My 7/20/12 No Labels Blog with alternate title for our website

A Tax Compromise that Will Work,
Or for You Extreme Liberals and Conservatives: What about Four to Five Times the Government Revenues do You Not Get!
By Tom Pallow

Right now one of Washington’s most heated arguments is over what to do regarding personal income, capital gains, and dividends tax rates on the wealthy. Just like with too many of the debates in Washington the two parties are hunkered down in unmovable positions, continuing only inaction and policies that hurt our economy and government fiscal positions.

Both parties have valid points in this argument. Democrats point to our $1.5 trillion federal deficit, the fact that overall federal taxes are now at a 30 year low, and that increasing the above three taxes on the wealthy will raise revenues from those who can most afford them while not increasing taxes on the poor and middle class or further reducing government spending both of which would have the effect of reducing already weak consumer demand. Republicans have equally strong arguments. They point out that President Obama’s proposed tax increases in these three areas would only close our deficit by about 10% while increasing taxes on those businesses that are most responsible for American private sector job growth. For example, the President’s proposed personal income tax increase would reduce the capital available for new hiring for all businesses making over $250,000 a year that are taxed as personal income, while it would reduce our deficit by only about 5%. Businesses that are taxed as personal income are typically responsible for as much as 90% of all new US hires when coming out of a recession, and about 55% of these new hires tend to come from businesses that are in the top two tax brackets that would be increased under the Obama plan. Such a tax increase might cut our GDP growth by more than half.

Does this mean that this stalemate and Catch-22 continues? No, enter the US Employer Tax Carve Out, an idea that is now being contemplated and shared by the top tax and economic counsels on Capitol Hill! You see, only a relatively small portion of the wealthy, and all others, receive their income from the active ownership of any business that is taxed as personal income that has one or more employees in the US. Think about the people you know in your life, even the wealthy ones, chances are that relatively few of them have multiple employees on a payroll. All such income accounts for only about 18% of all the income that is made by everyone who earns more than $250,000 a year. For the top 1% of US incomes this portion is about 21%, which is where this number peaks. For the top .5% of incomes this portion is about 18%, and for the top 5% it is about 16%(1,2,3). Entrepreneurship that employs fellow Americans is very hard work, yet more than anything it is what keeps our economy prosperous. Therefore, virtually all US employers should not receive a tax increase, in fact given the math and more importantly the economic realities, they should permanently be rewarded! Hence a simple and extremely broad US Employer Tax Carve Out, and more specifically, generous US Employee Tax Credits with floor caps for these credits.

Nearly the same tax credits can be used with our capital gains and dividends taxes where the US Employer Tax Carve Out would need to be even smaller. Further, US Employee Tax Credits can be used to reward all business entities that do the least degree of foreign outsourcing while having the worst offenders pay at the highest tax rates. Many specifics on these plans can be found at qualityism.org, especially in the “Weekly Blog” section.

Once an Employer Tax Carve Out program is enacted, Republicans and Democrats can debate, and voters in their way can decide, just how high the highest rates for these four taxes should be and just how much US employers should be rewarded. Yet nearly everyone agrees that this is simply a much more efficient method of taxing, especially in our global economy. We live in a much different economic world than just 30 years ago. The weakening and fall of the communist Soviet Union opened up a world of 4 billion inexpensive laborers in the underdeveloped world because multinational companies no longer have to worry about their offshore investments being nationalized, and new telecommunications technologies allow even the smallest businesses to offshore. These factors have created an effective 12 fold increase in global trade for the US since 1967. Our economic boom of the 1990’s was fueled by the building of the industrial basses of these underdeveloped nations and our economy would have been strong even with higher income tax rates than the Clinton rates. However, this building has been done, and for 10 years or more we have not been competitive and our uncompetitive tax system is part of that problem. Further, the problem of outsourcing across US state lines as a result of high state income tax rates is an even greater problem for our states than foreign outsourcing is for our nation as a whole. E.T.C.O. and E.T.C. tax programs can easily be run by our states if the feds do so first.

Not only would E.T.C.O.’s retain the available capital of growing US businesses while reducing outsourcing, but they would incentivize the non-employing wealthy, and all those wanting to became wealthy, to find ways to employ Americas. Moreover, the larger the difference in effective tax rates between the wealthy who do employ in the US versus those who do not, the greater this incentive will be and the more private sector jobs and government revenues with be produced! When dynamically scored an E.T.C.O program would raise four to five times the tax revenues than would an income tax increase without an E.T.C.O.(4). This would solve much of the fiscal problems of most of our states and our federal government while increasing employment demand in the private sector. Private sector employment demand, together with productivity increases, is the only way to raise real wages for the poor and middle class over the long run. The increased tax revenues can also increase productivity and real wages via better education and infrastructure investments.

Promoting Employer Tax Carve Outs as well as US and State Employee Tax Credits is something tailor made for No Labels. I hope you all agree.

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. 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.

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