My Proposed Fiscal Cliff Avoidance Compromise Plan

By Tom Pallow

The key to short, medium, and long run successful tax and budget policy in this era of slow economic growth and high government debts is to tax in a way that actually incentivizes and creates more private sector jobs, today this means the Senator Collins Employer Tax Carve Out, and budget spending cuts that are not actually cuts, but are the eliminations of inefficiencies, inefficiencies that when they are replaced by better policies, deliver much more services with much less costs. Four such budget cuts in the area of healthcare are essential components of this paper’s plan, as well as are two types of tax increases with ETCOs. Yet ETCOs will not be explained much in this paper. If you have questions about ETCOs you should visit my website, ThirdWayProgressives.org, in the Weekly Blog section, and read the most recent papers.

In short my compromise plan is to pass by Jan 1, 2013, at the least an outline of another bill to be voted on by April 15th and perhaps a third bill to be voted on within a year after that. Either the first or second bill would enact a one year extension to the debt ceiling, as would the third bill. In this way Congress would get into the practice of once again passing something like a yearly budget. These two or three bills, that would become two or three bills depending on the ambitions of Congress and the President, would primarily concern six great policy proposals. Two of these six great policy proposals are tax increases with ETCOs and four are healthcare reforms that correct inefficiencies. Three of the six are primarily supported by Democrats but have had bipartisan support, and three are primarily supported by Republicans but have had bipartisan support. Very importantly, the federal revenues and savings that would come through enactment of the three primarily Democratic ideas could be structured to exactly equal the federal savings that would come from enactment of the three primarily Republican ideas. And once again most importantly, the two tax increases with ETCOs will have the effect of raising more government revenues than would otherwise result without the ETCOs while incentivizing and creating more private sector jobs in the US than would otherwise result without the ETCOs, and the healthcare reforms are not actually spending cuts but the elimination of barriers and burdensome regulations and the enactment of reforms that actually save virtually everyone money.

First, the virtues of a personal income tax rate increase on the top 2% with an ETCO is that it would raise far more government revenues in the short, medium, and long runs than would an equal sized income tax increase on the wealthy without an ETCO. How much more government revenues is hard to say. When economic studies are used and their same assumptions are used to analyze the possibility of an ETCO, enacting ETCOs can be said to possibly raise as much as four to five times the government revenues as would an equal sized income tax increase without an ETCO.(1) This increase in government revenues is primary due to the fact that ETCOs incentivize private sector job growth while income tax increases without ETCO inhibit private sector job expansions in certain ways.

Moreover, progressive income taxes, which ETCOs make more efficient, tax and remove monies from the single largest part of the economy were the least total spending and velocity of money is occurring. Wealthy people, especially in the top 2%, save a much higher percentage of their income than do the other 98%. The top 1% generally saves about 60% of their income and the top 2% saves about 35% of their income. This savings is being stored, generally 88% to 95% of the time, in savings vehicles that have very little influence at all on overall business and job growth, economic growth, or consumer spending in the US. However, generally 5% to 12% of the time they are saved in very important investment vehicles that have tremendous importance for our short, medium, and long run economic futures. Our capital gains tax ETCO solves this problem by carving out and incentivizing investments in this important 5% to 12%. Our capital gains and dividends ETCO will be the second tax component to this papers fiscal cliff compromise plan. A personal income tax rate increase with an ETCO and a capital gains and dividends tax increase with an ETCO would work together to create a much more effective and efficient tax system because they work to remove moneys from areas of the economy were moneys are least being spent while not making it harder but actually working to incentivize and create domestic private sector jobs and especially those US jobs that are higher paying. For more on why protecting America’s most dynamic, proficient, and more often highest paying job creators while increasing income tax rates on the wealthy is extremely important, visit the ThirdWayProgressives.org website and read the blogs in the Weekly Blog section.

Therefore, at the least before April 15th 2013, or whenever this coming springs debt ceiling is hit, personal income tax rates on the top 2% should be increased to 39.6% and 35%, and at the President’s income levels, but with the Senator Collins ETCO. It may be that the Republicans and Senator Collins will stick hard to the $1 mill and above income level, but Democrats should try as hard as they can to make it the $250,000 level, or at the least have a two to four year faze in to reach the $250,000 level. But Democrats should not vote down with any of these two or three fiscal cliff avoidance compromise bills any personal income or capital gains tax rate increase that has an ETCO due to any disagreement with Republicans over this income level issue! Perhaps the simplest compromise on this specific issue would be to set the income level for the personal income tax rate increase with the ETCO at $625,000, which is the midpoint of $250,000 and $1 mill.

As well as this spring certain tax deductions on the wealthy should be reduced. These deduction reductions will be very limited in total savings, but they still should be enacted. My list of deduction reductions and how they can be enhanced on the revenue side by ETCOs can be found in my last paper that can be found in the Weekly Blog section of my website. Also, and sooner rather than latter, a third or fourth bill concerning tax reform should address C Corporation and businesses with more than 500 employees tax reform, my US Employee Tax Credit C Corporation tax reform that would truly bring high paying jobs back to the US, and even start some environmental tax reforms. But within at least one of the first three votes to avoid our current fiscal cliff, Congress should vote on by the end of 2013 but at least by April 15th 2014, a bill to raise capital gains tax rates on the top 2% with an ETCO and the second healthcare reform policy that the Republicans want. Given that legitimate economic studies suggest the possibility that a spring 2013 personal income tax rate increase with an ETCO, as I have proposed, would raise as much as four to five times the government revenues than would the same tax increase without an ETCO, and given that Congress would then be directed to have a second vote on a capital gains and dividends tax increase with an ETCO within a year, the financial markets and the world in general would be certain that, at least on the revenues side, the US is on its way to solving its deficit and debt problems! Again, for more on ECTOs visit the Weekly Blog section of the website, ThirdWayProgressives.org.

But the spending side is where most of our work needs to be done. Further, because an economy will only take so much new tax increases at any one time, even if it is tax increases on the wealthy, then most deficit reduction will have to come from the spending side. But remember, our four spending reductions are in reality real healthcare reforms that remove barriers and eliminate inefficiencies. Moreover, with the first fiscal cliff avoidance “outline” bill that needs to be passed by Jan 1 2013, the spending cuts/savings from ending the four healthcare ineficiencys could be made secure and real by Jan 1 2013 by writing a “half” fiscal cliff that would occur only on the spending side into the first by Jan 1 2013 bill. These one to two “half” fiscal cliffs would only occur if real healthcare savings was seen as not to be had in any of post Jan 1 2013 fiscal cliff avoidance bill. In which case the half fiscal cliff would come in the form of equal cuts in defense spending and discretionary spending that make up the spending side of today’s fiscal cliff. In other words, if there is not voted on and passed a bill that would create, say $1 trillion, in healthcare savings, then the same amount of federal spending cuts would occur in defense and discretionary spending and equally.

The first healthcare inefficiency is not allowing people 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 these 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 makes this possible. After all, these state laws are in reality tariffs and Obama Care can always help regulate this issue if need be.

The second healthcare inefficiency concerns Medicare’s inability to use their bulk purchasing power with prescription drugs. President Obama has proposed such a plan that the 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.

The third healthcare inefficiency 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. Always beware of the extreme political dogma that preaches that a monopoly in a sector of the economy is a good thing. Far left, liberal, progressive, Democrats need to rid themselves of the idea that a healthcare monopoly would be a good thing, whether it is run by a government or a corporate oligopoly. A very strong, vibrant, dynamic, competitive, and competent private healthcare system is a great thing for our economy and country.

Remember, healthcare will continue to make up a larger and larger percentage of the world’s overall Gross Product. This will happen as productivity increases in agricultural and manufacturing goods continue globally. Again remember, two of the things that virtually all people never get enough of are how long they live, i.e. healthcare, and how much time off from work they get. Of course there are natural economic constraints on trying to achieve both desires, but as productivity increases in agriculture, manufacturing, and other goods continue, more consumer demand will be available for healthcare and adventure products. This evolution is happening in the US first, and this is primarily why healthcare keeps becoming a larger and larger percentage of our overall GDP, but the rest of the world is following us closely behind. This evolution will most often bring great economic changes in healthcare that will most often arise in the medical device and prescription drug sectors. The US should easily be able to become even an even greater exporter in these areas. But this strong private healthcare market is extremely important for that to occur.

Private healthcare is lead by the demand of those who can afford it. It is a market of people who are willing to pay for the “extra ordinary” and the “next best new thing.” From this demand come the new diagnostic and operation tools and technologies, the new prosthetics, the new drugs, and many of the new devices that save lives and money. Republicans propose that this new option in Medicare would save something like $4.7 trillion over 10 years! Even if they are just partially right, it would be worth it.

If Republicans want this as part of a compromise to avoid the fiscal cliff we should let them have it, and we should get in return at the least a personal income tax rate increase on the top 2% with an ETCO or a capital gains tax rate increase on the top 2% with an ETCO! The other big potential achievement for the Republicans is the ability to buy private health insurance across state lines. The two big Democratic achievements will be the personal income tax rate increase on the top 2% with an ETCO and the capital gains and dividends tax rate increases at the rates and income levels that President Obama has proposed but with an ETCO. Given that these six great policy proposals will likely need two or three bills to be passed, you can see how in two of the bills the Republicans and Democrats will each get one big achievement. This will make passage of both bills easier.

After writing the last few paragraphs there are many reasons why I now want to point out that Adam Smith several times in The Wealth of Nations advocated for a progressive income tax, but I will save that for part of my upcoming book. The same writing also reminds me that in my upcoming book I will be presenting, Right To Unionize, legislation and that I will be explaining how Employee Tax Credits greatly assist labor in making union negotiations and union organizing more effective for both unions and business.

The fourth healthcare inefficiency, and all these healthcare inefficiencies are potentially interrelated, 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, at least to a great degree, 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 if Congress enacted this tort reform. This tort reform would only apply to Obama Care, so this tort reform would only apply to the 15 to 30 million people who now do not have any health insurance. Or if Congress chose, it could apply to those Americans who choose a healthcare option that has this tort reform as a feature. Then those Americans who choose to spend the extra money could buy private health insurance that would not be protected under this tort reform shield. For now, and as long as we begin to make our healthcare system more efficient and we raise the federal revenues that I am proposing, Congress can go without having this tort reform at all in Medicare or Medicaid. Other 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.

These are four of the five primary inefficiencies that exist in our healthcare system today. The fifth is that we have a pay by procedure model and not a pay by patient model. There are all kinds of things we can do to move to a pay by patient model in private healthcare, Medicare, Medicaid, and Obama Care. Many of these things are now being done or are in the process of getting ready to be done.

This paper’s six great policy proposals are the four healthcare inefficiency and the personal income tax rate increase with an ETCO and a capital gains and dividends tax rate increases with ETCOs. Three of these great policy proposals are primarily supported by Republicans but have had bipartisan support, and three are primarily supported by Democrats but have had bipartisan support. Also, all six of these proposals can be enacted in a way such that, within the bill that must be passed by Jan 1, 2013 to avoid the fiscal cliff, the Republicans get an equal amount of government savings to the Democrats equal amount of new tax revenues. Since the ETCOs make our tax rate increases that much more government revenue enhancing, this also means a greater amount of healthcare inefficiency reductions. With so much larger a reduction in our deficit, while not experiencing any real government austerity that would slow our economy, and with popular industrial policy ideas in the mix, the world’s credit markets will once again look at the US with nothing but increasing optimism! So everyone wins, Republicans, Democrats, but most importantly the American people!

There may exist other federal government spending cuts in these two or three fiscal cliff avoidance bills that Republicans and Democrats both agree on, where the particular federal spending is considered to be truly wasteful. If this is so, then these spending cuts should be made. Likewise there maybe some spending continuations that a majority of Republicans and Democrats can agree on, like extending unemployment benefits and current levels of military spending, so that can be in the first bill. But keep in mind, this paper’s four healthcare inefficiency fixes probably will not cut any monies from anywhere; they save nearly everyone money! This is extremely important to achieve in our still fragile economy.

Of course in a perfect situation Congress could pass one single bill by Jan 1, 2013 that would be primarily formulated around all six of these great policy proposals, and for all I know Congress can do this. But I am almost certain that because some of these six great policy proposals are relatively new to lawmakers and some of their aids in Washington, and this is particularly true with the capital gains and dividends tax rate increases with ETCOs, then the timeline and process to enacting all six policy proposals will need to go beyond Jan 1, 2013.

How much further past Jan 1, 2013, I do not know. This is entirely up to Congress and the President. I can only write papers and try to educate and motivate. If I had to propose a timeline, I would suggest that it would be best to pass these six great policy proposals in two or three bills. One vote obviously needs to happen by Jan 1, 2013. This first vote could be an outline of what could be passed this spring and what would then be passed within a year of that. Or this first vote could include two or more of the six great policy proposal and a later vote could than enact the rest of the six proposals. Also again, I think that the debt ceiling should only be extended for one year and preferably with this first vote that needs to occur by Jan 1, 2013. In this way Congress will once again get into the practice of passing yearly budgets. Further, given that their will need to be two or more votes to get these six great policy proposals passed, and given Congress’s recent track record, one or two “half fiscal cliffs” as described earlier in this paper will probably need to be enacted during this timeline.

But having a second or third vote in order to enact all six of these great policy proposals would be well worth it. At the very least, Congress needs to start move down the road of enacting these six policy proposals, and the sooner the better. The ETCO capital gains and dividends tax plan would be particularly helpful to this country. What our 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 in the US, and particularly in the US given how we address the domestic job growth qualifiers that exist in order for gains and dividends from these four financial investments to qualify for the lower capital gains and dividend tax rates. 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 all of the above three investments 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 (3&4). 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 an ETCO. 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 money 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 creation 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 also greatly reduce the likelihood and severity of speculative investment bubbles. They do this by incentivizing investments into the actual economy. You must have many more questions about my capital gains and dividends tax ETCO. The best place to learn more about them 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.

Personal income, capital gains, and dividends tax rate increases at the rates and income levels that have been proposed by President Obama, but with ETCOs, could raise as much as $8 trillion over 10 years due to the job growth incentives that ETCOs present. Fixing the four healthcare inefficiencies could save as much as about $9.95 trillion over 10 years without reducing consumer demand from our economy. This is enough deficit reduction to let the world know that the US is back and on the right track, and the rest of the world will soon follow us in this much more efficient, egalitarian, and environmentally sustainable economic way! We need to take advantage of this opportunity when the American people who still pay close attention to our politics are so focused on these issues. What would be the alternative: have our nation go over the fiscal cliff, go into a recession, have Democrats get blamed for this recession and loose in the next few elections, have even less people here and throughout the world believe in American democracy. That would not be the American way; we are better than this. Let’s roll!

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.”