The US Employee Tax Credit, the Environmental Fair Tax, Industrial Policy, and Saving Our Healthcare System and Our Budget: A Democratic Budget Outline

By Tom Pallow of Third Way Progressives, 6/21/11

In previous papers I have demonstrated to you how, through incorporating a US Employee Tax Credit, taxes could be taken much higher on the non-employing wealthy and that this would actually have the effect of increasing, through incentivizing, private sector jobs. This increase would occur not even calculating any stimulative effects that might come through spending any of the new government revenues raised or any other private sector spending. Remember, within all the income that is made by the top 2% of income earners in the US, only 18% of all the top 2%’s income is the profits of any business that is taxed as personal income that has one or more employees in the US (1,2,&3). Therefore, the higher we raise taxes on the wealthy who do not hire employees in the US, and the lower we take effective tax rates on those who do, the more private sector jobs and/or government revenues will be generated! This is why, when dynamically scored, our tax plan raises four to five times more revenues than the President Obama’s or the Deficit Commission’s tax plans. A US Employee Tax Credit also institutionalizes in our tax code something that exists in reality but does not exist in today’s tax code. That reality is, all things being equal, Americans who employ other Americans are more important to America than those who do not. So US employers should be rewarded and incentivized, and the most efficient way to do this is through a US ETC Employer Tax Carve Out. Just to clarify, wages and salaries that qualify for the US ETC are all wages and salaries where the employer pays FICA taxes. Also, our tax plan can be configured so that businesses that “hire” 1099 “employees” can receive some US ETC for their 1099 employee expenses.

Our overall tax plan would raise $1.25 trillion over 10 years versus $925 billion and $700 billion over 10 years for the Deficit Commission’s tax plan and President Obama’s tax plan respectively. These differences would be much greater if these plans were dynamically scored! Our plan would create or save many, many more jobs than any other proposed tax plan, over 11,553,000 between 2013 and 2020. Studies show that the Obama tax plan would cause the loss of as much as 6,243,000 jobs between 2013 and 2020 (4). While it would be very surprising if studies showed that the Deficit Commission’s tax plan would not lose even more jobs. Therefore, the private sector jobs that would be created in our plan would stimulate the economy even more and generate even more tax revenues. The Obama plan and Deficit Commission’s plan would do the opposite! If all three tax plans were dynamically scored our plan could easily raise up to 4 to 5 times as much federal revenues as the other two plans! $1.25 trillion X four or five, over 10 years is much more than the reported $2 trillion over 10 or 12 years that the Obama Administration is currently trying to reach in cuts as part of the ongoing negotiations to raise the debt ceiling. Very importantly, with our overall tax plan enacted, the Obama Administration would not have to cut a single dime from our federal budget in order to reach this goal!

Another virtue of the US ETC is that they would allow the targeted capital gains tax cuts in our plan to be directed toward job creation in the US. Remember, our capital gains tax plan would raise tax rates on most capital gains, but cut tax rates on gains from venture capital funds and projects, stocks bought at IPO and secondary offering, bonds bought at first issue, and the underwriting of the above three investments. And very importantly, all of the existing businesses and investments involved in these financial investments must have at least 5% of all their total business expenses being employee expenses that would qualify for our US ETC and/or are increasing it by a near equal amount to the equity raised in the financial offering. Remember, the four above financial investments generally constitute only about 3% to 12% of all gains in the financial markets (5&6). For more information on our capital gains tax plan read the 2010 summary of our overall tax plan that can be found in the Weekly Blog section of our website, ThirdWayProgressives.org. For more on all of our tax and budget ideas visit the same Weekly Blog section.

The US ETC also makes our FICA tax plan more efficient and incentivizing for private sector jobs in the US. They do this by creating another method in which effective tax rates can be widened between wealthy people who employ in the US and those who do not. This is on top of the job creating incentives that our FICA tax cuts generate.

Also, in our C Corporation tax plan the US ETC is able to bring jobs and investments back into the US, and do it in a way that incentivizes jobs that are more socially responsible. For more on this plan read the C Corporation portion of the 2010 summary of our overall tax plan and the paper in our Weekly Blog section that is entitled “Carried Interest, Partnerships, Income Tax Deferrals, and a System More Compatible with Democracy.”

The US ETC would also incentivizes employers to pay their FICA taxes and not pay their employees under the table. This is a growing problem that will only be exacerbated if FICA tax rates are raised as part of the Affordable Care Act. In this way the US ETC would also be of great benefit if we were to ever pass some kind of comprehensive immigration reform.

In this paper I will also explain another feature of the US ETC. This feature has to do with the environment. One of the tax proposals that has gained much popularity in conservative circles is the Fair Tax. This tax is essentially a national sales tax that claims to allow for the elimination of the personal income tax and the payroll tax. Third Way Progressives oppose this tax because it is regressive, and that because of its regressivity that would then slow the economy, its 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. The federal government could piggy back 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 be credited against some or all 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.

Along with the above Environmental Fair Tax, our tax plan features an Environmental Responsibility Tax Credit that drops effective tax rates for those businesses that produce in the most environmentally sustainable ways as designated by congress, either when producing a product, while a product is in use, and upon discarding a product. Through these tax incentives for producers and consumers, production will gradually but inevitably become more environmentally responsible. With these constant tax incentives in mind, engineers when given a choice will default to the more environmentally sustainable design. With these new and more environmentally responsible products and production there will come more opportunities for manufactures to produce in the US.

However, the above tax incentives will not be enough to increase manufacturing in the US, nor will they fully help us reach environmental sustainability. What is needed beyond these tax incentives and our US ETC is a form of industrial policy that has in mind these environmental tax incentives.

Therefore, it is with great pleasure to finally see the Democratic Party and a Democratic president adopting the beginnings of an adequate US industrial policy. This is happening with the President’s Win the Future program and the congressional Democrat’s Made in America program, and several states have long been involved with similar programs. Succeeding with these programs will be integral to the future of America and the Democratic Party. Our Environmental Fair Tax and our Environmental Responsibility Tax Credit would greatly aid in and add to making these programs a success.

Along with creating a more environmentally sustainable economy, what this environmental and industrial policy is doing is attempting to optimize one of the three primary engines that drive economic growth. There are three primary engines that drive economic growth. One is demand, two is the price of borrowing, and three is improved or new products. Welcome to New Growth, or Endogenous Growth, Economics! If you are not schooled in it, blame your college. They deserve most of the blame.

Republican, supply-side, or classical economists believe that with very low taxes the economy grows fastest because the price of borrowing is then kept low so that businesses and consumers can borrow cheaper and growing businesses have to borrow less. Supply-siders are right in that a lower cost of borrowing will increase economic growth. Also, they are right in that raising taxes on job creators will slow the economy because job creators will have to borrow money and pay interest on that borrowing to make up for the money that was taken from them by their increased tax bill.

Democrats, demand-side, or Keynesian economists believe that economies grow fastest when demand is high. The four components of demand are: consumer demand, business demand, government demand, and foreign demand, but demand-siders believe that consumer demand is by far the most important for economic growth. Keynesians are right on these facts. In reality consumer demand is generally responsible for about 60% to 70% of total spending and economic growth. But Keynesians belittle to the point of harm the importance of the other 30% to 40%. How Keynesians pay for the economic stimuli that pay for the increased consumer demand too often raises taxes on job creators and in the above way that then slows economic growth. Also, too often the economic stimuli are spent in ways that do not optimize economic growth and prosperity.

New Growth or Endogenous Growth Economists, or in our case, Endogenous Growth Economists and Qualityists, or Keynesians in a global economy, believe that supply-siders and demand-siders are both right, at least in the ways I pointed to above. However, Endogenous Growthers believe that there is a third primary engine of economic growth. That engine is improved and new products and production, but especially new products that are so desired that people will go out of their way to buy them even if their incomes and purchasing power are down and businesses will invest in even if their price for borrowing is higher. With the weakening and fall of the Soviet Union, the US and most of the world has experienced an effective 12 fold increase in global trade. Given this new economic environment that will not be reversed, Endogenous Growth Economists must have much more influence upon policy makers. Our overall tax, spending, and budget plan is a comprehensive Endogenous Growth School plan.

All business cycles can be analyzed through this Endogenous Growth perspective. Acknowledging that all major economic down turns since 1913 have occurred in 1913, 1918, 1929, 1938, 1948, 1958, 1972, 1978-82, 1990, 2000, and now, every economic expansion can be seen through the sector or sectors of the economy that were most responsible for the growth during that economic expansion. Keep in mind, generally in an economic expansion, 60% to 90% of the new growth in that economic expansion comes from what begins that economic expansion as only 2% to 3% of GDP.

For example, housing, healthcare, and cell phones were most responsible for the economic growth in the US between 2002 and 2008. Between 1992 and 2000 it was personal computers and the internet. Between 1982 and 1990 it was commercial real-estate and computers for businesses. In the 1970’s it was gasoline and inflation. In the 1960’s it was aerospace and war. In the 50’s it was TVs and consumer electronics. In the 40’s it was war, in the 30’s government, in the 20’s cars, trucks, and radio, and in the 10’s cars and war. Before 1913 there took place shorter economic growth cycles that were most often effected by railroad expansions.

You get the picture. High consumer demand is very important, a low price of capital is very important, but so is new and innovative products, and with our environmental tax plans, products that are more environmentally responsible.

Industrial policy, in accordance with better education, will help us increase this third primary engine of economic growth and prosperity. The Winning the Future and Made in America programs are a great start, but they need to be enlarged, broadened, and deepened. What Democrats are now supporting with industrial policy through our community colleges is brilliant government. We should be greatly and aggressively increasing funding on these programs. If we cannot sell this program to the American people we will likely not be able to enact any other government programs that we believe will help the poor and middle class.

Nevertheless, we will need to go far beyond this program. One of the ways we could achieve this is to expand the responsibilities of our universities. Our universities and colleges throughout the country should allow for students, the universities, the private sector, private financers, and state, local, and regional governments to be able to collaborate in ways that allow our business and engineering schools to create new commercial products and businesses that will then be obligated to an extent to employ in the US when they do employ. Our US ETC can be the basses for the obligation that a participating business will have. This would in essence create a free market for government R&D matching funds where the currency that would determine the highest bid would be future US employment to be measured in the amount of US ETC’s achieved. Therefore, the matrix of how we decide what R&D would be funded through this industrial policy would be the questions of how many private sector jobs and their quality the investment will create over the short and long run. Further, with our Environmental Fair Tax and our Environmental Responsibility Tax Credit in place production and products that are more environmentally sustainable will generally have a higher profit margin and therefore be shown to generate more local and national jobs. This same program should also be run through existing and future business incubators.

With such a policy we will need to greatly increase the output of our patent system, yet this is something we have long needed to do. We should also begin in accordance with the above program a more open patent system. We should simultaneously run through this program and otherwise a more open patent system along with our current patent system. I will have more on these subject in future papers.

But spending on industrial policy is not the only area where our federal government should be increasing spending. Just because Qualityist or Endogenous Growth Economists support industrial policy and a low cost of capital for American job creators does not mean that they do not support government projects that only the government can pay for and/or organize. Too often today, Keynesians, lacking imagination, fall back on traditional avenues of government spending that were much more important in a past eras and business cycles. Typically, Democrats talk of roads and bridges when most of this work was accomplished in the 1950’s and 60’s. While much infrastructure work like roads and bridges will always need to be done, projects that are absolutely necessity for our nation’s future economic growth and prosperity go unaddressed.

One such project that will be eventually needed is a water pipeline from the Mississippi River to the Colorado Basin. It is estimated that in the next two decades 70% of farms in Colorado and on the Colorado Plateau will have to go fallow for lack of water. Further, most of the American southwest will have much difficulty growing in the future due to a lack of water. Too much of our desert aquifers have already been used. Such a project is estimated to cost between $22 and $26 billion. But it is with certainty needed, and we could use an Apollo like project to make certain that as much as possible the pumping is done with solar and wind power. Another project that simply needs to be done if we want a livable and prosperous southeastern California is a sea canal to the Salton Sea. Also, as a part of this project, it will be rather easy to engineer a very efficient solar desalinization plant on the shores of a clean Salton Sea, given the climate and the fact that this involves heating water.

Our tax plan rises four to five time the federal revenue as any other proposed tax reform plan when dynamically scored. The above industrial policies and water projects will help create economic growth in the short and long term, but these programs will also cost moneys that we do not have. All and all, our tax plan with our industrial policies will grow the economy enough to cover only about 50% of the deficit reduction we will need. Given how studies have shown that reducing government spending too quickly will depress the economy and job growth, we need to find ways that reduce government spending that least pull consumer demand out of the economy (7). Therefore, we will need to make our government spending more efficient. Our industrial policy will help with this. But we will need to be more efficient when it comes to our private healthcare system, Obamacare, Medicare, Medicaid, Social Security, and other areas.

Let us start with healthcare. In order to do this it is important to start by dispelling a fundamental misunderstanding that many policy makers have when it comes to American healthcare.

This fundamental misunderstanding that too many policy makers hold is that healthcare as a percentage of our nation’s GDP keeps increasing because healthcare inflation is much higher than general inflation in our economy. The reality is that this relationship is, for the most part, the opposite of this. That is, inflation in healthcare is higher than the average inflation rate because healthcare keeps becoming a larger portion of our GDP. Moreover, healthcare becoming a larger portion of our GDP is simply a result of our further prosperity as a society.

For now, keep out of mind any reversals due to the severe recession of the past few years, however, we live in a nation where about 2% of our economy produces so much food that Americans throw away about 1/3rd of it, obesity is one of our worst health problems, and we are the world’s largest food exporter. Also, we live in a nation where, due to advanced technologies and cheap labor in the developing world, many Americans have so many physical consumer goods that over the past two business cycles self-storage units have been one of the fastest growing sectors of the US economy and home invasion robberies have become almost none existent. Moreover, over the last 30 years in the US and most developed nations manufacturing as a portion of GDP has been cut nearly in half, while even in nations like India and China manufacturing as a portion of GDP is lower than it was 30 years ago. Therefore, if you live in a society where food and physical goods are so plentiful that there is almost no more room for more, than your economy will grow faster in those sectors that produce products and services that you can never have enough of. One of these things that you can never have enough of is how long you live, i.e., healthcare. Hence, it is the natural evolution of a society to have an ever increasing percentage of a nations GDP move to healthcare. Further, any sector of the economy that is growing faster relative to the rest of the economy will almost axiomatically have a higher inflation rate.

It is very important that we understand the above relationship so that we do not stifle the advancement of new medical technologies. In fact, through our industrial policy we must facilitate the creation and use of new medical technologies because this natural evolution will also occur throughout the rest of the world. So this will be a great source of American jobs in the future. Another area of the economy that will increasingly grow due to the above phenomenon is tourism. This is especially true if the world has a more egalitarian tax and economic policy like we are proposing. Then, we should use our industrial policy to develop the world’s greatest toys that recreators and tourists can use.

In past papers I have written a bit on healthcare. But in order to fix our healthcare system in accordance with our budget troubles and our short and long term healthcare needs some important reforms will need to be made. Most importantly, we need to maintain a “mend it but dont’t end it” position when it comes to the Affordable Care Act and we need to address Obamacare first. Further, we need to structure the Affordable Care Act in a way that makes our private healthcare system more efficient, and in a way that gives us the option in the future of moving to a public/private healthcare exchange for Medicare and Medicaid like what was proposed by the President’s Deficit Commission. Improving the efficiency of our private healthcare system, along with an assigned risk policy for the elderly and those with preexisting conditions, can make this possible. Also, we as Democrats should not bend when it comes to assuring that all Americans have some form of health insurance. 2012, both the election and congressional hearings, should feature healthcare as the main issue. These hearings should be on how to mend the Affordable Care Act and how to make our private healthcare system more efficient.

It is very important that the federal government make it as easy as possible for people to be able to buy health insurance across state lines. This current inability is why 30% of America’s private healthcare insurance costs go to administrative costs, while it is in single digits for Medicare. Given our commerce clause and past interpretations of it, there is no way that our states should be able to make their healthcare regulations so idiosyncratic that states have so few private health insurers. These states are infringing on the personal freedoms of their own citizens. In fact, it should be the federal government’s role to make the private health insurance industry as competitive as possible in each state with as many private options as possible in each state. Further, private insurance companies with a very large national presence would then be able to team up with Medicare and Medicaid in order to use their bulk purchasing power to lower their overall costs of healthcare.

Tort reform should also be a major component for the future of healthcare when it comes to healthcare for the poor. This would be true for both private and public options. Healthcare is an art. Doctors and health providers should not have to make amends for educated, but still artistic decisions using the most probable to succeed procedures that go bad. They should only have to pay for decisions that even a lay person would know to be incompetent when educated on the standard practices for a particular diagnosis, or if they withhold information.

The other area that needs reform is prescription drug costs. It is not fair to the American people that we allow the rest of the world’s governments to acquire lower costs for American prescription drugs then what Americans pay. We can legally mandate that the cost burden for US prescription drugs be made more equitable across developed nations. In this age of possible “austerity”, it will not take long before there should not be a single US politician who can survive opposing this.

Along with the above changes to healthcare, the most important change that could be made to lower the cost of healthcare is to have a complete vertical integration of our healthcare system, wherein health providers are also paid per client and not per procedure. Federal law can help here. We will know that our healthcare system is working optimally when a person’s private health provider employs virtually all employees in a hospital or a wing of a hospital. State and federal law can help here as well. The system will also be working optimally when, private and public option health insurers can collaborate with Medicare and Medicaid to bid down the cost of their healthcare. Federal and state governments must help here too.

The most important thing for us to remember when it come to lowering the costs of Medicare and Medicaid is that fact that, the more efficient and cheaper we can make the private healthcare system, the lower we can make the costs of Medicare and Medicaid. This is because health providers will always pass on the costs of lower Medicare and Medicaid bills to their private sector patients. Therefore, the lower we help can make healthcare costs in the private sector, the lower health providers can make them for Medicare and Medicaid.

Another area of our federal budget where we could cut without pulling consumer demand out of the economy is Social Security. Raising the retirement age for Social Security for all those age 55 or younger to age 67 would not pull any consumer demand out of the economy, yet it would send the message to the credit markets and the rest of the world that we are getting serious about our debt.

Progressive activist will complain that the government is breaking a promise to the American people, but when Social Security was first enacted in 1935 the average American man lived to age 60 and the average American woman lived to age 64. Today these numbers are 76 and 81 respectively. Also, in 1950 there were 50 workers for every one Social Security recipient, today there are only 3. The numbers for Social Security just are not sustainable, even with raising the FICA tax cap up to $180,000, and even with indexing that to inflation. So this is the fairest and most logical way to save money and make the system solvent. The quicker we make the system solvent, the more confidence there will exist in the credit markets and the private economy. The vast majority of the American people will see this as real leadership and reward Democrats for it. We can also save by means testing Social Security.

Another policy that would save our federal government much money without pulling consumer demand out of our economy would be to create a Department of Peace. This idea is something that our Democratic base has long wanted. It would not cost us any money because we could pull moneys and people from the State Department to build and maintain it. The function of the department would be to develop messages, and develop methods and strategies that spread those messages, that would demonstrate to the rest of the world that we are a people who share their same values of freedom and democracy, and economic freedom, freedom of speech, and environmental responsibility. Messaging and the reality of that message is a primary reason why we won the Cold War, and this will be true with the War on Terror. Moreover, a Department of Peace will have the positive added effect of allowing the State Department to remain more policy neutral.

Another area that would greatly help with our federal budget and with economic growth would be to allow the federal government to sell or trade federal lands in the west. Few Americans are aware that so much of the land in our western states is owned by the federal government in some way or another, and very often these are BLM lands. 75% of Nevada and 45% of California are owned by the federal government. Counties and states should be allowed to buy and/or trade federal lands of all types. Counties, states, and the federal government would bargain with private developers over lands that local counties and states would like to develop. These payments would then go to the federal government to help decrease our deficit. Of course this program would also greatly increase economic growth.

  1. 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.
  2. The World Top Incomes Database, Facudo Alvaredo, Tony Atkinson, Thomas Piketty, January 2011.
  3. US Census Bureau, Statistics of US Businesses: 2008 : All industries US.
  4. Obama Tax Hikes: The Economic and Fiscal Effects,  Published  on September 20, 2010 by William Beach , Rea Hederman, Jr. , John Ligon, Guinevere Nell and Karen Campbell, Ph.D. Center for Data Analysis Report #10-07

5. “Recent Changes in US Family Finances” Federal Reserve Bulletin.

6. Jay R Ritter, University of Florida, “Initial Public Offerings”

7. Disinvesting in America: The House Republican Budget Plan, Adam      Hersh and Sarah Ayres, with data from Mark Zandi: www.americanprogress.org/issues/2011/04/disinvestingamerica.html