Canada: 43%, 29%
France: 60%, 40%
Germany: 56%, 45%
Japan: 75%, 40%
The UK: 60%, 50%
Spain: 65.9%, 27.13%
Italy: 72%, 43%
Australia: 60%, 45%
New Zealand: 60%, 35.5%

The top corporate income tax rates were also cut by these nation’s central or federal governments between 1981 and 2010 (7):
1981, 2010

The US: 46%, 35%
Canada: 37.6%, 16.5%
France: 50%, 34.4%
Germany: 56%, 16.5%
Japan: 42%, 30%
The UK: 52%, 26%
Spain: 33%, 30%
Italy: 40%, 27.5%
Australia: 46%, 30%
New Zealand: 45%, 28%

In 1981 the US’s top capital gains tax rate was 28% and its top tax rate on dividends was 70%. Until 2013 both of these rates were 15% (8, 9). Further, the OECD Centre for Tax and Policy Administration creates a complex amalgamation of effective top capital gains tax rates with effective top dividends tax rates, and these rates have also greatly decreased between 1981 and 2011 (7):
1981, 2011

The US: 42.9%, 17.8%
Canada: 62.8%, 46.4%
France: 61%, 52%
Germany: 56%, 26.4%
The UK: 75%, 42.5%
Spain: 65.1%, 19%
Italy: 72%, 12.4%
New Zealand: 42.9%, 17.8%

Again, because with the wealthy we begin to greatly experience the Marginal Propensity to Save, and because of the above tax history, the supply of capital and savings has greatly exceeded the level of demand for that savings. This is due both to the fact that there exist too much of that savings relative to those who can afford to pay for those savings and due to the lack of those who can make money by borrowing that savings, this last lack due to a slow economy primarily due to lower consumer demand. Due to this demand/supply imbalance, interest rates throughout the world have reached historically low levels in most financial markets and for many historically long periods of time. An example of the Marginal Propensity to Save is that fact that, in the US, those in the top 1% of incomes on average save about 60% of their total income, while the top 2% saves on average about 35% of their income, the top 10% saves about 10%, and the numbers drop down precipitously after that (19).

Most everyone reading this paper knows the history of US interest rates over the last several decades and how they have progressively over each 10 year business cycle since the early 1980s dropped to historically low rates. But below is some international data that nearly parallels the exact US experience.

The Bank of England’s, Official Bank Rate, was 17% in 1979 and was gradually reduced to .5% by March 2009 (10). The rate was 14.9% in 1989, then 5.1% in 1994, 7.5% in 1998, 3.5% in 2003, 5.75% in 2007, and then finally .5%. The Reserve Bank of Australia’s, Target Cash Rate, went from 17% in 1990, to 5% in 1993, to 7.5% in 1996, to 4.25% in 2001, to 7% in 2008, to only 3% in 2009 (11). The Reserve Bank of New Zealand’s, Official Cash Rate, went from 32% in 1987, to 4.2% in 1990, to 10% in 1996, to 4.25% in 2001, to 7% in 2008, to 3% in 2009 (12). The Bank of Canada’s, Bank Rate, had a rate of 21% in 1981. By 1990 it was 14%. It then went to 3.9% in 1994, to 8.5% in 1995, to 3% in 1997, to 5.75% in 2000, to 2% in 2002, to 4.5% in 2007, and to .25% in 2009 (13). Go ahead and look up this data for all the other larger economies of the world, I have several times, and you will find that virtually all fit the same exact pattern except for those countries that have recently entered debt crises.

Above is presented the “top heaviness” of not just the US economy but the economies of virtually the entire world. The world has experienced top heavy economies before, and they were easily corrected by traditional Keynesian stimuli and higher progressive income taxes that of course Keynes and Keynesians supported. It is important that the higher taxes come from higher income taxes on the wealthy because this is where the slowest velocity of money and the Marginal Propensity to Save generally exists in all modern economies. Yet, this is the first time in history that virtually all economies of the world are in a truly global, competitive, top heavy economy. So, not only does the US need some type of Keynesian stimulus and tax plan, but so does virtually the rest of the world!

What is one of the things that the US does best most often in this world? We lead! The truth is, the entire globe could use some kind of Keynesian stimulus and tax plan. But we are not all one government nor will be ever want to be in one. Almost equally suicidal would be entering a trade war by trying to go back in time to some pre-global economy of the past. Moreover, foreign trade is good for US and global peace and good for US and global economic prosperity, but it needs to be updated for the 21st century.

The US needs to lead with a Keynesian stimulus and tax program. But in this relatively new global economy, first Mr. Quality needs to kick the Crude Keynesian’s ass, and kick him out of Washington DC for good!

So now that I have established that our economy, and the economies of most of the rest of the world, have structurally transformed since 1967 and especially with the fall of communism and socialism, let’s examine how this relates to the four elements of Krugman’s Crude Keynesian model from the 1930’s, and how that relates to the three basic questions that political-economists must answer.

(“Mr. Quality has the Crude Keynesian locked in an arm bar!!”)

Let’s start with element two: “The belief that America’s employment and growth problems are overwhelmingly cyclical, not structural, and therefore remediable by short-term and aggregate demand management.”

Obviously we have established that the effective 8 to 12 fold increase in foreign trade and competition has fundamentally and structurally changed our economy. The new global economy is the primary reason that US economic growth rates in the 1990s were high even with higher income tax rates on the wealthy, and the global economy is the same reason why US economic growth would greatly slow over the next 14 years. In the late 1980s and early 90s, with the fall of communism, many of these new cheap labor markets like India, China, and Russia aggressively moved to free trade policies. One of the largest suppliers of the products that these nations needed to build their new industrial and manufacturing bases was the US because there were few other places to buy these capital expenditure goods. Therefore, our economy would have grown fast in the 1990s even with higher income taxes on the wealthy, the wealthy being more likely to be new jobs producers. Yet by the early 2000s, the new industrial and manufacturing basses of these developing nations were fully functioning and they were now economic competitors of the US. This was a major factor in slowing our economy in the 2000s and beyond. This is one of the reasons why it is foolish to compare tax policy in the 1990s to today. The world is in reality, much more competitive today than it was even as recently as the 1990s!

The global economy has also greatly affected element one of Crude Keynesianism.
“1) The belief that multipliers on tax cuts and transfers are stable, predictable, and large.”

Obviously, if the US is importing four times the amount of goods and services relative to GDP than it was in 1965, then this will mean that the multiplier effect of Keynesian stimuli will be greatly reduced. Especially given our trade deficits, our Keynesian stimuli are very often simply stimulating the economies of our major trading partners. Also, the smaller that these Crude Keynesian stimuli are relative to our mushrooming imports, the less stable and predictable they will be. This increased import leakage of our Keynesian stimuli is clearly one of the primary reasons why 2009’s stimulus bill had much less of a US growth effect than predicted.

Element three of Crude Keynesianism also is affected: “The belief that a growing debt burden is a minor nuisance as long as the economy is in recession.”

Every business today knows that someday someone relatively soon is going to have to pay for any Keynesian stimuli today, and the more government debt that already exists, the sooner and the more will need to be paid for. Under a Crude Keynesian stimulus today, higher personal income tax rates on wealthy job creators and corporations will likely soon be in order; meanwhile, the Keynesian stimuli will only be short term. In our new, highly competitive global economy, these soon to come higher taxes on our primary job creators will only take away capital they need to expand while making them less competitive with their competitors throughout the world. This reality will reduce the economic confidence of not only these primary job creators but our economy’s consumers as well. At the least, Krugman admits that these income tax increases on wealthy job creators has a secondary negative effect on economic growth. But even if it is only a secondary negative effect, it should be gotten rid of!

And this is where Mr. Quality needs to open up a can of whoop-ass, as they say, on the Crude Keynesian.

As I wrote earlier, Krugman is fantastic at analyzing how large Keynesian stimulus plans need to be, but he is terrible and crude at figuring out how to raise government revenues to pay for these stimulus plans and all government, and he is terrible and crude at figuring out how the stimuli and other government funds should be spent.

Let’s start first with the tax side and how it needs to be adjusted to the new, highly competitive global economy.

Many of you are already knowledgeable of personal income and investment income Employer Tax Carve-Outs, which are the most efficient form of taxation in our global economy. So, I won’t spend too much time on them here, although some numbers are very important to remember. Furthermore, personal and investment income ETCOs would likely be the most efficient form of taxation even in a self contained, non-foreign trading, economy, but in a global economy they are that much more efficient and important.

Personal income tax ETCOs are quite simply. When personal income taxes are raised, hopefully just on the wealthy given that this is where the lowest velocity (spending) of money exists, Employee Tax Credits are be used to create an Employer Tax Carve-Out for virtually all employers. Under the personal income ETCO plan that is in the Summary of Our Overall Tax Plan that can be found in this Weekly Blog section, 98% of those employed in the US by private pass-through employers would have their employers effective income tax go slightly down, 1% would stay about the same, and 1% would go up. Sow the ECTO is extremely universal. The tax credits are worth 7 cents on every dollar of w-2 1040 employee expenses, and even 1099 expenses if desired. A simple cap on how low the credits can be exercised for each income bracket is set. The greater the difference in effective tax rates between the non-employing wealthy and the employing wealthy, the greater will be the incentive for the non-employing wealthy and those who are destined to become wealthy to finds ways to become US employers, and also, the more government revenues will be raised! This is because, even in the highest income strata, very few Americans, and this is true for other nations, are employers. In the US, only about 21% of all of the top 1%’s income is the profits of any business that is taxes as personal income that has one or more employees in the US. The top 1% is about where this number peeks. For the top .05% it is about 18%, for the top 2% it is about 18%, for the top 5% about 16%, and for the top 10% about 12% (14,15,16). When stricter Active Income definitions are used, these numbers drop even further. The fantastic, Collins/McCaskill ETCO that was proposed last year for employing less than 500 employees and for incomes over $1,000,000 would only have cost, when statically scored, about 14% of what an exact same tax increase without the ETCO would have raised. Yet when dynamically scored, using the same assumptions as respected studies, it could be said that the Collins/McCaskill tax increase with the ETCO would have raised as much as four to five times the government revenues than an identical tax increase would have raised without the ETCO (17)! ETCOs would also greatly assist in immigration enforcement in that they create a tax incentive for businesses to pay FICA taxes for their employees and not paying their employees under the table.

Yet in our competitive global economy there are some other very important numbers to remember regarding ETCOs that make four to five times the revenues possible. Let’s examine just the top 2% of US income earners for now. Only 18% of all the income that is made by all of the top 2% of income earners in the US is the profits of any businesses that is taxed as personal income that has one or more employees in the US (14,15,16). Yet this 18% of income is extremely important. It comprises the immediately available capital for what are generally America’s fastest growing and most dynamic businesses, that are also generally of the greatest importance to America’s economic future. Businesses that are taxed as personal income are responsible for generally 60% to 90% of all new private sector jobs, and closer to 90% when coming out of a recession. Such businesses that are in the top 2% of incomes are America’s most successful, so they are responsible for as much as, and often near to, 55% of the above new jobs(18). Also very importantly, these same businesses typically become America’s most prolific exporters in the following business cycle a decade latter and well beyond!

One common misconception about growing businesses is that they are not adversely affected by high income tax rates and quarterly income taxes because they can write off as a tax deduction the profits they quickly plow into their expansions. But very few businesses ever expand this way. Most often they need to save for a few years before they can then make their next big expansion. This expansion savings would be reduced without ETCOs. Therefore we should not be reducing their immediately available capital in their most important stage of development when the availability of this capital is so very important to all of us, even if it is for needed government revenues! If you need to know more about ETCOs visit the website, ThirdWayProgressives.org, and go to the Weekly Blog section. My best papers there for a tutorial on ETCOs are “Why an ETCO is Much Better than Just Limiting Deductions for the Wealthy”, the No Labels blog written just before it, and the summary of the overall tax plan using 2010.

The investment income ETCO program works using a very similar tax incentive strategy as does the personal income tax ETCO. What the capital gains and dividends tax ETCO does is reduce capital gains and dividends tax rates on gains derived from the four financial market investments that are most responsible for facilitating private sector job investments, and with the ETCO’s domestic job qualifiers. These four financial investments are, and again with domestic job qualifiers: All venture capital funds and investments, all bonds bought at first issue, all stocks bought at IPO and secondary offering, and the underwriting of any of the above three investments or the investing in any of the three when working within the carried interest rule. As a matter of fact our capital gains and dividends tax ETCO is a great way to fix the carried interest rule.

Fortunately, these four investments constitute generally only about 5% to 12% of all financial market capital gains (19,20). With our domestic job qualifiers this employer tax carve out would cost even less while generating far more government revenues than would an equal sized capital gains and dividends tax increase without ETCOs. This revenue increase would exist due to the cheapening of the cost of capital for the expanding business that this new tax incentive would now be bringing more investor monies to, and then due to the economic growth and domestic labor demand that would increase wages and therefore tax revenues that the US employer carve out tax inventive would induce.

Generally speaking, mid-sized American businesses seek venture capital to expand, larger businesses launch IPOs, and America’s largest businesses float bonds. Again, just like with ETCOs and personal income tax increases, the larger the difference in effective tax rates between those engaged in the behaviors what most directly create jobs in the US and the wealthy who do not, that is, the lower the rate for the direct job creators and the higher the tax rate for the wealthy who do not, the more government revenues will be raised because for example in the case of capital gains the none job creating monies make up generally 88% to 95%, and also the more private sector jobs will be created due to the tax incentives to employ, and the more wages will be increased in the US due to the added demand for labor in the US!

Capital gains and dividends tax ETCOs would also greatly reduce the likelihood and severity of speculative investment bubbles that are severe enough to lead to a recession. They would achieve this by moving more of the financial market monies into the one area of the domestic economy that has the highest velocity of money, that is, here the fastest rate of spending occurs. With more money going to the one place in the economy where it is most often spent and on the largest range of goods and services, price fluctuations for the entire economy will naturally be more likely to be relatively smaller. This would make economic planing and investment for the economy as a whole, including the financial and investment markets, more predictable and stable. This greater economic certainty, and along with it greater economic confidence, will increase the likelihood of greater confidence and lesser volatility in the financial markets, while leaving less for financial market speculation and gyration. Moreover, capital gains taxes revenues are notoriously the most volatile of all forms of taxation because of the relatively high volatility of the financial markets relative to the rest of the economy. Therefore with the incentives inherent in capital gains and dividends tax ETCOs, capital gains and dividends tax ETCOs would not only greatly increase government tax revenues, but reduce the volatility of how much these tax revenues are collected, as well as create less volatility and more certainty for the financial markets and the US economy as a whole! The best place to learn more about capital gains and dividends tax ETCOs is in the 2010 Numbers, Summary of my overall tax plan that can be found at ThirdWayProgressives.org in the Weekly Blog section. Or please feel free to contact me directly at anytime.

With the personal income and investment income ETCOs just presented as ways to much more efficiently raise government revenues and in a progressive, New Keynesian manor:

(BAM!!! … Oh My!! The Crude Keynesian just got hit by an Atomic Elbow!! ……. He’s out!! .. And he aint gonna get up anytime soon!! …… Mr. Quality is lifting him on his shoulder! ….. And he’s taking him to the top rope!!!)

I know this whole wrestling thing is getting a bit juvenile, which is a fair assessment given that that is pro-wrestling’s target audience. But just give me a minute here.

You must realize that when I was in graduate school in California in the very late 1980’s, I was not allowed to talk about my ideas at all!! This was before New Keynesianism was popularized by David Romer and Gregory Mankiw in 1991, and before the related Endogenous Growth Economics arose in the early and mid 1990s. I wanted to become the best possible political-economist/macro-economists I could possibly become. Yet I ran into trouble when I made a presentation to my graduate school class about how a global economy was about to explode, and with it would be a need for a new egalitarian economic model, and a redefinition and reform of what was deemed to be liberating, similar to what occurred in the early 1900s with the Progressive Era, and four generations earlier than that with the Second Great Awakening of the early 1800s, and with the Great Awakening of the early 1700s, and the Puritan Awakening of the early 1600s, and the Protestant Reformation of the early 1500’s, and frankly, Awakenings following this same four generation, 100 year cycle dating back as far back as I and others could study history, and that other extremely respected scholars had written about this same cycle.

When I made a presentation about these ideas to my graduate school class, the professor who was the head of my masters program told the entire class, with me present that, “Tom’s ideas are … evil, and we will not be talking about them in this class and program, and it would be in the best interest of the other students in this program to not talk to Tom about his ideas either in class or out of class!” Through graduate school I was hated by both the liberal and conservative professors for disagreeing with them, and these groups together made up nearly all of the professors. In the end I was told that I was not allowed to discuss or write about my ideas because I was “not working within any existing school of social science thought.”

I have to forgive the head of my program in that he was mostly a psychologist, and he seemed to study little macro-economic data, so he was simply most ignorant in the areas that I was strongest. But, heck yeah, I was very bitter at the time! And the experience turned me against academia as the route for me to help redefine and reform liberalism for the 21st century. And the truth is that I can still become a bit bitter even at times in these years.

But the larger truth is that it was a blessing in disguise. As it turned out, most of the time I was always able to have jobs where much of the time I was either studying some type of economic data or I had the opportunity to study economics and history, and all the extremely diverse range of things you need to be aware of to be a great political economist today. Traditionally, most people have seen someone experiencing many, many jobs as a primary indicator for measuring poor work ability. But not becoming a college professor meant that I have been able to work more jobs than any single person I know, and across the entire job market, on the high paying end and especially on the low paying end, and in virtually every sector of the economy, including sub-sectors like pro-wrestling. No experience at any college or university would have prepared me better to be a political economist than what I have experienced!

But on the other hand, I have yet to earn a single dollar from any of my political economic work, and Paul Krugman has earned a whole lot! And Krugman with his influence is now slowing down the economic and the egalitarian and environmental progress of the US, whether he knows it or not! Krugman probably is not even aware of the ETCO, which is something that some of you can probably change easier than I can.

So yeah, in this paper, Mr. Quality has a bit of a chip of his shoulder, so this beat down of the Crude Keynesian has just begun!!

Crude Keynesianism has influenced the Murray/Reid budget far too much for the good of our nation. Regarding revenue raisers, the Senate budget is an improvement over traditional Crude Keynesianism in that it is a little more pro-economic grow oriented than personal income and investment income tax increases without ETCOs. If we were to reduce tax deductions and credits for the wealthy, given that wealthy growing employers are less likely to be using these deductions and credits than are wealthy non-employers, then the burden of this tax increase would fall less on wealthy employers than it would on wealthy non-employers. Of course personal and investment income tax increases on the wealthy with ETCOs would create a much more economically efficient tax increase than this, but it is a slight improvement over traditionally crude progressive tax increases.

Further, in reality, both for political reasons but even more so for economic reasons, relatively little new tax revenues will be able to be raised by reducing tax deductions and credits for the wealthy. Most itemized tax deductions are already very limited for the wealthy. Moreover, the most costly to the federal government itemized deduction for the wealthy is the charitable deduction. It would not make political, economic, social, or moral sense to limit charitable deductions in any way, perhaps with the exception of reducing for the wealthy the value of non-cash donations. For the wealthy, medical expense deductions could also be cut to some degree, as could mortgage payments for second homes for those with extremely high incomes, as well as could be cut the home business deduction for the wealthy regarding actual living spaces. Savings deductions are already greatly restricted for the wealthy, but where they do exist they should be cut. Moreover, means testing these deductions and credits, as well as means testing Social Security and other entitlements, is very complicated and bureaucratic. All of the above are reasons for an ETCO tax strategy.

ETCOs and Employee Tax Credits can also be used within the C Corporation tax code where they can be used to incentivize businesses with more than 500 employees, and those with less, to employ more often in the US and with higher pay and benefits. Other ETCO tax strategies and innovative environmental tax strategies can also be found at ThirdWayProgressives.org in the Weekly Blog section.

So now that I have established a much less crude, New Keynesian method of raising government revenues, let us move on to the spending side where the Crude Keynesian can take even more of a justifiable beating.

The fourth element of Crude Keynesianism is: “The belief that for practical purposes, the most urgent need is to raise aggregate demand rather than to focus on the quality and type of public spending.”

The Crude Keynesian’s thinking is flawed in that he does not realize that the sooner that we make our entitlement programs more efficient, and particularly in healthcare in that we derive more actual healthcare per dollar spent, the more we can bank that future savings for economic stimulus today! And for more effective economic stimulus at that!

There exist five primary reforms that will make Medicare, Medicaid, Obamacare, and our overall healthcare system much more efficient. In “My Proposed Fiscal Cliff Avoidance Compromise Plan” of the first week of December 2012 that can be found at ThirdWayProgressive.org, I go into much more detail regarding four of these five reforms, and in my last paper I discuss the fifth. The five are: Allowing Medicare and Medicaid to be able to use their bulk purchasing power to buy prescription drugs, allowing anyone to be able to purchase any kind of health insurance across state lines, tort reform in Obamacare, Paul Ryan’s private option in Medicare and Medicaid, and President Obama’s bundling of Medicare payments. Some studies have shown that the first four of the above five reforms alone could save as much as $9.95 trillion over 10 years (21). Very importantly also, the above reforms are not budget cuts, they are in reality, new communications and protections that allow for the same work to be done with significantly less money! Monies that could then be used to reduce the deficit and stimulate the economy now!

The above five healthcare reforms are all interrelated, and they would need to coincide with a public/private catastrophic care association. We can all easily envision 50 state exchanges with Paul Ryan’s private insurance option, but where people can buy across state lines so that bureaucratic savings are accrued due to the uniformity of operations, and where traditional Medicare and Medicaid plans are sold, but with President Obama’s payment bundling, and where all those in Obamacare can purchase insurance because it is simply an extension of the whole system. Medicare, together with the private plans, could use their bulk purchasing power with prescription drugs, and sensible tort reform would exist only in Obamacare where, as long as a healthcare provider used progressively the procedures that epidemiological studies showed to be the most probable for success, those health providers would be legally protected, and within Obamacare only there should at least for some time be a sensible tort cap, of perhaps 10 years. After all, these are people who right now do not have any health insurance, and in reality we have not yet figured out how to pay for their new health insurance. The above system would especially work more efficiently and creatively if we encouraged healthcare insurers to at the same time also be major healthcare providers.

This would be a great base for an extremely efficient and creative healthcare system; one that would be the best in the world! Almost immediately Medicare and Medicaid would begin so save money on prescription drugs. Within a few years there would be less insurance paper pushers working for insurance companies and in hospitals and medical offices. But many of them would quickly, actually, be working with patients, and private insurers would save a lot of money that could then be “cost shifted” and/or the price of private insurance would go down. With cost shifting, Medicare and Medicaid could pay healthcare provider less, and because the private insurers now have more money, they can pay the healthcare providers more thereby make up the difference and/or they will have less expensive insurance for their patients. That Medicare and Medicaid savings would be more money that could equally be spent on deficit reduction and economic stimulus today!

One of my brothers is one of our nation’s top cancer/nuclear radiological specialists, and he thinks that no other factor in medicine creates more waist than the extra medical tests that are made for fear of unjust lawsuits. Certainly we can make some headway here, and certainly Obamacare would not cost as much with some type of tort reform. We are already beginning to save money with the pilot programs in Obamacare that are bundling Medicare payments to health providers. And I know that a lot of Democrats, progressives, and liberals do not want to hear this, but Paul Ryan’s plan of having private healthcare options for Medicare and Medicaid that, via choice and competition, would over time improve the quality and reduce the price of healthcare is absolutely fundamentally sound!! And even before 2013 we would begin to save money under this aspect of the Ryan’s plan.

One of the lessons that most of us learned with the global fall of communism and socialism is that nearly all private, competitive markets, even with a profit margin, are more efficient and creative, especially over the long run, than are government run markets without a profit margin. This is even true with healthcare, and it will be even more so true if we allow people to buy insurance across state lines thereby making the market more competitive. A great recent study that explains in just one way why this is all so is, “Can’t We All Be More Like Scandinavians?” by Daron Acemoglu, James A. Robinson, and Thierry Verdier.

A very vibrant private healthcare market is extremely important if we want to lead the world in healthcare, and healthcare will continue to become an ever larger percentage of the economies of all nations of the world as the world becomes more affluent. Above is not just an amalgamation of the hottest new healthcare reform ideas around today, they are the most prominent bipartisan healthcare reforms that most people have long known would make our healthcare system much more efficient and capable. Together, they would truly reform our healthcare system and bring it into the competitive global economy of the 21st century so it was not such a burden on our employers and overall economy!

Yes, this is a grand bargain that I am proposing, and it is best for our nation! Further, the sooner we make this grand bargain, the sooner we can enact some kind of economic stimulus, and the bigger the bargain, the bigger the stimulus!

This grand bargain should have “spending cuts” (the above healthcare efficiency improvements) and total tax increases that are nearly equal in size to those in the Murray/Reid Budget. At the very least the total debt reduction should equal $1.85 trillion over ten years, but anything else above that saved or raised should equally be split between debt reduction and a new economic stimulus that should occur over the next few years. The tax increases should consist of more personal and investment income tax increases on the wealthy but with ETCOs than they should be tax deduction reductions for the wealthy, and they should equal the amount in the Senate budget. In order to make the tax increases in this bargain more palatable for Republicans, ETCOs should be enacted immediately so that there will be certainty that all future personal and investment income tax increases will have ETCOs, and so that Jan 1 2013’s income tax increases can have ETCOs. In fact for tax reform in 2013, whatever tax expenditure deductions for the wealthy are cut, that amount should be used immediately for a Collins-McCaskill style ETCO for all businesses with less than 500 employees against Jan 1, 2013’s personal income tax increase. The new income tax increases on the non-employing wealthy should not be scheduled to increase until April 15, 2017 for 2016’s tax year. It should also be written in this grand bargain legislation that these 2017 tax increases could be vetoed by any new president and that that veto would have to be overwritten by Congress. In this way the Republicans can present to their base that they are not actually voting for tax increases because a Republican president can always repeal those tax increases after the 2016 election, and they can with pride explain that Republicans are voting for tax reductions that will occur this year for most of American’s most proficient job creators by enacting the ETCOs. For voting for ETCOs and potential tax increases the Republicans should also get Paul Ryan’s, private option for Medicare, healthcare reform, but with Obamacare set to live strong and long.

We can bank now many of the reform savings that we will incur over the next 10 years and use half of all deficit reduction above $1.85 trillion over 10 years (this is the amount of savings and new revenues in the Senate budget) towards a new economic stimulus plan this year! Furthermore, we can iron out all of this between now and September 1 of this year! We can and should do this! The confirmation of a great political compromise is that no one is certain which political party came out best, but everyone one is certain that the American people came out the best! The above grand bargain would achieve this!

Juan Williams recently wrote an article stating that most Washington DC politicians were already looking only to the 2014 election, and that no grand bargain would be possible with the 113th Congress. If I had just one message I could give to every American politician it would be, “YOU ARE NOT PAID BY THE AMERICAN PEOPLE TO CAMPAIGN!” The American economy is still quite bad, and waiting for the next election is willful neglect of the American people!!!

Paul Krugman recently in an interview with Fareed Zakaria said that the 113th Congress could never come up with a grand bargain, but that by 2023 our federal government, even with the Murray/Reid budget, will have had to make reforms to our entitlement programs, especially Medicare and Medicaid, or we will begin to enter a period where budget wise, something will have to give, either cuts in entitlements or a potential debt spiral. At the same time the Crude Keynesian makes fun of those who worry about today’s deficit and debt, and he is emphatic in his belief that it is illogical to think that securing the budget problem today would improve economic confidence for business and consumers (read his paper on The Confidence Fairy).

So Krugman’s logic is: American businesses and consumers should not worry in any way at all about a problem that will sabotage the economy in less than 10 years, even though nobody but perhaps me here is offering a compromise solution, and there exists no possibility for a solution at least until 2014, and that it is extremely unlikely that one party will be able to run DC and/or get their entire way in DC over the next ten years. We dont’t need to review this logic to see how crude and wrong it is. This logical failure completely exposes the failure of Crude Keynesian element three: “The belief that a growing debt burden is a minor nuisance as long as the economy is in recession.”

Yet Krugman’s influence is all over the Murray/Reid budget, and that budget is simply far too little too late for the American people. But it is not so much that Krugman is illogical. It is that Crude Keynesianism is illogical in today’s highly competitive global economy, and Krugman only knows Crude Keynesianism. This particular illogic is exposed by element four of Crude Keynesianism: “The belief that for practical purposes, the most urgent need is to raise aggregate demand rather than to focus on the quality and type of public spending.”

Crude Keynesianism was developed in the 1930’s when John Maynard Keynes, in an effort to just convince the US Congress that some kind, any kind, of government transfer and spending to increase consumer demand should be made and right away, would often joke, something like, “It would be better for economic growth for the government to pay people to dig holes, put bags of money in those holes, pay them to bury the bags of money, then pay them to dig them up, and then let them have that money, than it would be to simply do nothing!” The problem is, Keynes thought of this statement as a joking exaggeration to make a greater point, but others took it seriously. In the 1930s and prior to 1967, with so much less foreign trade throughout the globe, that degree of “Keynesian waist” if you will, could exist without adversely affecting the entire economy. But today, this is no longer true.

As an aside, quickly back to taxes. Frankly, the above experience for Keynes is a lot like the experience for me with you folks and with the Employer Tax Carve-Out, except I’m not joking. Do I actually believe that personal and investment income tax increases with ECTOs will actually raise four to five times the government revenues than would an exactly equal tax increases without ETCOs? The answer is, yes, I do actually believe that sometime in this century, if most of the ideas on my website were fully enacted, the ETCOs would increase what our current progressive income taxes generate by as much as four to five times the government revenues. But what about today, say if we were going to enact the fantastic, Collins/Mc Caskill ETCO; this is the more important question? And the answer to that question is, I think that with the very talented staff we now have in Congress and how they understand that ECTO, I honestly believe that we would double the personal income tax revenues that would otherwise be generated without an ETCO! And remember, the greater the difference in effective tax rates between employers and non-employer, the greater any increase will be! So let’s get on with this ETCO stuff!!

Back to spending. We are at least for much time to come going to be in a world with this level of foreign economic competition, whether we like it or not. So we need to spend our government dollars in more efficient ways, whether it is in areas where we currently spend, or in popular and effective new programs. So with this attitude, and the ETCO tax strategies, and some labor rights legislation that I have yet to blog about, and of course with all the other great ideas we already have and will have, the US should lead the way in making this new global economic order much more prosperous, egalitarian, environmentally sustainable, and peaceful than it is today!

To start with, making these healthcare reforms and enacting an ETCO tax strategy as fast as we can will allow us to bank future savings today that we can us for more debt security and economic stimulus today! But remember, upon kicking the Crude Keynesian’s ass I taught you that spending really matters. Look at all the wasted Keynesian stimulus that occurred in 2009’s stimulus plan! The worst culprit there was securing the pensions of state government employees when reforms would have sufficed. If you had to develop an economic stimulus project that stimulated the economy the least, it would be securing a pension plan. The government is borrowing savings to then put it in savings. As an economic stimulus it could not get worse.

So what are good projects for future spending over the next few years? I’m sure there are plenty of shovel ready projects that are by now, truly, shovel ready. Plus, there is always the Hanford Nuclear Reservation in Washington State that needs to be cleaned up, and we cannot let college interest rates double, and Democrats and the nation should not have to worry about chained CPI!

But related to education, and to increasing our manufacturing and industrial base (which you remember how important that is given the foreign trade data above, and how it is value added, and how much our manufacturing and industrial bases have depleted relative to the rest of the world over the last 40 years), and related to creating a much more environmentally sustainable economy, I would hope that you would read the below proposals that were in one of my older papers if you have not already:

President Obama’s newly proposed National Network for Manufacturing Innovation at first glance looks to be the right step in the right direction, as has long been the Brookings Institute’s, Energy Discovery – Innovation Institutes. However, with only $500 million to $1 billion proposed to be spent over four years with the new NNMI, this is a baby step when an Olympic long jump is needed. Nonetheless, if structured properly it will take relatively little time before it is found that this program more than pays for itself. I dont’t mean “pays for itself” using some times too typical squishy Washington DC accounting, so the monies earned through the program could be plowed back into it!

What is suspected that the NNMI would do, because it is reported to be modeled after Germany’s Fraunhofer Institute, is to invite as many private business participants as possible to come together along with governments to brainstorm over what possible technological developments they would like to collaborate in developing that they would all find benefit in using once developed. Those ideas that attract the most private sector R&D investment commitments would then also receive government R&D funds and other basic and applied research support. With the right government incentives the intellectual property developed would then be produced and used in the US.

At present there is a debate within the Obama administration as to whether the NNMI should be structured with incentives for businesses to manufacture in the US those products that arise using the NNMI government funds. Unless China and India offer to pay, and I dont’t mean lend the NNMI funding, the answer to this question should be yes. More specifically what should happen is that as federal, state, and local funds begin to rise on a particular project, so too must correspondingly rise the percentage of payroll that a business has in each jurisdiction relative to its global payroll in order for it to have a right to the intellectual property developed. Failure to do so would mandate very high royalties and fees in order to use the intellectual property. Further, the best way to calculate payroll increases would be to measure them through the amount of Employee Tax Credits earned. Given that our ETCs as part of our personal income and corporate tax plans allow for ever greater ETC rewards that can be given to businesses that compensate their employees at ever greater amounts above the norm, the NNMI would then maintain, create, and attract higher paying jobs in the US. Germany’s Fraunhofer Institute provides 70% of its funding via its own internal profits, with only 30% of its funding coming from German governments. With the right incentives and tax structure the NNMI would more than pay for itself!

Such institutes in the US will need to expand far beyond what is being proposed above. A very extensive NNMI along with robust state involvement and connected institutes through business incubators and our universities will be a must. One of the missions of our universities should now be to be their own business incubators with manufacturing institutes. Large “patent pools” and networks should be formed within and among them. Students, private groups, and perhaps even non-affiliated individuals would give up exclusive intellectual property rights in exchange for a predetermined percentage of royalties. The exclusivity of each patent pool would be determined by the university, each program coordinator, and the programs intellectual property contributors. Private investors, existing businesses, and those within the business incubators would then be able to license any such patents with similar payroll, ETC, and/or royalty commitments as would exist above with the NNMI. Further, universities should stop using not always relevant math courses, that are taught through very irrelevant practices, as “weeder” courses into many science and engineering degrees. Albert Einstein, perhaps the greatest physicist of all time, was a well below average mathematician. It is safe to say that many of the futures greatest inventors and scientists may be the same.

All of this will be part of a transformation of our universities that is typical for a time period that has experienced an even more profound economic transformation, that being our rapid movement into the global economy. After the Civil War and around the turn of the last century the mission of America’s universities was greatly broadened. Prior to the Civil War, American college students could typically only receive degrees in one of five subjects: law, medicine, theology, philosophy, or science. But as our economy was rapidly transformed from agricultural to industrial during this period, within our colleges and universities the subjects of philosophy and science splintered and became specialized, eventually into what we know them to be today. During this period higher education became much more relevant to the needs of society. A similar revolution is now upon us, and reluctant schools will only suffer.

Given these reforms to higher education along with the NNMI, it would not take long until our economy’s scientific and technological output would be taken to a more desired level. Recent testimony in Congress stated that the US’s technological and scientific output is only about half of what it could potentially be (22). Along with various environmental tax incentives and programs, the possibility of maintaining a pristine and safe environment for the US and the rest of the world would greatly increase. On the purchasing end, the federal, state, and even local governments could enact an Environmental Fair Tax. For states and local governments this would simply mean that they would structure their sales taxes such that products with a great environmental rating would receive a very low to no sales tax, while products with low environmental ratings would make up for this cost by having much higher sales tax rates. This tax would be revenue neutral. A federal Environmental Fair Tax would piggy back on the state and local sales tax system, thereby lowering sales taxes even further for products with great environmental ratings while raising sales taxes even further on those with poor ratings.

Our other environmental tax proposal would reward tax credits for the production of products using best practices. Just like with an Environmental Fair Tax on the federal level, the EPA could designate, and then Congress and the president could OK, best, standard, and poor practices, and then award a lower income tax rate via this designation. Also just like with an EFT, these practices could be judged for what is generated for the production of a product, for when a product is in use, and for when a product is discarded. Another very positive proposal for the environment is to have the federal government announce that the first some odd amount of the production of a certain best practice could be produced tax free. All of these tax incentives would slowly but inevitably create a cleaner environment as new best practices are invented and standard practices become old practices and so on. With these tax policies understood as being permanent, given multiple potential technologies being even close to equal, engineers will always default to employing the more environmentally friendly technology. Furthermore, given that the overall output of environmentally friendly technologies will increase under qualityism, if the free market with these tax incentives alone is not enough for a given sector to move away from certain less environmentally friendly products and procedures, it will then be easier for governments to mandate the use of cleaner technologies without adversely affecting the economy.

(Mr. Quality has the Crude Keynesian up on the top rope!! …… No he couldn’t! … No he shouldn’t!(“Yes do it!!”) ….. Oh no! He is going to suplex the Cure Keynesian off of the top rope!! ……………………. BAMM!!! The Crude Keynesian is not gonna get up from that! …….. 1..2..3!! Ding!Ding!Ding! This match is over!! The Crude Keynesian must stay out of Washington DC forever!!!)

Hopefully the President will come out with a budget that is more influenced by New Keynesian ideas than Crude Keynesian ones!

If not, it is likely that I will be moving to Washington DC this summer to make certain that the Crude Keynesian stays out of Washington DC for good. I will soon be starting a 501 C4, and I’m sure I will be asking for help. I think that a coalition now has the chance of being put together that can make much of the grand bargain that is in this paper become law by September 1 of this year! We shall see, and maybe I will see you in DC!

PS: Paul Krugman is probably a very nice guy, and I hope to have a good laugh with him someday in Washington DC as we celebrate the passage of good egalitarian legislation. And if you are or were a pro-wrestling fan, I wrestled as C.I.A. in the California independent pro-wrestling circuit back in the 90s, and I was co-owner and co-operator of Southern California Championship Wrestling, a minor league pro-wrestling school and promotion, while also wrestling for SCCW. Most of this took place before the internet, so there is not a whole lot that can be found on the web about it.

1. US Census Bureau, Foreign Trade, Historical Services, US International Trade in Goods and Services: 1960 – present
2. Bureau of Economic Analysis, Industry-by-Industry Total Requirements Table
3. OCED 2006, National Accounts of OCED countries.
4. National Bureau of Statistics of China
5. Trade Profiles – India, World Trade Organization
6. United Nations: Manufacturing Share of GDP
7. OECD – Centre for Tax Policy and Administration: OECD Tax Database
8. Tax Policy Center, Brookings Institute Tax Facts, Capital Gains and Taxes Paid on Capital Gains 1954-2008
9. Tax Foundation – Tax Data – Federal Individual Income Tax: Exemptions of Treatment of Dividends, 1913-2006
10. Bank of England: Statistical Interactive Database – Official Bank Rate History.
11. Reserve Bank of Australia: International Official Interest Rates, Target Cash Rate.
12. Trading Economics, National Statistical Data, Interest Rates.
13. Bank of Canada, Canada Target Rate History.
14. Emmanual Saez and Thomas Piketty, “The Evolution of the Top Incomes: A Historical and International Perspective,” National Bureau of Economic Research, working paper no. 11955, January 2006.
15. The World Top Incomes Database, Facudo Alvaredo, Tony Atkinson, Thomas Piketty, January 2011.
16. US Census Bureau, Statistics of US Businesses: 2008 : All industries US.
17. 1. Obama Tax Hikes: The Economic and Fiscal Effects, Published on September 20, 2010 by William Beach , Rea Hederman, Jr. , John Ligon, Guinevere Nelland Karen Campbell, Ph.D. Center for Data Analysis Report #10-07.
18. Bureau of Labor Statistics
19. “Recent Changes in US Family Finances” Federal Reserve Bulletin.
20. Jay R Ritter, University of Florida, “Initial Public Offerings.”
21. State Health Insurance Regulations and the Price of High-Deductable Policies, Kowalski, Congdon, and Showalter, 2008.
22. US Senate Committee on Finance: Full Committee Hearing 9/20/11
23. US Bureau of the Census, 2008

solving the Sequester and Moving to Prosperity

By Tom Pallow

America, Democrats, and the Obama Administration are at a crossroads. It is a clear fork in the road, and it is at the least the time to turn our direction signal one way or the other!

One road leads to the same unsolvable arguments that drive us at best through budget mediocrity and economic malaise. Yet taking the second road would be much like a NASCAR driver turning right. It is something that is rarely done and it is a bit different, but in reality it is very easy and more importantly it would lead to much less government debt and a much more prosperous, egalitarian, and environmentally sustainable economy.

The first road would include the sequester cuts beginning March 1st. Sure, even with the sequester cuts total federal spending would be $15 billion more this year than last year. But the sequester cuts are set to occur in defense and non-defense discretionary spending. These two areas respectively were scheduled to increase by 1.8% and 1.6% annually over the next ten years, while Social Security, Medicare, and Medicaid are scheduled to increase by 5.8%, 6.6%, and 8.5% respectively over the same period. Therefore, with the sequester cuts actual dollars will be cut from this years defense and non-defense discretionary budgets. Moreover, the sequester calls for across the board cuts without the ability to transfer funds from less pressing needs to more important ones. This would create many of the sequester horror stories that we have seen in the media lately that would have the effect of slowing our economy.

Because this first road drives through the sequester that would slow our GDP by about.6%, the $1.2 trillion in total federal savings over 10 years that the Budget Control Act was supposed to achieve would have very little hope of actually achieving that much federal savings. Moreover, $1.2 trillion, even if we were lucky enough to achieve that much savings, is such a small amount that our deficit to GDP and debt to GDP ratios will remain in a very sub-par position. That is, $1.2 trillion in federal savings would bring our deficit to GDP and debt to GDP ratios to manageable levels, but only if interest rates continue to stay at extremely low levels for an historically long period of time and/or the Federal Reserve continues QE3. No nation would want to remain in such a relatively potentially dangerous position that gradually over time does erode the purchasing power of their people. Moreover, there exists an intertwined relationship between economic prosperity and higher than we have now interest rates, and it would be great if our nation could experience broad economic prosperity once again!

Our economy can achieve broad economic prosperity once again if we take the second road. This second road can best be described as a timetable and commitment to enact new and innovative healthcare reforms that would save the federal government trillions of dollars and virtually every American much monies while also raising new tax revenues in new ways that actually incentivize private sector job growth in the US.

The first stop on this second road would be to avoid March 1st’s sequester cuts. This could best be done by acknowledging that President Obama is already smartly saving money by beginning to bundling Medicare payments through the Affordable Care Act. By paying Medicare providers in a bundled payment for most procedures per patient served, both healthcare providers and Medicare can save on administrative costs and some of the healthcare provider’s savings can be passed onto Medicare through cost shifting to the private sector. Furthermore, with this bundling payment system it will be much less likely that a financial incentive will exist for healthcare provider to charge Medicare for procedures that are not actually needed. Even though this Medicare bundling is only a pilot program at this point, with our federal government spending over $900 billion a year in healthcare payments, it is not difficult to imagine that $85 billion would be saved for the federal government once this bundling program has been fully implemented. The Republicans and President Obama should agree that this bundling program is going to save our federal government large amount of revenues and agree to a realistic ballpark number that can count against the $85 billion needed to end the sequester. In a further effort to reach out to Republican some of the rest of the $85 billion can be saved by enacting a majority of the items off of Congressman Eric Canton’s wish list of cuts and savings. If these two sources are not enough and other sources of savings can not be found, then the Pentagon and all domestic agencies should be granted the authority to move resources from less urgent needs to more urgent ones. After all, this shifting of resources by, more closer to the action management, should be something that all institutions, public and private, regularly practice if they care about efficiency. More importantly, any person involved with the American government should be ashamed of themselves as an American if their plan is to hurt and punish the American people in anyway in order to achieve what they shortsightedly see as political points that can win an election, especially when there exists this second road option that will avoid any of these pains!!! This authority will not only save the federal government money, but some of these moneys relatively soon can be shift to new, needed, and popular industrial policy and education programs.

As part of this papers sequester avoidance plan, March 27th’s continuing resolution deadline should be extended to May 18th when the debt ceiling is hit. In this way we can start to consolidate these “cliffs”, and therefore perhaps acquire the pressure to actually achieve the grand bargain that Republicans and Democrats both know needs to be achieved and soon. Or this new “consolidated cliff” could be placed at September 1st when the new budget has a deadline to be totally completed. But the most important element of this part of this paper’s plan is to create a fiscal cliff large enough to motive the creation of a grand bargain vote.

This is where our second road begins to take us to a much happier places. As part of this paper’s sequester avoidance compromise, it should be written into law that one single grand compromise bill should be voted on by May 18th 2015, but hopefully much much sooner and the sooner the better. The debt ceiling would also be extended until May 18th 2015, but not after if the specified amount of savings and new federal revenues in this papers plan is not found. This grand bargain should consist of exactly equal amounts of entitlement reform savings and new tax revenues.

In my last paper, “Two Grand Bargains and Fiscal and Economic Sanity,” that I wrote for the No Labels blog and that can also be found at ThirdWayProgressives.org, I lay out $15.5 trillion over 10 years that possibly can be saved and raised in almost equal amounts in federal spending cut and new tax revenues. Yet these spending cuts are not actually cuts. They are only four interrelated healthcare efficiency improvements that actually save virtually everyone money. Therefore these moneys can be spent on more desired things throughout the entire economy and by virtually everyone while ridding ourselves of our federal deficits. These four interrelated healthcare reforms are: allowing anyone to purchase private health insurance across state lines which can now be done much easier due to Obama Care, allowing private insurance options in Medicare, Medicare using it’s bulk purchasing power on prescription drugs, and tort reform within Obama Care. Just as beneficially, the tax increases in the above paper would actually incentivize private sector jobs in the US. This is because they are personal income tax rate increases and capital gains tax rate increases on the wealthy but with Employer Tax Carve Outs, one of them being Senators Collin’s and McCaskill’s recently proposed ETCO. Using the same assumptions as respected studies, it could be said that personal income tax and capital gains tax increases with Employer Tax Carve Outs can raise as much as four to five times the tax revenues than would equally sized and shaped personal income and capital gains tax increases without ETCOs (1). Progressive income taxes with ETCOs are the most efficient of all taxes because they extract monies from the part of the economy where the lowest velocity of money exists while protecting and incentivizing the areas of the economy that are most responsible for short and long term economic growth and prosperity. Much more on ETCOs can be found at ThirdWayProgressives.org. The paper titled, “Why an ETCO is Much Better than Just Limiting Deductions for the Wealthy” and my July 2012 paper for No Labels would be most appropriate for you to read.

This grand bargain vote should consist of exactly equal parts of entitlement reform savings and new tax revenues. In this way, if no entitlement reforms and tax increases can be agreed upon, then the vote that must take place by May 18, 2015 will be meaningless. However, the debt ceiling would not be able to be extended beyond this point without other budget improvements. But at least Congress will have to take a vote. Maybe by then Congress will become disgusted enough with their own ineptitude that they will rise to the occasion. However, the deadline for this grand bargain vote is extended into the next Congress so that if this Congress does not have the courage and ambition to make a grand bargain before the next Congress, then the American people will be able to vote in a new Congress that will. Furthermore, if Democrats commit to this second road agenda and the Republicans do not cooperate, then the Democrats will win very very solidly in the 2014 election and Democrats will be able to pass this agenda in 2014 regardless. Also, as a way of further reaching out to Republicans and as good policy, the total amount of tax deduction reductions for the wealthy that are agreed upon could be used to increase the size of the Employer Tax Carve Outs. Remember, the larger the difference in effective tax rates between wealthy employers and wealthy non-employers, the greater will be the incentive for the non-employing wealthy and all talented people to find ways to employ in the US.

Of course we do not need, nor would we want to cut, $15.5 trillion over 10 years from our federal budget. But the $15.5 trillion, while it is a total of four healthcare reforms and two tax increases all while using fairly optimistic assumptions, it just goes to show that many inefficiencies in our federal government exist. Importantly, even if we had no federal debt and a budget surplus, we would want to get ride of these tax and healthcare inefficiencies! By doing so, we would allow wasted spending to be spent by more people and in more desired ways and our tax system would raise revenues while generating more economic prosperity. In order to get our debt to GDP and deficit to GDP ratios low enough so that interest rates could rise to more historic averages and the Fed would not have to continue QE3, it would be best in my opinion to raise and save at least $1.8 to $2 trillion over the next 10 years with this grand bargain vote. Further, do not underestimate how much confidence is justifiably reduced from our economy and financial markets due to the acknowledgment that interest rates can not move much closer to historic averages even if $1.2 trillion is saved and raised by the federal government over the next 10 years. But perhaps even more importantly, we want to retain enough revenues to fund new, needed, and highly popular industrial policy and education programs that would make our economy much more prosperous, egalitarian, and environmentally sustainable for us and the rest of the world. These new industrial policy programs are explained at ThirdWayProgressives.org, especially in my older papers.

It is time for us to make the right decision, flip our turn signal and take the best road. If not, the American people will justifiably find new and very different drivers and quickly!

1. Obama Tax Hikes: The Economic and Fiscal Effects, Published on September 20, 2010 by William Beach , Rea Hederman, Jr. , John Ligon, Guinevere Nelland Karen Campbell, Ph.D. Center for Data Analysis Report #10-07.

Two Grand Bargains and Fiscal and Economic Sanity, my newest paper for No Labels

By Tom Pallow

Given that Congress must now pass a budget by April 15th, this Congress should pass two compromise budgets that together solve our debt problem and reform our healthcare system.

The first grand bargain budget should contain both new revenues and real federal savings. The new revenues should come in the form of raising the second to top personal income tax rate to 36% from 33% at $250,000 for joint filers and $200,000 for singles. But with this tax increase, as well as with the one just passed for those making over $450K and $400K, the bipartisan Collins-McCaskill Employer Tax Carve-Out for businesses with less than 500 employees should be enacted. This ETCO would protect today’s most prolific job creators and our future most prolific exporters. Analysis suggests that ETCOs would help to generate four to five times the tax revenues than would the exact same tax increase without an ETCO. In exchange for this new tax increase Republicans would receive their choice of one of the larger and one of the smaller below healthcare reforms. These reforms are not spending cuts as much as they are the elimination of regulations that will then save virtually everyone money.

The first larger reform is the right to buy private healthcare insurance across state lines. By allowing this we would permit much “healthcare cost shifting” to occur, whereby, lower Medicare and Medicaid payments to most all healthcare providers can be offset by their new found bureaucratic savings. Respected studies suggest that state insurance mandates can raise the costs of private healthcare premiums by 30% to 50%. This might translate into $3 trill to $5 trill over ten years in cost shifting and therefore government savings. The second larger healthcare reforms is the Republicans proposal to bring a private insurance option to Medicare. Some Republicans have proposed that this option to Medicare could save as much as $4.7 trillion over 10 years! Even if they are just partially right, it would be worth enacting. The first somewhat smaller healthcare reform concerns Medicare’s current inability to use their bulk purchasing power with prescription drugs. The Obama administration says that changing this will save Medicare more than $200 billion over ten years. The second smaller healthcare reform would be tort reform within Obama Care. A reasonable tort reform in Obama Care would be to civilly and criminally protect all healthcare providers when they use only the one device or procedure that epidemiological studies suggest has the highest probability of success at that time. Other much less radical tort reforms are said by CBO to be able to save about $54 billion over 10 years.

The above first grand bargain vote should also extend the debt ceiling, but for only one full year because our deficit problem will only be halfway solved. For this same reason this same vote should also enact No Budget No Pay as part of the 2014 budget process!

The second grand bargain will have to come by April 15, 2014. With this second compromise Democrats should receive a capital gains and dividends tax rate increase of 5 percentage points to 23.8% for joint filers earning over $250,000 and singles over $200,000. However, this investment income tax increase, along with that of January 1, 2013, should be enacted with Employer Tax Carve-Out. Investment income ETCOs protect and incetivize the generally 5% to 12% of financial market gains that are derived from those investments that directly fund American job and economic growth. These four financial investments are: venture capital funds and investments, bonds bought at first issue, stocks bought at IPO and secondary offering, and the underwriting of the above three investments, and these investments all have the same US employment qualifiers to achieve the lower tax rate through the carve-out. Similar to personal income tax ETCOs, it is possible that the investment income ETCO could incentivize enough domestic job growth to cause this tax increase to raise as much as four to five times the tax revenues that would exist without the ETCO. Much more on all ETCOs can be found at ThirdWayProgressives.org. Republicans in this second grand bargain will receive one of the above larger healthcare reforms and one of the smaller. Yet because the smaller healthcare reform that will likely be leftover after the first grand bargain is more often supported by Democrats, that being Medicare using bulk purchasing power for drugs, the tax increase in the second grand bargain will be smaller than the tax increase in the first grand bargain.

Yet when these two grand bargains are fully implemented and our economy is able to fully adjust to them, it is possible that all together they could raise and save as much as about $15.5 trillion over ten years, which means a surplus of $4.5 trillion over our current deficit! Very importantly again, these pro-growth tax reforms and interrelated healthcare reforms would not be pulling $15.5 trillion out of our economy, they would for the most part simply be making our healthcare and tax system much more efficient and effective, which would then be adding monies to our economy. Moreover, then there would exist the $4.5 trillion that could be used in several beneficial for the country ways including braking the economic headwinds of the recent FICA tax increase. We have all already witnessed how austerity, IE, sequestrations, are now not working in Great Britain as they are now starting to experience a double-dip recession. Maybe we do not raise and save as much as $15.5 trillion over the first decade. But this is what good governments do; they enact better policies and then work on refining them. Remember, the biggest change in our lifetimes is the effective 12 fold increase in global trade that has come with the fall of communism. It is time for us to stop relying on tax and healthcare policies that are 100 years old and not built for the global economy of the 21st century!

Grand Bargains One and Two, Two Budgets and Ridding Ourselves of Fiscal Cliffs and Fiscal and Economic Mediocrity, my paper to Capitol Hill Democrats

By Tom Pallow of Third Way Progressives

America is now in need of a great Congress. The best way to achieve a great 113th Congress is to start early with a great agenda that the vast majority agrees upon, then get it done. Below is what I believe are two grand bargains that would help create two on-time federal budgets, a more than balanced budget likely before 10 years, and a much more prosperous and egalitarian economy.

Given that Congress must now pass a budget by April 15th and given that the debt ceiling must be extended by May 18th, it would be best to pass one good compromise bill this spring that would work both as a budget and as a way to extend the debt ceiling for at least a year. This first budget bill, or first grand bargain, should contain both new revenues and real federal savings. The new revenues should come in the form of raising the second to top personal income tax rate to 36% from 33% for joint filers making over $250,000 and for singles making over $200,000, but with the bipartisan Collins-McCaskill Employer Tax Carve-Out for businesses with less than 500 employees. This ETCO should exist for all such businesses in this second to top tax bracket as well as the top bracket that was just increased to 39.6%. This ETCO would protect America’s most prolific job creators from having needed capital pulled from them due to these two personal income tax increases. Such a tax policy when statically scored would raise about $300 billion over 10 years. But when the same assumptions of respected economic studies are used, an ETCO with these two personal income tax increases could all together raise as much as four to five times the federal revenues, or $2.8 trillion to $3.5 trillion over ten years (1). For more on ETCOs visit the website, ThirdWayProgressives.org. In exchange for this new tax increase Americans and Republicans should receive federal savings in the form of their choice of one of the larger and one of the smaller healthcare efficiency improvements that are in my December 8, 2012 paper. Again, these are not federal spending cuts as much as they are the elimination of regulations that will save virtually everyone money, including the federal government and our state governments. Also, all four efficiency improvements have in the past received bipartisan support.

The first larger healthcare efficiency improvement is the right of Americans to buy private healthcare insurance across state lines. By allowing this to happen we would permit “healthcare cost shifting” to occur, whereby, lower Medicare and Medicaid payments to most all healthcare providers can be offset for those healthcare providers by private insurers who now have much more moneys due to their new ability to consolidate internal bureaucracies due to their new ability to sell anywhere in the US without having to worry about state regulatory concerns. There exists much literature on this reality. Respected studies like that of Kowalski, Congdon, and Showalter 2008, suggest that state insurance mandates can raise the costs of private healthcare premiums by 30% to 50% (2). This might translate into something in the range of $300 billion to $500 billion a year in likely cost shifting savings once health insurance companies are able to fully adjust to their new opportunities. Even if in reality this policy change turned out to save a much smaller amount than $3 trill to $5 trill over ten years, it would still be worth making this change. As for the constitutional question of the federal government regulating healthcare commerce across state lines, clearly the commerce clause allows for this, and clearly Obama Care too makes this possible. After all, these state regulations are in reality tariffs and Obama Care can always help regulate this issue if need be.

The second larger healthcare efficiency improvement concerns a probable but not certain inefficiency. This is the inefficiency that Republicans are trying to solve with their effort to bring a private insurance option to Medicare. Republicans in the past have proposed that this new option to Medicare could save as much as $4.7 trillion over 10 years! Even if they are just partially right, it would be worth enacting.

The first somewhat smaller healthcare inefficiency concerns Medicare’s inability to use their bulk purchasing power with prescription drugs. President Obama has proposed such a plan that his administration says will save more than $200 billion over ten years. This is something that should be done if only just for the principle that it is unfair for Americans to pay the pharmaceutical drug costs of developed nations who do use their government backed purchasing power with drugs. For those who are rightfully concerned that our great American drug companies, that we want to continue to be the world’s leaders, will lose enough profits to have their future growth and R&D expenses cut, any such cut will be more than offset by an expanded market via the new patients coming onto Obama Care, even more generous and stable R&D tax credits and structures, increased government research spending, and new industrial policy programs that should be able to be enacted in the next several years.

The second smaller healthcare inefficiency has to do with tort reform. Liberals dont’t like to talk about tort reform, but we are now about to add 15 to 30 million people to our healthcare system, and right now we can’t even figure out how we are going to pay for those we are now serving! A reasonable tort reform in healthcare would be to allow in Obama Care the legal right for doctors, hospitals, and healthcare providers to be protected civil and criminally if they run only the one device or procedure that epidemiological studies suggest has the highest probability of success. This is where much money in healthcare can be saved. Moreover, in no way would the federal government be taking away a current right. This tort reform would only apply to Obama Care, so it would only apply to the 15 to 30 million people who now do not have any health insurance. Or if Congress chose, this tort reform could apply to those Americans who choose a private healthcare option that has this tort reform as a feature. Other much less radical tort reforms are said by CBO to be able to save about $54 billion over 10 years. The above proposed tort reform would likely save much more than that.

The Republicans with this, by April 15th 2013 vote, should receive their choice of one of the two larger healthcare reforms and one of the two smaller reforms. In my opinion the best larger reform to start with is being able to buy private health insurance across state lines. One reason this is because this reform would also allow the state exchanges in Obama Care to be much more streamlined and much less expensive to operate. In my opinion the best smaller healthcare reform to start with in 2013 would be tort reform in Obama Care. One reason for this that this would be one of the quickest of the healthcare reforms to implement.

The above first grand bargain should extend the debt ceiling for one full year. This is because our deficit problem will only be halfway solved with this first budget vote. Plus, given that a very important part of our new budget involves new healthcare reforms, the appropriations portion of the budget process, that existing from April 15th to October 1st, will be extremely important and requiring of added efforts. These are also why as part of this spring’s vote No Budget No Pay would be enacted as part of the 2014 budget process.

The second half of our deficit problem can be solved with a second grand bargain to come by April 15, 2014. With this second compromise Democrats should receive a capital gains and dividends tax rate increase of 5 percentage points to 23.8% for joint filers earning over $250,000 and singles over $200,000. However, very similar to the personal income tax rate increase that came with the first grand bargain, the second grand bargain’s capital gains and dividends tax increases, along with January 1, 2013’s investment income tax increases, should be enacted with Employer Tax Carve-Out. Yet these are Employer Tax Carve-Outs that are applicable to investment income. Much more on investment income ETCOs can be found at ThirdWayProgressives.org. Republicans in this second grand bargain will receive one of the larger healthcare reforms and one of the smaller healthcare reforms. Yet because the smaller healthcare reform that will likely be leftover after the first grand bargain is more often supported by Democrats, that being Medicare using bulk purchasing power for drugs, the tax increase in the second grand bargain will be smaller than the tax increase in the first grand bargain. However, the statically scored about $400 billion over ten years that would be raised by all of the investment income tax increases enacted after January 1, 2013 could possibly be increased by as much as four to five times that amount with an investment income ETCO.

Investment income ETCOs are relatively simple yet extremely effective when it comes to simultaneously raising large amounts of new government revenues and incentivizing the creation of large amounts of new private sector jobs in the US. Investment income ETCOs carve-out the generally 5% to 12% of financial market gains that are derived from those investments that directly fund American job and economic growth (3&4). These four financial investments are: venture capital funds and investments, bonds bought at first issue, stocks bought at IPO and secondary offering, and the underwriting of the above three investments. Very importantly, in order for gains from these financial investments to receive a tax carve-out the business that received the capital investment must increase its combined labor and capital investment in the US by 80% of the total financial investment that could receive a tax carve-out. Therefore, with April 2014’s vote the top tax rate on dividends and capital gains would be set at 23.8%, however, if the investment income comes from one of the four special financial investments with the US investment qualifiers, than the top tax rate would be only 15%. The other generally 95% to 88% of financial market investments that receive the higher tax rate are virtually only the trading of existing stocks, bond, or derivatives that have very little effect on direct job and economic growth, while the four special financial vehicles are the conduits for virtually all economic growth that is facilitated through the financial markets. Also, just like with the personal income tax ETCO, the greater the difference in effective tax rate between income that comes directly from US employment and that income that does not, the greater will be the tax revenues raised and the more the wealthy will be incentivized to invest in ways that employ fellow Americans. The investment income ETCO is also a great way to fix the carried interest rule.

The fact that the investment income ETCO and some of the above healthcare reforms are new concepts is one of the reasons why this budget process will take at least two years. Yet when these two grand bargains are fully implemented and our economy is able to fully adjust to them, it is possible that all together they could raise and save as much as about $15.5 trillion over ten years. Very importantly again, these two grand bargains would not be pulling $15.5 trillion out of our economy, they would for the most part simply be making our healthcare and tax system much more efficient and effective, thereby freeing up these monies to stimulate the rest of the economy. Moreover, the four healthcare efficiency improvements, along with a fifth efficiency improvement of moving from a fee for service system to a fee for patient system, are all interrelated so it would be best to handle them all in one relatively short period, and now before Obama Care is fully implemented would be much better than afterward.

Maybe we do not raise and save as much as $15.5 trillion over ten years, or maybe we raise and save even more! But this is what good governments do: they find better policies and laws and then work on refining them. So if we do not raise or save $15.5 trillion this decade, we will learn how to do it in the next decade, and we will get fairly close to it this decade! Further, $15.5 trillion is $4.5 trillion more than the $11 trillion in debt we would accrue if our current deficit is continued over the next 10 years, and it would be far better than taking the sequestration cuts that will be enacted if we do not pass a budget this spring. We have all already witnessed how austerity, IE, sequestrations, are not working now in Great Britain as they are now starting to experience a double-dip recession. The US could use this extra $4.5 trillion to make certain that every police and fire station in the nation can make instant background checks for gun purchases. We could also use it for many infrastructure improvements and industrial policy programs, green and otherwise, and we could even use a little bit of it in the form of an economic stimulus as a way fighting the economic headwinds of the FICA tax increase that just fell upon most Americans!

This decision is really simple. Remember, the biggest change in our lifetimes is the effective 12 fold increase in global trade that has come with the fall of communism. It is time for us to stop relying on tax and healthcare policies that are 100 years old and not built for the global economy of the 21st century!

1. Obama Tax Hikes: The Economic and Fiscal Effects, Published on September 20, 2010 by William Beach , Rea Hederman, Jr. , John Ligon, Guinevere Nelland Karen Campbell, Ph.D. Center for Data Analysis Report #10-07.
2. State Health Insurance Regulations and the Price of High-Deductable Policies, Kowalski, Congdon, and Showalter, 2008.
3. “Recent Changes in US Family Finances” Federal Reserve Bulletin.
4. Jay R Ritter, University of Florida, “Initial Public Offerings.”

My Short Proposal to Congress to Help Avoid the 2nd Fiscal Cliff

By Tom Pallow

Dear Capitol Hill Participant,

Few optimum strategy maneuvers have ever been more obvious than what awaits the Democrats in relation to tax policy and the coming sequestration/debt ceiling “cliff” compromise that will need to occur over the next few months. It is obvious that the American people and Democrats would most benefit by President Obama and Democrats in Congress supporting a Collins/McCaskill Employer Tax Carve-Out for businesses with less than 500 employees for those making above $400,000 and $450,000, as well as for those making above $220,000 and $250,000, as President Obama and Democrats should now push for income tax rate increases, or at the least scheduled income tax increases to occur in a few years, for those making above $220,000 and $250,000 as part of the coming sequestration/debt ceiling cliff compromise. In exchange for this new tax increase Americans and Republicans would receive their choice of some of the healthcare efficiency improvements that are in my last paper. Such a tax policy when statically scored would almost double the $620 billion over 10 years that the January 1st tax increases would achieve, but with ETCOs they could raise as much as eight to ten times the federal revenues (1). These new federal revenues, along with the greatest amount of healthcare reforms possible, would mean less federal spending cuts, more debt reduction, and a greater likelihood of passing a short term economic stimulus that would help our economy more easily get through the headwinds of January 1st’s FICA tax increase. In just a few months we can pass a bill where both parties get somethings they desperately want, but most importantly, the American people win! More on ETCOs and my last paper can be found at my website, ThirdWayProgressives.org.
An ETCO would make January 1st’s $400,000 income tax increase, as well as a newer $220,000 income tax increase, much more economically efficient thereby allowing it to raise as much as four to five times the federal revenues, and importantly, incorporating an ETCO would be the best strategy for bringing about enough Republican votes so that the income level for a new income tax increase could be brought down to $220,000 and $250,000. If there ever existed a time to pass an ETCO it is now, and given that there has never existed any serious argument against ETCOs, the competence of Washington DC will be clearly tested over the next two months, although I believe you will be up to the task. An ETCO for January 1st’s capital gains tax increase, or even a newer even higher capital gains tax increase, could also be enacted with this same sequestration/debt ceiling cliff compromise, or they could be put off until the needed corporate tax reforms occur later this year. Tax deduction reductions for the wealthy that a majority of Congress agree on should also be enacted with this important vote in two months, although some of this may have to be put off until later this year. But the most important tax policy that could be enacted in the next two months is the above ETCO strategy. It will bring certainty to American businesses that in the short, medium, and long term they will be in a favorable tax environment, and it will bring certainty to the financial markets that we are handling our federal debt, both of these factors will encourage and allow for even more economic growth and tax revenues.
Please feel free to contact me if you have any questions concerning these issues, and I wish you all the luck in these very important endeavors!

Tom Pallow
Third Way Progressives
202-903-1133

1. When the same assumptions of the following study are used when analyzing ETCOs: Obama Tax Hikes: The Economic and Fiscal Effects, Published on September 20, 2010 by William Beach , Rea Hederman, Jr. , John Ligon, Guinevere Nelland Karen Campbell, Ph.D. Center for Data Analysis Report #10-07.