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.”

Why an ETCO is Much Better than Just Limiting Deductions for the Wealthy

By Tom Pallow

It seems like only one element has remained from the Romney campaign, and that is because it is a good element. This element is the concept of tax reform that was explained by the campaign and many of its supporters that now is one of the two centerpieces of the soon to be future tax reform laws that must be the outgrowth of a needed compromise to the fiscal cliff that also must include medicare and healthcare reform that greatly increases price shifting to private healthcare. This concept of tax reform has been defended by brilliant economists like Martin Feldstein. This concept of tax reform is helping to move tax policy beyond the same old two arguments that have dominated tax policy over the past 100 years and were designed for a different economy. While these two arguments still need to be heard and for some very important reasons, this Romney concept has greatly helped to shift the tax policy focus toward a much more important target, a target that the two dominant tax policy arguments are not as brightly fixated. This important fixation is something that most economic analysis throughout history has shown to be one of two most important fixations. This fixation is private sector job growth and employee demand. More specifically, private sector job growth and demand in industries providing the world’s most desired goods that simultaneously bend the technology curve towards ever more sustainable products and production while not decreasing economic growth. Absolutely all of these things can be done simultaneously. They are all now being done simultaneously, but not nearly as efficiently and abundantly as they could be. This is what my work is about. The second fixation is scientific and technological advancements.

Job growth and employee demand creates lower unemployment. The simple laws of supply and demand than dictate that as demand relative to supply increases, prices will go up. In this case it means the price for labor. As a bidding war for employees and potential employees heats up, and as products get cheaper to produce and are of a higher quality, real wages will increase for all employees. Moreover, this is the only real way that real wages increase over the medium and long run, meaning a few or more years depending on a nations borrowing power until forever. Low unemployment also means much less government spending on welfare and food stamps.

Everyone knows the most important part of the Romney tax reform argument: Today’s growing US businesses that are taxed as personal income that are in the top 2% of US income earners that would then have their personal income tax rates increased under the proposed Obama tax plan are more likely to now be plowing their profits back into business expansion and new US jobs and less likely than the non- US employing wealthy to be using these monies on things that tax deductions can be taken for. (All of this argument is mathematically true by the way, at least for the most part and to a positive degree.) Therefore, if we reduce these tax deductions for the wealthy, taxes will be increased on the wealthy, but in a way where the taxes are disproportionally increased on the wealthy that are not employing in the US, relative to a disproportionally lesser increase of taxes on the wealthy who are American employers. The revenues raised from the reduction of these tax deductions can then be used to lower income tax rates for everyone or they can be used for deficit reduction, depending on your politics.

The most important feature of this Romney tax strategy is that it begins to move tax policy into the competitive and dynamic environment of the 21st century global economy. It finds a way to raise government revenues in a progressive manner by raises revenues from those who can most afford it but it also raises revenues in a manner that is less damaging to America’s most dynamic businesses and most proficient job creators. Of course we have enacted in the past countless tax credits and incentives that have had the effect of doing these same two things simultaneously before, on the federal, state, and local levels. But the Romney plan is the first to try this on a much more comprehensive and generalized manner. Remember, the biggest change economically in our lifetimes is the effective 12 fold increase in global trade that came with the weakening and fall of communism. We are never going back to the old communist world. Communism and socialism have been completely discredited as a solution for many reasons, one of them economically being that the elimination of the profit motive greatly reduces the ability to measure the value of products and commodities.

Therefore, we need to continue to move further into this new tax and economic philosophy, this form of New Keynesianism. Employee Tax Carve Outs with income tax increases on the wealthy will much more rapidly and beneficially do this. But so will some of the Romney tax plan, so both should be enacted during the upcoming tax reform laws. By getting ride of several tax deductions, but only adding a few very important tax credits in the form of US Employee Tax Credits that are used in a few very important ways (as well as against the AMT which would not cost much while saving and incentivizing many private sector job), we will make our tax code much more efficient while simplifying it. Further, because US ETCs are measured in w-2 1040 employee expenses, and even 1099 expenses if desired, they will make our tax code much easier to police. The Senator Collins ETCO will be a fantastic start! It will also allow for Republican to cross over and vote with Democrats for an income tax rate increase on the top 2% or less as part of a fiscal cliff compromise.

Romney’s tax plan and personal income tax increases on the wealthiest 2% with an ETCO would both increase government revenues while not taking away as much or virtually none needed capital from growing US businesses that would otherwise have their tax bill go up under an old fashioned income tax increase on the wealthy. ETCOs can raise far more government revenues than the Romney plan while also protecting growing US employers far more! ETCOs also create a difference in effective tax rate between the US employing wealthy and the wealthy that do not employ at all in the US. This tax rate differential acts as an incentive for the non-employing wealthy to become US employers. Moreover, he greater the difference in effective tax rate, both the more government revenues will be raised and the greater this incentive will be! Remember, only 18% of all the income that is made by all of the top 2% of income earners is the profits of any businesses that is taxed as personal income that has one or more employees in the US (1,2,3).

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, close to 90% of new jobs. They also typically become America’s most prolific exporters in the following business cycle a decade latter. Therefore we should not be reducing their immediately available capital, even for needed government revenues. One common misconception about growing businesses is that they are not adversely affected by high 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. If you need to know more about ETCOs visit the website, ThirdWayProgressives.org and go to the Weekly Blog section.

Romney’s tax plan should be enacted to some degree. But in reality, both for political reasons but even more so for economic reasons, relatively little tax revenues will be able to be raised by reducing tax deductions 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 were they do exist they should be cut. Of course all US employers would be able to use US Employee Tax Credits to create an ETCO against all of these reduced tax deductions, thus creating a way to further widen the effective tax rate differences between wealthy people who employ in the US and those would do not. You get this, we create a greater incentive, we get more private sector jobs and government revenues; see this qualityism thing is really pretty easy!

However, with charitable deductions consisting of such a large portion of all tax deductions taken by the wealthy and with the great need for these charitable deductions to stay in place, and given how few and little all other itemized deductions can be reduce further for the wealthy, not many new government revenues are going to be raised by the Romney plan. However, raising revenues with this plan would be much more efficient and job growth incentivizing than would be an equally sized personal income tax increase on the wealthy without an ETCO. Once again, this new tax strategy that works to promote private sector economic growth will, due to its ability to do so, generate far more economic growth and therefore also more tax revenues than will an old fashioned tax increase that does not have an ETCO and therefore has no concern for how it will adversely affect private sector economic growth. Because the new style of taxation will created an atmosphere that is much more supportive of job and economic growth while the old style will have the effect of slowing growth, the new style of taxation in the short, medium, and long run will raise far more government revenues than would the old style.

However, anyone reading this paper and understanding the virtues of this new, endogenous growth tax philosophy must by now be thinking, there has got to be a more efficient and proficient method for raising taxes on the wealthy but in a way that promotes job and economic growth. There is, and because problems are most often solved by being as direct as possible, what you are really questioning is: Is there a much more efficient and proficient way of raising effective tax rates on wealthy non-employers while lowering effective tax rates on all employers in the US and in our states that chose to participate with their income taxes. Of course the answer is ETCOs, and done best by using US and state Employee Tax Credits.

Remembering the virtues of low unemployment and the fact that few tax and economic entities are more accurately measured and regulated than W-2 employee expenses, it becomes easy to see the virtues of ETCOs, especially while using ETCs. For example, with Romney’s plan, effective taxes will be kept low on wealthy non-US employers who currently are not saving and buying things that would trigger tax deductions. These wealthy would be rewarding equally with many of America’s most proficient new job providers. Further, under Romney’s plan, if any of these most proficient job providers are currently taking the itemized deductions that will be cut, their effective tax rates will be going up. But of course we know how to fix this with ETCOs. One of the few concepts that all economists agree on this that monetary incentives matter, so let’s incentivize one of the two most important thing that increase real wages, private sector employment demand. This is what ETCO’s and ETCs do. This is also why, when dynamically scored, which is more often closer to reality then most static scores, a tax increase with an ETCO will raise four to five times the government revenues than would an equal sized tax increase without an ETCO!

Furthermore, the Romney’s plan will raise relatively little revenue while ETCOs and ETCs allow governments to raise very large amounts of tax revenues without slowing economic growth and prosperity. Remember, the larger the differential in effective tax rates between the employing wealthy and the non-employing wealthy, the larger the amount of tax revenues will be raised and the greater the incentive will be for the non-employing wealthy and all those who want to be wealthy in the future to find ways to become wealthy by employing fellow Americans. Our federal government needs a great amount of new tax revenues. We cannot continue to monetize our debt without eventually experiencing massive inflation, and if our debt continues to increase we will someday in our lifetimes enter a debt trap of not being able to keep up with our interest payments. On the ThirdWayProgressives.org website, in the summary that is in the Weekly Blog section, is a batch of data about how high income tax rates have historically averaged since WWII. Rates have averaged quite higher than they are today for the top 1%, 2%, 5%, and even 10% of incomes. Look, we need tax revenues, and we need to find our tax revenues were they are least often spent in the economy, and because of much higher savings rates those high incomes are where that exists.

For those who are rightfully concerned to some degree that further income tax rate increases with ETCOs will not raise as much government revenues as myself and others are projecting due to Laffer Curve related concerns, let me quickly explain why ETCOs alter the Laffer Curve. You see, the Laffer Curve is a great mathematical measure of a market that exists in our economy where supply meets demand. The demand comes from those who have incomes above about $12,000 who also have the prevailing attitude that, “Government takes far more from me than what it gives to me, therefore, whatever I can do to cheat it I will!” The supply in this market comes from accountants or people who pose as accountants who help them cheat. Like with any market, the higher the price, the more sophisticated the service and the greater the demand is likely met. ETCOs alter the Laffer Curve because, people who are high or very high income earners who work for others or do not employ enough to benefit from ETCOs, tend to have spent more time being educated and trained via monies that are government provided, whereas employing entrepreneurs with these high incomes tend to have spent less time being trained and educated via government funds and more time when the did indeed, build it on their own. This is a generalization about our economy that is simply true and that will likely always be true. Just think about the well off doctors, lawyers, engineers, and then employing entrepreneurs that you know. Therefore with ETCOs, we will be lowering income tax rates on many high income earners who already are inclined to believe that they are not now getting a good deal from government, while we are raising income taxes on the wealthy who are more inclined to believe they are. Moreover, by reducing tax deductions for the wealthy and increasing income tax rates on the wealthy with ETCOs, we will be simplifying our tax code and making it easier to police those people who more often believe that they are getting a bad deal from government. Once again, ETCOs, especially when measured through US Employee Tax Credits are measured by w-2 and w-4 expenses, or whatever is legislated, which makes this particular tax credit extremely easy to policy.

This new, endogenous growth tax philosophy agrees with the primary goals of the two old tax policy arguments, that redistribution of incomes must occur so that consumer demand is kept up with the rest of the economy, and that taxes on employers must be kept low so that their cost of capital will be kept low. But this new philosophy believes that increasing the demand for employees and increasing scientific and technological outputs are at least equally as important. Most importantly, unlike the two old arguments, our new tax policy in no way trades a primary goal for another primary goal. Our tax and industrial policies achieve all four primary goals simultaneously.

I have not explained ETCO’s in this paper. But if you visit ThirdWayProgressives.org in the Weekly Blog section you will find a 12 page summary of our ETCO tax plan. This summary explains how ETCOs can greatly increase the efficiency and effectiveness of capital gains, C Corporation, FICA, environmental, and estate taxes. Also in the Weekly Blog section you can read about our industrial policy proposals which affect the other half of what creates prosperity for all in the economy, scientific and technological advancements.

One very important thing, if you are reading about ETCOs, and you find it hard to imagine how a particular tax concept could be formulated into workable tax law, please, please, please, do not assume that it cannot be done! I have been working on these ideas since right after the 1988 election, for more than 24 years now. Believe me, if you have a question, I will have a workable answer! So please feel very free to contact me personally if you have any questions. Anything less would be laziness and letting the American people down.

With Congresses having an approval rating somewhere in the teens, and for a few years now, the American people have felt let down for a long time. Further, dont’t for a second believe that because Democrats won in this election, the American people like what Democrats have to offer! They hate Democrats and Republicans nearly equally. Most people who voted for Romney were voting against Obama, and most people who were voting for Obama were voting against Romney. Moreover, once again the fastest growing group of voters was independents. Since 2002 nearly all polls put in the 60’s and 70’s the percent of American’s who think that America is on the wrong track. The numbers for this question have been more often worse for Obama than they were for Bush, even though they have been very bad for both. We now exist in a very competitive and dynamic global economy, and if we do not adapt through our tax and industrial policy we will all suffer greatly. If President Obama and Democrats do not do anything to make the economy better, Democrats will lose big in 2014 and 2016. We can not rely in the future on hurricanes right before elections and sub-par Republican presidential campaigns. Further, do not assume that economies naturally and automatically come out of recession. With our federal and state government fiscal positions, with weak consumer demand, with the competitive nature of our global economy, and with the economic slow downs in Europe and Asia, America could easily experience a “lost” economic decade as Japan did in the 1990’s and even beyond.

Mediocrity is not in America’s nature and we will not stand for it. Since our beginning we have more than any other nation been the world’s leader. During this time we have been the first to do more things than any other people. Let’s be the first to bring on a much more efficient and effective tax and industrial policy system, one that would be much more prosperous, egalitarian, and environmentally sustainable than any other in the past and by far. It will work this way for us as well as for the rest of the world as it greatly helps to increase the number and quality of democracies. It is time that we do what America does best again!

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.

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.

Summary of Our Overall Tax Reform Plan Using 2010 Numbers

THE ONLY TAX REFORM THAT WILL SIMULTANEOUSLY INCREASE GOVERNMENT REVENUES AND PRIVATE SECTOR JOBS

Contact: Tom Pallow at 202-903-1133 or tompallow@msn.com

All polls show that the top two issues Americans care most about are creating private sector jobs and lowering our federal debt. Our overall tax plan addresses these two issues better than any other proposed plan. Plus, our plan avoids the major economic and political vulnerability that Republicans will exploit Democrats with given the global nature of our economy, that Democrats will be raising taxes on job creators, and most detrimentally during a recession. Our overall plan affects the personal income, corporate, capital gains, and FICA taxes.

The personal income tax portion of our plan rests on a little known economic reality. We believe that now and in the future, given the now global nature of our economy, Democrats will need to fully take advantage of this reality in order to be successful regarding tax policy. The little known economic reality is this: Within the highest incomes strata in the US, as well as all incomes, a relatively small percentage of the total income is the profits of any businesses that in not a C Corporation that has one or more employees in the US. For example, within all the income that is earned by the top 5% of income earners in the US, only about 18% of all that income is the profits of any business that is not a C Corporation that has one or more employees in the US(1,2,3). For the top 1% of US income earners this number is about 21%, and for the top 10% it is about 12%(1,2,3). For the top 2% it is about 19%. The top 5% of earners is roughly all households that make more than $220,000 a year, or about where today’s 33% personal income tax bracket starts. President Obama has pledged to have the Bush tax cuts expire on today’s 33% and 35% brackets, and have them go to 36% and 39.6% respectively, beginning at $250,000 of income a year where about the top 2% of income earners begins.

Republicans with often quote figures as high as 70% for the number of “business owners” in the top 1% or 2% of US income earners. Yet that number can only be derived at by counting all those who own any kind of stock as business owners. Republicans will also say that if we raise taxes on the top 2% we will be raising taxes on 50% of the income of small business owners. If we define small business income as all business income that is taxed through the personal income tax, then it is true that 50% of small business income would have higher tax rates.

One option within the personal income tax portion of our plan would increase tax rates on the top two brackets by the same amounts and at the same income levels as President Obama’s plan. However, our plan would award US Employee Tax Credits for all W2’d employee wages and salaries below $106,800 a year (or that years FICA cap) that are spent in the US. These tax credits would enable a private businesses to lower their effective tax rate from the amount as though the bracket rates were 39.6%, 36%, 28%, 25%, 15%, and 10% to no lower than if the bracket rates were 35%, 33%, 28%, 20%, 10% and 5%. With the second set of numbers, given that the bottom four rates are below where they are today, and that the top two rates are not changed, the effective tax rate for about 98% of private businesses that hire in the US would go below where they are today under the current Bush plan. Effective tax rates for nearly all private businesses entering the 39.6% bracket would be cut by 2.25%. The 36% bracket would be cut 6.8%, the 28% bracket by 34%, the 25% bracket by 33%, the 15% bracket by 50%, and the 10% bracket by 50%.

These tax credits would create an effective tax cut for the employers of 98% of Americans that are hired by private businesses, and only about 1% of such Americans would have their employer’s tax rate go up. These tax cuts, along with the fact that they are tax cuts for employee expenses spent in the US, would completely reverse the argument by Republicans that Democrats will be raising taxes on job creators during a recession!

Our US Employee Tax Credits are calculated by adding $.07 for every dollar spent in employee net earnings for the first $106,800 in one tax year of W2 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 $106,800, where social security payroll taxes are paid, the calculating of the tax credits for businesses, and the policing of the policy for the IRS, will be made much earlier. Also, the $106,800 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 only get 7 cents of tax credit. Also, such an independent contractor would no longer be able to employ anyone to work for him and thereby be able to use these qualifying employee expenses for ETC’s against their income.

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. 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 the ETCO. So the ETCO’s contribution to the question of how high or low employer FICA tax rates should be 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.

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 can not 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 employees 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 can not 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 based employee expenses which are one of the most documented expenses and figures in all economic data. Meanwhile, ETCOs and ETCs accomplish so much more than any other tax credits or tax strategy.

A private or pass through business’s tax bill would be arrived at by first going through all existing steps in the tax code. Then, if a 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 rates were 39.6%, 36%, 28%, 25%, 15% and 10%, and the second as though the rates were 35%, 33%, 28%, 20%, 10%, and 5%. The business could then deduct $.07 for every dollar of qualifying US Employee wages and/or salaries spent, from the dollar amount of the first number in the grid, to no lower than the second number in the grid. Also, in order for the ETCO to not become a subsidy, added to a business’s total deduction of $.07 for every dollar of qualifying employee expenses should be the total dollar amount of all other tax credits or deductions for employment, either local, state, or federal. 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 this compilation of tax credits and deductions, thus creating a bottom line financial subsidy for employment for these purposes.

If it is decided by law makers that the ETC will be capped for businesses of a certain size, say for example 500 employees, than the ETC will be phased out in the following way: As a business adds their 501st and 502nd employee and so on, what would normally be the qualifying employee expenses for the ETC 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 ETC of the business’s first 500 employees. At this point the same above tax table calculation would be made.

If you are involved with policy, and you have any questions at all regarding any of the ideas that can be found in this paper or any of the papers in this blog, please feel free to call Tom Pallow at 202-903-1133 during normal EST hours, and any and all of your questions will be answer right then or within a few days!

These tax credits in the personal income tax portion of our plan would only cost about $97 billion over 10 years, or conservatively about 20% of the $488 billion over 10 years in new federal revenues that President Obama’s planned personal income tax increase would raise. However, there are several possible pay-fors that would lower, eliminate the cost, or even raise more federal revenues than President Obama’s personal income tax plan, while accomplishing one of our plans primary goals of increasing private sector job creation. For one, a 7th bracket could be created for all incomes above $500,000 a year for both singles and joint filers with a rate of 41%. Such a 7th bracket would generate about $91 billion over 10 years, or about 94% of the cost of our US Employee Tax Credits. If this 41% bracket were to start at $349,700, and therefore become the rate for the top and 6th bracket, $106 billion over ten years would be generated, $11 billion more than President Obama’s plan. Also, if the second to top rate were taken to 37% instead of 36%, another $17 over 10 years would be generated. Therefore, our personal income tax plan could generate about $28 billion over 10 years more than Obama’s personal income tax plan while creating an effective tax cut for 98% of private businesses that hire in the US! Further, these revenue numbers assume that all private businesses in these top two or three brackets will exercise our US Employee Tax Credits to the fullest extent. Also, EVERY NUMBER in the above calculations is statically scored. If these numbers were dynamically scored, which is closer to reality than static scoring, the economic growth and therefore tax revenues would be much higher, perhaps four to five times higher.

These rate increases to 41% and 37% would keep personal income tax rates on the top 5% of income earners, and the top 1% of earners which is about where today’s top bracket begins, to BELOW the US historic averages since 1947. Married couples filing jointly, who are right at the income point where the top 5% starts, would pay a top rate of 28%, while single filers would pay a top rate of 39.6%. The US average since 1947 for the point where the top 5% starts is 32.8% for joint filers and 40.2% for single filers. The average for the top 5% from 1947-1986, a period ending with the Reagan tax cuts being fully implemented, was 34.6% and 43.5% respectively. All of the yearly averages since 1947 for the top 1% are far above 41%.

While implementing our US Employee Tax Credits without the pay-fors would cost some revenue if statically scored, this option for our plan, regarding both personal income and capital gains taxes, would raise conservatively about 2% more federal revenues than President Obama’s plans, $702 billion over 10 years versus $688 billion. Our plans would raise 15% more revenues, $793 billion over 10 years, if a top bracket of 41% were created at $500,000 of income. If the 41% bracket were taken down to $349,700, 17% more federal revenues would be raised, $808 billion over 10 years versus $688 billion. If on top of that, the 2nd to top rate were taken to 37% instead of 36%, 20% more revenue would be raised, $825 billion over 10 years. Also, our FICA tax plan as explained below would raise another about $336 billion over 10 years on top of the above numbers. That means as much as $1.161 trillion over 10 years versus $688 billion, or 69% more federal revenues.

ALL OF THE ABOVE NUMBERS do not account for any positive dynamic effect to tax revenue that would take place through our plan incentivizing private sector job growth and capital formation. Very importantly, our plan would take away the argument from Republicans that Democrats are raising taxes on job creators during a recession. In fact, our plan would create a continuous, built in, incentive to hire in the US. Moreover, the fact that it is a, continuous and built in, incentive would create more jobs than if the incentive were temporary!

Our capital gains plan would raise about 63% more revenues than President Obama’s capital gains plan, not counting the new healthcare increases. This would be $311 billion over 10 years versus $200 billion. Our capital gains plan would create three rates for long term gains, 10% for where today’s 10% and 15% personal income tax rates are, 20% for where today’s 25% and 28% rates are, and 25% for where today’s top two personal income tax rates are. But very importantly, our plan would lower to 15% the rate on the top bracket, it would lower to 10% the rate for the middle bracket, and drop to 0% the rate for the bottom bracket, on all long term gains derived from four investment types. These four 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 that would be taxed under today’s Carried Interest rule.

These four investment areas represent anywhere from 3% to 20% of all capital gains in the financial markets, but most of the time they are only 5% to 12% of all financial market gains. Therefore, the tax on the 95% to 88% of capital gains that are speculative paper trades can be raised, and gains from the four investment areas can be lowered. This policy would increase government revenues, while steering capital to U.S. 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.

Very importantly, 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 its 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 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 our plan, all tax brackets and rates for ordinary dividends and qualified dividends would go to the numbers that President Obama has proposed for 2011 and beyond.

Our corporate tax plan would employ nearly the same US employee tax credits as our personal income tax plan. This portion of our plan we keep revenue neutral if statically scored, while if dynamically score it would raise large amount of government revenues due to its positive effect on US job growth. Our plan would eliminate the top four C Corporation tax brackets, while taking the fourth, 39% bracket, to 39.6%, and the third, 34% bracket, to 38%. Yet C Corporations, both foreign and domestic, could use our US Employee Tax Credits to lower their effective tax rate to no lower than if the bracket rates were 15%, 25%, 30%, and 30%. However, by making the US Employee Tax Credits for C Corporations worth only $.04 on the dollar, about half of all US corporations would have their effective tax rate go down while about half would go up. This would keep this portion of our plan revenue neutral when statically scored while creating a continuous, built in, incentive to hire in the US versus overseas.

It would also be possible to make the $.04 tax credit worth more for those C Corporations that have a median wage and salary that is above the US corporate norm or greater, or greater than that areas prevailing wage. This would incentivize American corporations to treat their US employees better.

All existing foreign C Corporations that presently hire employees in the US would be taxed as though their US employee expenses that would qualify for US Employee Tax Credits, when compared to their global expenses, was at the same ratio as is the average for all US C Corporations. Then, once our C Corporation tax plan was instituted, these foreign C Corporations would have their effective tax rate go down or up depending upon if they increased or decreased their ratio of US Employee Tax Credits to global expenses. Also, once the plan is instituted, any foreign C Corporation that latter begins for the first time to hire in the US would be compared in their first year to the US C Corporation average ratio. Their tax rate would then go down or up depending upon if they increased or decreased this ratio. Foreign C Corporations could also have their effective tax rate go down if their median wage or salary was above the US average or the prevailing wage of a particular area. For much more on this part of our C Corporation tax plan read the paper titled, “Carried Interest, Partnerships, Income Tax Deferrals, and a System More Compatible with Democracy” that can be found in the “Weekly Blog” section of our website, ThirdWayProgressives.org. Further, I will be presenting much more on our C Corporation, or over 500 employees, tax policy and plan in my coming, early August 2013 paper and submission to the Senate Committee on Finance.

Our FICA tax plan would also accomplish the four primary goals of our revolutionary tax policy. These four goals are: one, stimulating private sector jobs and income growth, two, increasing government revenues, three, separating wealthy income that is more likely to create domestic jobs from wealthy income that is more likely to only purchase consumer goods or speculative financial investments, four, create a significant tax rate difference between those who hire employees in the US and those who do not, thus incentivizing entrepreneurship and the demand for labor domestically.

Our FICA tax plan would cut FICA tax rates for one year to 0, both on the employee and employer side, for the first 20 “net” new employees that are added to a business or the first 20 employees of a new business. These tax cuts would cost the federal government about $14 billion a year. However, our FICA tax plan would more than pay for these cuts in a way that would further stimulate American job and economic growth.

Our plan would more than pay for these tax cuts by raising the FICA tax cap from $106,800 of income a year where it is today to $120,000 for non-business owners. Such a plan would raise about $30 billion in the first year in new federal revenues above the $14 billion cost of the tax cuts. This would mean a gain of about $336 billion over 10 years in new federal revenues! Moreover, this $336 billion gain includes the cost of allowing “business owners” to use US Employee Tax Credits, as both are defined under our personal income tax plan, to lower their tax burden to no lower than as if their FICA tax cap stayed at $106,800. Very importantly, the fact that these business owners could lower their personal income and FICA tax rates by employing people in the US would greater incentivize job creation in the US by creating a greater difference in tax burden between those who hire in the US and those who do not!

Our plan would also make it easier for new entrepreneurs to start new businesses that hire in the US in that it would free them to focus on making a profit and growing their business as opposed to focusing on the bureaucracy of tax law. It would also make it easier for them, and potential employees, by making their first 20 employees cheaper to hire.

A FICA tax cap at $120,000 would also keep the FICA tax cap BELOW the point where the top 10% of US income earners begins. The original intent of social security was to only have the top 10% of US income earners have their remaining income exempt from payroll taxes.

A business would be considered to have “a net new employee” with their first hire that takes the dollar amount of their total US payroll above what it was the prior year, not counting any salaries that might go to any “business owners.”

The plan would be phased in by allowing all existing businesses to eliminate FICA taxes on the employee and employer side for their first 20 net new hires for up to five years. Such a rule would insure fairness among businesses with different size payrolls and when compared to brand new businesses. This rule would also create a greater incentive for all businesses to hire in the US. The above revenue numbers fully account for this phase in rule.

The final components of our tax policy deal with the environment. Under our environmental 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 by. 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 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 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, 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. That is, 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 count against some of such a sales tax, the burden on American job creators would be reduced and a greater tax incentive to hire in the US would be created.

Our plan is important to implement at this time for two primary and related reasons. These reasons are our federal deficit and debt, and the current fragility of our economy. Our federal deficit in 2010 is projected to be about $1.38 trillion. Given that the total Obama tax increases regarding individual income, corporate, and capital gains taxes (outside of the Affordable Healthcare Act tax increases that were created to pay for healthcare) are projected to raise only about $688 billion over 10 years, in order to eliminate the $1.31 trillion deficit that would be left, our economy would have to grow at an unrealistically fast rate above what it is now growing, or government spending would have to be cut by $1.31 trillion below today’s GDP growth rate. The problem with either of these scenarios is that the Obama tax increases, alone, will create some kind of drag on economic growth, and the decreases in government spending will likely drive GDP growth down even more so. This might not be a problem if growth in the private sector were robust. But growth there is not, so the tax increases and government spending cuts could force our economy into a double dip recession. This scenario will be even more likely given that Japan and Europe will be engaged in similar levels of tax increases and spending cuts at the same time we are.

However, our overall plan would reverse these two primary problems. Few policies would do more to stimulate private sector economic growth than our plan, and our plan would more than pay for the tax cuts that would create this stimulus. Our capital gains and personal income tax plans raise 20% more federal revenues than President Obama’s like plans, and our FICA tax plan would raise another $336 billion over 10 years, all while giving a tax cut to capital formation and to the employers of 98% of Americans who work for private businesses in the US and a tax incentive for C Corporations to hire in the US. These numbers are when statically scored. Dynamically scored our tax plans could raise four to five times the government revenues.

To explain the US’s current situation regarding economic growth we must understand our current political/economic position and how unique it is. Our current recession is taking longer to get out of because banks and other lenders see an economic environment where governments in the US, Europe, and Japan have such high debts that they are now, or soon will be, forced to reduce their spending levels. This will create a damper on economic growth. This reduction in spending would not be so bad except for another phenomenon that has never occurred simultaneously with such high levels of government debts. That phenomenon is the fact that Federal Reserve interest rates are now essentially at 0% and that most experts expect that any added quantitative easing would have little effect at lowering interest rates for borrowers or stimulating the economy. In a normal recession lenders could lend knowing that if the recession became stubborn or a double dip occurred the fed could always cut interest rates further and/or the government could spend more to stimulate the economy. This is the first recession in our history where this is not true, and this is why this recession has been so stubborn. Our tax plan would be the best prescription for allowing the government to continue its higher spending levels, while increasing private sector growth, and creating stability and confidence in the economy!

Right now Democrats could push for immediate passage of the tax cuts in the personal income, capital gains, and FICA tax parts of our plan. However, they should only pass these cuts with the legal agreement with Republicans that, in 2013 with a new Congress and possibly a new president, there would be an up or down vote regarding the tax increases in the plan that by law could not be filibustered. Separate bills in 2013 would address the C Corporation part of our plan, along with general C Corp tax reform, and perhaps the environmental component of our plan.

Republican would have to go along with these tax cuts, because, they are very simple tax cuts and Americans are desperate for private sector jobs. Whereas, with the small business bill that just passed, Republicans were able to argue that the bill mostly consisted of the government buying equity stakes in small banks. Also, the Republicans would appear very cowardly and undemocratic if they did not take the challenge to have the vote in 2013 after the 2012 election. A large majority of Americans are weary of the filibuster, so this would also work in our favor.

For several reasons our tax policy over time can raise much more federal revenues than any other current tax proposal. For one, because our policy lowers taxes on most businesses, our proposal would eliminate the fear among voters that raising taxes on the wealthy would slow job and economic growth. With the elimination of this fear, the top tax rate on the wealthy could be raised far above 39.6% or 41%, and that tax base, those who we consider “the wealthy”, could be broadened far beyond what it has in recent decades.

Beyond political reasons, our policy is simply much more efficient from a purely economic stand point. Under our plan the demand for labor will be increased in the US, and the cost of capital for businesses will be lowered because businesses will have more money in hand due to their lowered tax rate and because our capital gains policy would lower business borrowing costs in the financial markets. A lowering in the cost of capital for businesses will then raise productivity because businesses would then have more money on hand to invest in R&D, capital improvements, employee training, and new employees. It is only an increased demand for labor, along with an increase in productivity, which raises real wages for workers.

Our new philosophical perspective would desire the biggest differential possible between the tax rates of those who employ people and those who do not. Such a tax model would be the most efficient tax regime possible, as long as R&D was continued to be rewarded and the differential was not so large that all other capital investments were given a tax disadvantage that had a negative effect on economic growth. The increased economic efficiency of our tax plan can be most specifically measured by quantifying the amount of money that growing businesses would no longer have to pay in interest costs for moneys they had to borrow to make up for the capital they lost due to increased quarterly taxes.

But more importantly, in relation to job creation, economic growth, and overall prosperity, our tax policy acknowledges a social reality that our current tax model does not. That reality is: All things being equal, a person who employs people is more important to society than a person who does not; therefore we need to create more who do.

Our tax policy is a different way of viewing the economy. An old liberal view of the economy pushes a dichotomy between labor and employers. We look at business, particularly small business, as being on the side of labor. In this era the most important dichotomy in the economy is between those who have capital to lend and those who do not! Our policy will also bring Democrats a new group of supporters in the form of the many business owners who would benefit from our policy.

Our policy continues the predictable cycle of having the definition of “liberal” substantially change every four, 25 year, generations, dating back to the 1500’s, and to a somewhat lesser way even before that. Between 1905-15, France, Britain, Spain, Germany, the US, and several other counties all past a progressive income tax for the first time. Prior to this time progressive income taxes had only existed for short periods and in a few countries, and most often just to pay for war. Very importantly, it was during this period of time that the Labor Party in Britain that championed the progressive income tax became the dominant political party along with the conservative Tories, while the then dominant Liberal Party that was not as passionate in championing the progressive income tax began to slip into political obscurity.

This rapid move to a progressive income tax in the developed world, and then latter for nearly the entire world, was done to compensate for the fact that economies had just moved from primarily agricultural to primarily industrial. This economic shift necessitated the need to compensate for the reality of Surplus Value. Surplus Value refers to the fact that, in an industrial economy, in order for businesses to make a profit, they must charge more for their products than what they pay their employees. For this reason, and therefore the need to redistribute income to the poor and middle class, the progressive income tax was created.

Today, we still need to compensate for Surplus Value with a progressive income tax. However, we now need to contour our progressive tax policy to the reality of the effective 12 fold increase in global trade that has come with the weakening and fall of the Soviet Union. The fall of the Soviet Union opened up a new cheap labor market of about 4 billion people to the multinational businesses of the developed world. This change is here to stay, regardless if some people want that or not. Nonetheless, due to the natural and accompanying desire to attracted business investments, this globalization has created a, race to the bottom, in tax policy. 30 years of this, race to the bottom, policy has created unsustainable government debts throughout the developed world, and our plan is the only responsible way to get out from under this debt while prospering.

Redefinitions of “liberal” also came during the Second Great Awakening of the early 1800’s with the advent of all the first modern socialist writers, during the Great Awakening of the early 1700’s with the popularization of democracy, and during the Puritan Awakening of the early 1600’s and the Protestant Reformation of the early 1500’s regarding increasing degrees of religious freedom.

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.

How Obama and Democrats are Not Going Far Enough Regarding Tax Policy and American Job Growth

By Tom Pallow of Third Way Progressives, 3/12/12

This paper is not at all about what one would commonly imagine upon reading its title. It is not at all about President Obama and Democrats not being “progressive” or “liberal” enough. It is about them not going far enough into the radical center, not adopting enough Endogenous Growth policies, or what we call qualityist policies. As of early 2012 Obama and Democrats are certainly not doing these things enough to turn the economy around or to inspire the electorate to vote for him and Democrats this fall.

We are in a unique position in US and world history. The most important change in our lifetimes has been the effective 12 fold increase in global trade that has accompanied the weakening and fall of communism, along with new technologies that make outsourcing across state and national borders as easy and fast as the movement of light. With the fall of communism, every multinational employer in the developed world no longer needed to worry that an investment in an underdeveloped nation might become nationalized by an emerging communist government. This suddenly very different reality opened up a new cheap labor market of 4 billion people. No major nation in the future is ever going to champion socialism or communism, so the old world order is never going to return. Therefore, all successful tax and spending regimes in the future will need to be structured around the realities of this highly competitive global economy. Not only will this new regime make our economy more competitive, but it will make it more egalitarian and more environmentally sustainable than it ever has been.

Regarding tax policy, a good first step in the right direction is the recent plan by Senators McCaskill and Collins to cut the employer payroll tax rate as a way of carving out, or exempting, US employers from any tax increase on the wealthy. Given that about 65% of US employers are taxed at the personal income tax rate, and given that these businesses are generally responsible for creating as much as 90% of America’s new jobs, raising taxes on these job providers is never a good idea in a global economy and especially when the economy is weak. US employers are always a very small percentage of tax payers. For example, the McCaskill-Collins carve out would only cost about 13% of their tax increase on those who make over $1 million that was proposed by them in December 2011 to pay for this year’s employee payroll tax cut. Successful tax policy, now and in the future, given the now global nature of our economy, will need to take full advantage of the little known but extremely important economic reality that a relatively small amount of the money that is earned, even among the highest income earning Americans, is the profits of any business that is taxes as personal income that employs one or more persons in the US.

There are several reasons why a US employer exemption, or carve out, is a very important policy to enact. For one, it is very cheap while it accomplishes much. This is because, with a US employer carve out, the math always works for us. Very little of the earnings of the wealthy, as well as all others, actually comes from the profits of a business that is taxes as personal income that has one or more employs in the US. This means businesses that are sole proprietorships, partnerships, or any businesses that are “pass through” entities, and therefore not C Corporations that are therefore taxed at the corporate income tax rate. The high mark for this number is about 21%. This comes as incomes reach about $350,000 a year or at about what demarcates the top 1% of US income earners. As incomes go higher and lower from this point this percentage drops quickly. For example, within all the income that is earned by the top 5% of income earners in the US, only about 16% of all that income is the profits of any business that is taxed as personal income that has one or more employees in the US, while for the top .5% of US incomes it is about 18%(1,2,3). For the top 1% of US income earners this number is about 21%, and for the top 10% it is about 12%(1,2,3). For the top 2% it is about 19%(1,2,3). The top 5% of earners is roughly all households that make more than $220,000 a year, or about where today’s 33% personal income tax bracket starts. President Obama has pledged to have the Bush tax cuts expire on today’s 33% and 35% brackets, and have them go to 36% and 39.6% respectively, beginning at $250,000 of income a year where about the top 2% of income earners begins.

Again, the McCaskill-Collins carve out for those earning over $1 million a year would only cost 13% of their total tax increase. If this new tax incentive to employ in the US were to motivate more of the wealthy to employ in the US so that this percentage were to increase, then great, more Americas would be employed and the increased demand for labor would increase real incomes and tax revenues.

Reason two why it is important to enacting an employer tax increase exemption is, when raising income taxes on the wealthy without a US employer tax carve out, raising taxes on wealthy growing businesses has the effect of slowing the economy to some degree because capital is taken away quarterly from growing businesses who would otherwise use that capital to invest in new US jobs. This is especially true coming out of a recession when as much as 90% of all new jobs are typically created by businesses that are taxed as personal income, and most of these are within the top income tax brackets.

Reason three, without an employer tax carve out, US employing businesses have an incentive to close up shop in the US and outsource to foreign countries in order to avoid the higher tax. This is especially true within the US when states that raise their income taxes will often see employer flight to US states that are not raising their income tax or do not have a state income tax. This is a big problem right now with our cash strapped states. The current problems in Illinois are just the most recent example, and their example will deter others states from raising their income tax. These states, along with Illinois, will continue their cash flow problems, but a state employer tax carve out with a state income tax increase would solve this problem. There is more concerning this problem below.

Reason four is one of the most important reasons. The greater the employer tax carve out is made, that is, the larger the difference in effective tax rates are made between the US employing wealthy and the non- US employing wealthy, the greater will become the tax incentive for the non-US employing wealthy, or others who want to become wealthy in the future, to find ways to stay wealthy or become wealthy by employing fellow Americans. This tax incentive will greatly increase economic growth and the demand for labor in the US. It is only increases in productivity along with increases in the demand for labor primarily in the private sector that has the effect of raising real wages for the poor and middle class.

Reason five is as important as reason four. Because American voters will soon realize that an employer tax carve out strategy will not slow down the economy but actually increase private sector jobs, our federal and state governments will be able to raise income taxes far above where Americans would otherwise let them go. As this occurs, the above reason four will only become more pronounced, thus creating a virtuous cycle of increasing private sector job growth that will also be accompanied with increasing government revenues!

Reason six is as important as reasons four and five. These increased tax revenues will allow our governments to fully fund new industrial policy projects that will further grow the US private sector while allowing us to fully fund current government programs. Fully funded governments, along with a robust private sector that is aided by new industrial policy projects will increase the demand for labor in the US so high as to increase real wages in the US for the first time since 1967. 1967 was when the global economy really began with the end of the Kennedy GATT trade rounds that signaled the weakening and eventual fall of communism!

Reason seven, our federal deficit and debt problems, along with those of our states, that have the effect of creating economic uncertainty and trepidation that then slows the economy, will be no more!

In his American Jobs Act President Obama proposed an employer payroll tax reduction that holds the possibility of working much like the McCaskill-Collins US employer carve out. The problem is that Obama proposed that this tax cut only exist for one year when it needs to be permanent. We can only hope that if this part of the American Jobs Act were ever passed, a part of this tax cut would be made permanent, along with the Bush tax cuts expiring on the top two income tax brackets, thus creating an income tax increase with a permanent US employer tax carve out.

If President Obama does not aggressively sell such an idea by the general election season he will lose reelection. Under current proposals, it will not take long before the Republicans will be able to explain that all of Obama’s proposed tax increases will only cover about 10% of our federal deficit. Obama’s proposed expiration of tax rates on the top two income tax brackets, his Buffet Rule which is essentially a capital gains tax increase on those earning over $1 million, his taxing carried interest at the ordinary income tax rate, his valuing itemized deductions at 28% for those earning over $250,000, and his elimination of oil tax preferences and corporate jet depreciation will altogether raise only about $150 billion a year while our deficit in 2011 was over $1.5 trillion. Therefore, the president will be asking to raise all of these taxes on a still slow and probably even slowing economy just to cover 10% of our deficit!

I know that Democrats like to point to polls that show that most Americans favor many of these tax increases. But very importantly, if you study the actual wording of the questions in these polls you will see that most of these polls make it appear as though these tax increases would create an equal trade off with spending cuts in order to cover our full deficit. These questions read as though these tax increases would cover 50% of the deficit with spending cuts covering the other 50%. However, given that they would only cover about 10% while likely slowing the economy, the Republicans will easily be able to argue that we have a spending problem not a revenue problem and that Democrats will destroy any economic growth we have. However, with US employer tax carve outs this problem will be eliminated. In fact, due to reason number four above, we will be able to argue for and enact even larger tax increases. Moreover, when dynamically scored, which is closest to reality, due to the accompanying economic growth that would be created by it versus the economic constraints that would be created otherwise without it, an employer tax carve out with a tax increase would raise four to five times that government tax revenues than would an equal tax increase without an E.T.C.O.! So hopefully President Obama will push for a permanent employer payroll tax cut and sell it as a US E.T.C.O. that would accompany a tax increase on the wealthy.

Better yet, the President and all others looking to create an E.T.C.O. should look to institute an Employee Tax Credit along with an employer payroll tax cut. Regarding employer tax carve outs for income tax increases, while an employer payroll tax cut has some advantages over a US Employee Tax Credit, a US ETC has more advantages, but a combination of the two is optimum. An ETC is a credit against a final income tax bill that has a flour cap at a particular effective rate. For more on US ETCs see our website, ThirdWayProgressives.org.

An employer payroll tax cut does have the advantage that the tax cut is awarded immediately with the first employment of an individual, while with an ETC the tax cut is awarded latter, after a profit is made. The immediacy of the payroll tax cut makes the cost of capital for the employment of new hires lower than it would be with an ETC. Further, it is important in the global economy to make employing fellow citizens as easy as possible and an employer payroll tax cut helps in this regard. However, Social Security and Medicare must be paid for, and employer payroll taxes cover about 18% of our total federal revenues, therefore only so much can be cut. For these and another very important reason our tax plan proposes an employer payroll tax cut for new hires while relying primarily on a US ETC to achieve most of the tax carve out.

The most important advantage of a US ETC is that it will allow our 31 states that do have income taxes to enact state employer carve outs, while with an employer payroll or withholdings tax cut this would not be possible. Given that the economic competition for employment between our states is even more intense than it is between the US and other nations, employer tax carve outs are a must for our states! Employer payroll tax cuts as carve outs are impossible for our states because most of these tax rates are already very low in places, too low to create tax carve outs. More importantly, these payroll taxes, that usually come in the form of unemployment and disability insurance taxes, are generally structured as to create very valuable tax incentives, with those businesses and industries that have high rates of unemployment and injures paying higher tax rates and those without them paying lower to often extremely low tax rates.

It is very important that these tax incentives are maintained. Therefore, in order to create carve outs, state ETCs will need to be enacted. Further, given that most tax policing is done by the IRS and that states have much less resources in this regard, it would be very inefficient for each individual state to have to do all of its policing for its ETC. For this reason, and the fact that we can only cut federal payroll taxes so far, the federal government should enact a US ECT as part of an employer tax carve out strategy. Hopefully we are concerned as much about the welfare of our state governments as we are the federal government.

Another very positive feature of December 2011’s McCaskill-Collins Bill is its “technology company,” venture capital investment tax credit or possible carve out. However, this tax credit’s shortcoming is that it is only for investments in technology companies that are expanding in the US, while it should be for investments in all companies that are expanding in the US. Also, many problems will arise be trying to define what a “technology company” is.

Our qualityist capital gains tax plan would raise to 25% today’s top capital gains tax rate from 15%. However, it would carve out, and slightly lower from where the rates are today, capital gains tax rates on four basic investments that would all need to have a minimum of jobs created in the US. These four fundamental investments are: first issue bonds, stocks bought at IPO, venture capital investments, and the underwriting of any of the above three investments. More on our capital gains tax plan can be found at ThirdWayProgressives.org. These four investments are the primary products of the financial market that allow it to raise capital for growing businesses in America. Generally in order to expand, small businesses raise venture capital, medium sized businesses launch IPOs, and large corporations float bonds. With our qualifications for increased employment in the US in order to achieve the lower tax rate, the financial markets will be generating jobs in the US like never before!

The virtues and math in our capital gains tax plan are nearly identical to that of a US employer tax carve out with an income tax increase. Generally, only about 5% to 12% of all gains in the financial markets come from the above four fundamental investments. However, these four investments are responsible for nearly all of the job growth that is facilitated by the financial markets. It is not that the other products in the financial markets are not important to the economy. It is just that a higher capital gains tax on them would have little to no effect on American job growth. Except for first issue mortgage backed securities that could also receive a lower tax rate with little cost, virtually all of the rest of the financial products sold are preexisting stocks and bond, and options and derivatives. This other, typically 90% or more, of the financial markets, even with a much higher capital gains tax rate, would retain enough liquidity in their market as to not present any adverse effect on the businesses that rely upon them. However, the more investment we have in the four fundamental financial vehicles, the lower will be the cost of capital for American businesses that are expanding in the US. The greater the difference in tax rate between these four investments and all the other financial vehicles that are generally speculative paper trades, the more American economic growth will occur through financial markets via this tax incentive and the more tax revenues will be raised. Therefore, our capital gains tax regime will allow the federal government and our state governments to be able to raise capital gains tax rates far above were they are today while actually improving the economic efficiency of our financial markets! This capital gains tax policy would also have the very positive effect of decreasing the likelihood of speculative investment bubbles occurring.

Our overall qualityist tax plan also has a C Corporation tax plan that uses ETCs to incentivize job growth in the US along with further rewarding and incentivizing compensation above the US norm for US employees. Our overall plan also contains tax policies designed to create a more environmentally sustainable and safe economy. All of these plans can be found at ThirdWayProgressives.org.

But tax policy is not the only area where we need to adapt government policies to the realities of our highly competitive global economy. Qualityism resides in the world of the New Growth, or Endogenous Growth, Economics School, a school that is only a few decades old and not completely defined. Like most Endogenous Growthers, qualityism believes that economies are affected positively by three primary factors. Like the Keynesians, qualityists believe that it is important that governments take an active role in keeping consumer demand high. Yet like classical or supply-side economists, qualityists believe that it is very important to keep the cost of capital low for the private sector by keeping taxes low on employing businesses and capital formation. The above qualityist tax policies and others that can be found at ThirdWayProgressives.org destroy the public policy catch 22 that we have been in for the past 100 years regarding this unfortunate tradeoff between Keynesian and supply-side economics, and our new global economy is too competitive, complex, and demanding to put up with this catch 22 any longer! But qualityists also believe that there exists a third primary engine of economic prosperity that is at least as important as the other two. This engine is the emergence of new technologies and methods of production.

Like New Growth or Endogenous Growth economists, and like those on the right who call themselves Real Business Cycle theorists, qualityists see economic growth and the business cycle as being dominated by the arrival of new technologies, products, and methods of production that will be bought and invested in even if consumer demand is low or the cost of capital is high. When one examines historically how relatively small portions of the economy can be responsible for very large portions of the growth of an economy, the reality for this perspective becomes extremely evident. Some studies have shown that as much as 60% to 90% of the economic growth in an economic expansion occurs in what begins that expansion as only 2% to 3% of GDP. For example, housing, healthcare, and cell phones were responsible for an extremely large percentage of the total economic growth in the US between 2002 and 2008. Between 1992 and 2000 it was personal computers and the internet that drove growth. 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 other consumer electronics. In the 40’s it was war, in the 30’s government, in the roaring 20’s cars, trucks, and radios, and in the 10’s cars and war. Before 1913 there took place shorter economic cycles that were most effected by railroad expansions.

Yet unlike Real Business Cycle theorists who believe that the best policy is for governments to simply not get involved and let this real cycle play out, Endogenous Growthers and qualityists believe that the government should, and has in the past but never so optimally, facilitate and add to new technological developments. When one recognizes that the private sector alone has never been able to produce at close to peak potential scientific and technological outputs, and given our need for more environmentally sustainable technologies among others, it is easy to realize that the government should be doing much more in this area. It has been said by those who study the subject that the free market alone only generates about half of the R&D that the economy could efficiently produce(4).

A majority of the most impressive achievements of mankind were financed and designed with government funding, from the pyramids in Egypt, to the ships that were designed via Prince Henry the Navigator of Portugal and then financed by the royalty of Spain that discovered the New World, to the moon landing, satellites, and the internet. Moreover, war financing has generated much technological improvement, from arguable everything but the pyramids above, to many improvements in the combustible engine and most improvements in aerospace. Given our technological needs as a growing species with only one planet, we should not rely on the inefficiencies and horrors of war as the catalyst for needed technological improvements!

It is wealth and better technologies that allow societies to preserve their environments while acquiring what they need and desire, not economic constraints and poverty. The poorest and least politically and economically free nations of the world are all its least environmentally preserved. Therefore, it is the free market in accordance with predictable, transparent, and robust government R&D support, along with tax incentives both on the purchasing and profit end, which will preserve our environment. But it is also the free market with such government support that will best allow us to fulfill our economic needs, wants, and dreams that are not hampered in any major way by environmental concerns. The people of the world are made better off if a favorite play toy of many that the private sector alone would have taken 50 years to develop is there to enjoy 25 years earlier because a government helped in the development of that product and production. Further, when structured properly, workers are able to engage in jobs that produce higher rates and qualities of output while enjoying a larger share of that output.

For all of these reasons an important feature of qualityism is structuring the most fair and economically efficient way for the government to assist the private sector in increasing the economies overall scientific and technological output. As importantly, qualityism is structured so that the people of a nation who pay for their government’s successful R&D support receive just compensation for these expenses while their workers are able to benefit from an increased demand for their employment. For this to be done in a way that is predictable, transparent, and not swayed by political influence is of utmost importance. Fortunately, such a method is also one that would be most economically efficient and without waist.

In the last several years our federal government under programs like the Energy Policy Act of 2005 and some assistance of General Motors has began to move in this proper direction. However, many of these programs have provided assistance at points of production that create waist and can be adversely altered by political influence. It is very important to remember that the point of production where governments can assist the private sector with the least amount of waist and adverse political influence is during the basic and applied research and development stages.

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 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 typical squishy Washington DC accounting, so the monies earned through the program could be ploughed back into it. However for now, at the very least and with this year’s election, a real commitment to this program needs to be made!

What is suspected that the NNMI would do, because it is reported to be molded after Germany’s Fraunhofer Institute, is to invite as many private business participants as possible to come together along with the government 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 science 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 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 and each program coordinator. 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 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, 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 this reform to higher education along with the NNMI, it would not take long until the economies scientific and technological output would be taken to a more desired level. 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, 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, when a product is in use, and 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 old best practices becomes standard 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.

But what qualityism would best achieve over time is a more egalitarian society! Our tax plan would raise far more government revenues than any other currently proposed tax plan. Much of these new revenues could be used to improve education. Greater educational opportunities are liberating for both individuals and the overall economy. Until the last few years, greater educational outputs have been virtually the only policy initiatives of Endogenous Growth Economists. A more highly educated work force will entice capital and job growth, along with raising productivity and incomes. Meanwhile the tax incentives in qualityism also increase the demand for labor in the jurisdiction of the government that employs them. In the end, given that government can never be larger than the private sector that creates it and keeps it alive, it is only the demand for labor in the private sector and increases in productivity that can overtime raise real incomes for workers. These tax incentives, along with the NNMI and our proposed incentives for their associates to employ domestically, would ensure that the demand for labor in the domestic private sector is at its optimum, along with ensuring that desired scientific and technological outputs are at their optimum.

With a greatly increased demand for labor and better technologies that will increase productivity, clean the environment, and deliver better products, workers will be able to demand more of better products, and/or more time off and vacations if they so chose. A great demand for labor will put workers in greater control. Moreover, free market entrepreneurs will have more opportunities than ever before to rise and become wealthy, while everyone will have a more prosperous life even if they chose to do less, all while creating a more environmentally sustainable economy. The economy will be of a higher quality, and this will give all individuals more of an opportunity to do what they dream. Such is the essence of anything that is liberating.

Qualityism liberates us from the failed philosophies of both Keynesianism and Supply-side economics. Keynesians, especially in a competitive global economy, adversely constrain and shun the private sector while far too often they spend through the government in ways where economic efficiency is inadequately measured. Meanwhile, Classical economists or Supply-siders fail to live in the real industrial economy where, without government or union intervention, consumer demand by the masses is never able to keep pace with the rest of the economy, leading to an ever slower and less prosperous economy. Unfortunately today in our global economy, the only redeeming value of either economic philosophy, and therefore most of the beliefs of either political party, is that their advocates block the other party from completely running, and therefore completely destroying, our economy!

Unfortunately for Democrats in our global economy, it would take Keynesians less time to destroy our economic prosperity than it would for Supply-siders to do so. Certain destruction would come with Supply-side policies, but a slower certain destruction. The American people sense this, and this is why since the global economy really began with the end of the Kennedy GATT trade round in 1967 Democrats have only had one two term president while the Republicans have had three. Further, every exit poll showed that without Ross Perot running, Bill Clinton never would have won in 1992, so the Republicans would have had a fourth two term president and the Democrats zero. In order to win in 1996 Clinton had to “triangulate” and become a “New Democrat.” Without Watergate, the financial crash in the fall of 2008, and Ross Perot, it could have been a complete wipe-out for the Democrats since 1967. No president has ever been reelected with such a poor approval rating this close to an election as President Obama now has. Democrats can pretend that this is not a problem and continue to lose, as the American people continue to lose. Or they can face reality and adopt Endogenous Growth, qualityist policies, thereby improving their lot and more importantly the lot of the American people.

Exactly 100 years ago, as the most developed economies of the world experienced an equally pronounced and profound economic transformation as our sudden movement into a global economy, the Democratic Party took up the mantel of the progressive income tax and other progressive legislation as a way of adapting to the sudden movement from a primarily agricultural economy to a primarily industrial economy. This economic transformation was primarily due to the recent development of electricity, mechanized farm equipment, and railroad expansion. In an agricultural economy during a recession, people can remain or move back to family farms and live off of them. In an industrial economy this is much less so. Plus, industrial economies have to deal with non-reinvested profits that disallow workers to be able to keep their consumer spending at pace with the rest of the economy, thereby helping to bring on recessions. Only progressive income and capital gains taxes can increase consumer spending by the poor and middle class because all other forms of taxation are regressive so they cannot increase moneys to the poor and middle class. These are the reasons why between 1910 and 1915 virtually all of the economically developed nations of the world enacted for the first time, with a few short exceptions in Britain and the US in order to pay for 19th century wars, progressive income taxes, along with other progressive legislation. All of these nations, and soon after most of the nations of the world, have had progressive income taxes ever since.

Today we still live in an industrial economy, and hopefully with vigor want to remain in one. Therefore, we still must redistribute income in order to keep consumer demand up, and we must do it through progressive income taxes. However, given our now highly competitive and employment mobile global economy we must contour our progressive income and capital gains taxes in a much more sophisticated manor that does not damage domestic job growth but actually incentivizes it. Income and capital gains taxes make up about 55% of our federal revenues and the top 5% of income earners pay about 70% of these taxes. The top 5% or higher of income earners is where the money is, and this is where we must acquire it. However, and very importantly, our qualityist income and capital gains tax plans increase taxes only on the moneys in the economy that are LEAST responsible for domestic economic growth while incentivizing domestic economic growth!

No major nation of the world in going to champion communism or socialism and take this world back to the pre-global economy days. The lesson that has been learned by effectively all the world that came out of the grand struggle of communism and socialism against the free market is that a private economy with a profit margin is much more efficient and liberating then is a government controlled economy without a profit margin. Communism and socialism have been permanently discredited and there is no going back. The global, industrial, free market economy is here to stay, until sometime long after we are dead it transforms into something different. If the US were to now champion qualityism, it would not take long until the rest of the world had more democratic, free market, qualityist governments which would therefore have higher labor and environmental standards. This would in turn allow the US and the other economically developed nations of the world to have ever higher labor and environmental standards. Our government’s much better fiscal position under qualityism, along with similar governments and fiscal positions in Europe and Japan, would also give these democratic nations much greater influence upon the world and upon all undemocratic nations both large and small.

Just like with what was done 100 years ago, the Democratic Party must lead the way in applying new policies to a new economic reality. Being the “conservative” party, or in other words the “slow to little change” party, we cannot rely on the Republicans to champion these new policies. The Democratic Party also led the way during its inception during the Second Great Awakening of the early 1800’s by championing very important democratic reforms that made our democracy much more representative. The early part of each century, following a cycle of four roughly 25 year long generations, or a cycle of roughly every 100 years, has always experienced a profound and very substantial redefinition of what people considered to be politically and socially liberating. This occurred during the Progressive Era of the early 1900’s, the Second Great Awakening of the early 1800’s, the Great Awakening of the early 1700’s, the Puritan Awakening of the early 1600’s, and the Protestant Reformation of the early 1500’s. This 100 year cycle in this manifestation appears to have begun with the great period of sovereign state building that occurred in Europe in the late 1400’s that was primarily a result of the invention of the canon and the printing press during that century. However, a paralleling sequenced 100 year cycle of new and profound societal changing ideas appears to have followed this same pattern as far back as into the ancient world. But most importantly for us, an Awakening of more modern magnitude is, and must, now be upon us. The sooner we accomplish what past generations have and rise to the challenge of history, the better off we and all future generations will be!

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. US Senate Committee on Finance: Full Committee Hearing 9/20/11

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

Carried Interest, Partnerships, Income Tax Deferrals, and a System More Compatible With Democracy

By Tom Pallow of Third Way Progressives, 4/25/11

The one area that I have covered least on the blog postings and in the literature that can be found at ThirdWayProgressives.org concerns the parts of our tax plan that most relate to taxes on very high income earners and the area of international tax law. These subjects will be covered in this paper.

It is ridiculous that profits from most hedge fund investments, as well as most capital gains, receive a top tax rate of 15%. Our capital gains tax plan would fix this problem, and our capital gains plan is essentially our fix to the Carried Interest Rule. Our Carried Interest Rule fix would generate much new federal revenues, as well as state revenues if they so chose, while simultaneously creating new private sector jobs in the US.

Our capital gains plan would bring tax rates to 15% and 10% for long term gains made from four special investments, while raising the top rate on all other long term investments to 25% or higher. These four special investments are: venture capital funds and projects, stocks bought at IPO or secondary offering, bonds bought at first issue, and the underwriting of any of the above three investments. Very importantly, in order for gains from these four investments to acquire a lowered capital gains tax rate, the venture capital project or business that is doing the VC, the IPO, or the first issue would have to have at least 5% of their overall business expenses as US employee expenses that would qualify for our US Employee Tax Credits that are used in the personal income and C Corporation parts of our tax plan. For more information on all of our tax plans visit ThirdWayProgressives.org.

Our capital gains plan, if the top tax rate were only raised to 25%, would raise over 63% more federal revenues than President Obama’s capital gains plan. In fact, under our capital gains tax plan, top long term rates could be taken up to the personal income tax rates and no harm would be done to the US economy. On the contrary, the larger the difference in tax rate between ordinary speculative investments and the four special investments that receive the lower tax rate, the greater would be the incentive to invest in American jobs and the more federal revenues would be collected. Our capital gains tax plan would simultaneously incentivize American private sector jobs while increasing federal revenues, along with creating a fix for the Carried Interest Rule, because, generally, only about 3% to 12% of all gains in the financial markets come from the four above investments that receive the lower tax rate; this includes hedge fund investments (1&2). While it is true that hedge fund moneys retain a higher percentage of this 3% to 12% of financial gains than do non-hedge fund investments, these four investments are still only a small minority of hedge fund gains. Therefore, our capital gains tax plan would raise more federal revenues from these hedge funds while incentivizing them to invest in jobs in the US!

Regarding how partnerships are taxed within the personal income tax portion of our plan, in order for anyone to be considered a “business owner”, and therefore be able to exercise our US Employee Tax Credits against their personal income, a person would have to receive 10% or more of the before tax, net profits of a business. Then, whatever amount of US ETC is awarded to that business is split among all partners who receive 10% or more of the before tax profits of that business, and the US ETC is split in portions that equal the exact portion of the before tax profits that a partner is given.

For example, if a partner in a business receives 20% of the before tax, net profits of a partnership that is taxed as personal income, that “business owner” can then exercise 20% of whatever US ETC is generated from that business. Further, and very importantly in order to prevent fraud, that business owner can only exercise those tax credits against the profits that come from that business entity. So for example, if a person in the top tax bracket were to have income from three separate sources, one of which is W2’d income, and two of which are separate businesses where that person receives more than 10% of the profits of each business, that person would add up all of their income from the three sources to find their top tax rate, then he would exercise the US ETCs generated from each business only against the income generated from that business, and only down to as low as the flour cap for the US ETCs would allow the rate to go. Very important to remember, a “business owner” cannot receive any salary or any form of income that is then used to exercise a US ETC for any business in which he is a “business owner.”

The above, 10% of profits to be “business owner” rule, is set low enough to incentivize private sector capital formations for businesses, but high enough to avoid the tax fraud of every employee claiming be a business owner and therefore wanting a lower tax rate. Also, in order to establish 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 can not 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.

Regarding how US multinational businesses and foreign businesses in the US are taxed under our tax plan, keep in mind that within our C Corporation tax plan, in order to keep that part of the plan revenue neutral, the tax credits have a value of only $.04 on the dollar, while in the personal income portion of our plan the tax credits have a value of $.07 on the dollar. However, we also propose that we should give the US ETCs in our C Corporation plan a higher value and more “power”, if a business is paying above the prevailing wage and the degree to which it is paying above that prevailing wage for a geographic area, or if the business is paying for employee pensions or healthcare. The “power” of the US ETC refers to the degree to which the US ETC is allowed to lower an employers flour cap tax rate for the US ETC. For example a pass through business could go from a top tax rate of 35% to 30%, and a C Corporation could go from 35% to 25%. The plan also proposes making the value and/or power of the US ETCs worth more if a business has a comparatively high percentage of their total global expenses that are employee expenses that would qualify for our US ETCs. Our tax plan also proposes that these elaborations of the plan could be incorporated for businesses and US multinationals that are taxed as personal income. With or without these elaborations to our tax plan, the US could then use a world-wide tax system or a territorial tax system. However the US, as well as the rest of the world, would do best by moving to a modified world-wide tax system.

Under a territorial tax system, the ETCs would be calculated, but not taxed in final, as though a world-wide tax system was being used, then a territorial system would be used for the final tax bill. That is, within the C Corporation part of our plan, and maybe even the personal income part with further elaboration of that plan, a US business would have its final tax bill calculated on a territorial basses, however, the value and power of the US ETCs would be calculated using a world-wide system. The US ETC would be more valuable and/or powerful, the higher the percentage of a US multinational’s total worldwide expenses are US employee expenses that would qualify for the US ETC. After the value and power of a US multinational’s US ETC is calculated, the US multinational would be taxed using a territorial method while exercising its US ETCs.

However, the optimum policy for the US and most other nations of the world would be to use a world-wide tax system, with the caveat that the tax for foreign profits would be set at a lower rate than the C Corp or personal income rate. That is, let us suppose that the US’s top C Corporation statutory tax rate is brought down to 30% after a Wyden-Coats type bill and our tax plan is enacted. Let us suppose further that a US C Corporation 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 this tax bill paid to Ireland against the rest of the 30% US tax bill for a payment of about 17.5% to the US government. 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 some other tax haven nation. Therefore, the extra percentage of tax that is paid to the US due to the world-wide tax system should be set at no more than 10%. Moreover, as a greater incentive to hire in the US, those US businesses with powerful US ETC, because they have a high percentage of their global expenses as US employee expenses, would be able to have a tax rate as low as 3%. Therefore under a world-wide system, a US business would calculate the value and power of their US ETCs using a world-wide system. Then, they would take that power of their US ETC to calculate the tax they have to pay on their foreign profits, whether the tax is set at 10%, 3%, or somewhere in between.

Under the above world-wide tax system several developments would occur. More tax revenues to the federal government would be raised, there would exist much less of a motivation for US businesses to relocate overseas, there would be an increased tax incentive to hire in the US, and under a world-wide tax system most other forms of international tax avoidance, like transfer pricing, are much easier to detect for the IRS so even more federal revenues would be raised.

Naturally, the next question that arises is, how is the value and power of a US ETC calculated for foreign multinationals that are doing business in the US now or foreigners who want to do business in the US for the first time? The answer to this question is the most delicate of all perhaps in our entire tax plan. The issue here is that the US government will want to find a value and power of US ETC that is strong enough to entice foreign multinationals to invest in the US for the first time, but not too valuable and powerful that too many US companies that have weak US ETCs are left with higher effective tax rates than foreign multinationals who have far less employee expenses that would qualify for the US ETC. Therefore, a happy median must be found here. The best happy medium would be to immediately set the value of the US ETC for a newly US hiring foreign multinational at 30% of the fullest value that any US ETC could achieve. For example, if, all things being equal, a US ETC could be worth anywhere from $.04 on the dollar to $.07 on the dollar, a newly American hiring foreign multinational would upon entree into the US have a tax credit worth $.05 on the dollar. New US foreign multinational would have US ETCs with a power equal to their American counterparts. Once that foreign multinational hires for more than one year in the US, and this goes for today’s foreign multinationals in the US, the value and power of their US ETCs would be calculated using a comparative average between the US’s foreign and US’s domestic employers. Foreign owned businesses that are not C Corporations would be taxed just as if they were domestically owned non-C Corporations.

Again, the above would happen only if we decided to enhance our C Corporation tax policy, or even our personal income tax policy, so that in the case of C Corporations the US ETC would be worth more than $.04 on the dollar. However, even if these elaborations to our tax plan were not made, using a world-wide tax system that has a tax rate set at 10% or 3%, or something in between, would create an incentive for US multinationals to hire in the US. This is because, let us suppose that US C Corporations can use US ETCs to lower their tax rate from 30% down to 20%, if a US business is very socially responsible and has a top US tax rate of 20%, then with a lower tax rate on what they have to pay on foreign income, they will continue to be rewarded for being socially responsible in the US. This would not be true under our current world-wide tax system without income tax deferrals.

Therefore, our tax plan would promote the use of a world-wide tax system for the US and for most other nations. We also believe that our tax plan would work best if it were married with a plan much like the Wyden-Coats Bill. It would also be very beneficial if these plans were incorporated with some of the proposals to make our tax policy and the IRS much more computer friendly, where taxes can be done for most Americans and American businesses easily over the internet.

With our tax plan enacted, a world-wide tax system would be promoted, and with computer improvements by the IRS, and with other nations taking on our tax plan, and therefore more nations taking on a world-wide tax system, and with their computer improvements, all global and US tax enforcement will improve. Global tax policing will be improved, so more revenues will be raised to all governments, without raising enforcement costs. Also, the issues of immigration and security will be more easily solved and enforced. Nearly world-wide we would be bringing tax policy into the 21st century global economy.

On top of all this, our tax plan, or Keynesianism for a global economy, or qualityism, would have the effect of making the world more peaceful. This is because qualityism is more compatible with democracy then is socialism, the current solution on the far left. Socialism involves expropriating businesses and property from many people. This comes in conflict with democratic freedoms. Yet qualityism is about empowering and uplifting, not taking businesses away from individuals, so it is much more compatible with democratic rights. Plus, qualityism does better than any economic philosophy at creating competition in the economy. This is because it works to decrease oligopolies, something that conservatives dont’t always fight hard enough against. Plus qualityists are not for government monopolies, except for the police and the military. Qualityists are only for government options in some economic sectors. Because qualityism is more compatible with democracy, and once the rest of the world takes on qualityism, there will be more democracies world- wide, and therefore, there will be less of a need for military spending, both world-wide and for the US.

In such a world, once again, just like with most of the 20th century during the era between the progressive era that really began in 1913 and the advent of the global economy that came with the fall of the Soviet Union, political parties would once again compete in productive ways over the size of government. Between 1913 and 1989, developed capitalist democracies where able to primarily debate and enact policies related to the size of government and the tax rates on its wealthiest people. With qualityism we will be able to go back to such simple debates and policy changes, although we now need to move the rest of our government into the highly competitive global economy of the 21st century. But this is exactly what societies do; before they transform or reform their governments they generally start with tax policy. Let’s get this tax stuff done, put the credit markets as ease, and get on to working on the other stuff!

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

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

Why the US Employee Tax Credit is the Best Tax Incentive

By Tom Pallow of Third Way Progressives, 3/29/11

Economists may disagree as to the value that tax incentives bring to generating economic efficiencies and prosperity. Some see great value in tax incentives and others do not. Regardless of these disagreements, there are some tax incentives that virtually all economists and policy makers like. Regarding tax incentives for businesses that bring private sector job growth to the US, in recent years the two most popular of these tax incentives seems to have been the R&D tax credit and the early depreciation of certain capital expenses. Given the popularity of these two tax incentives, if the superiority of the US Employee Tax Credit were to be demonstrated when compared to these two more known tax incentives, it would be safe to say that the US Employee Tax Credit should join these two more popular tax incentives as part of our country’s collection of tax tools that our federal and state governments use. This paper will demonstrate the superiority of the US Employee Tax Credit to these two effective tax incentives. Our US ETCs would affect C Corporations and businesses that are taxed as personal income.

Regarding businesses that are taxed as personal income, our US ETC would be awarded for all US W-2’d employee expenses up to the FICA tax cap. This credit would be worth $.15 for every dollar expensed. Our personal income tax plan would raise taxes on the top two brackets up to the same rates and income brackets as President Obama has proposed, or above that. However, businesses that hire employees in the US will be able to use these tax credits to lower their effective tax rate to no lower than if today’s top three rates stayed the same and the bottom three rates were dropped even further. Such a policy would create an effective tax cut for the employers of 98% of Americans who work for a non-C Corporation business. Yet statically scored, these tax credits would only cost about 21% of all the federal revenues that would be raised otherwise.

Very importantly, studies propose that President Obama’s tax plan would cause the loss of over 6 million private sector jobs between 2013 and 2020 (1). While using some of these same assumptions, our personal income tax plan would create or save over 7 million private sector jobs during the same period. Such a difference, if dynamically scored, would mean that our personal income tax plan would raise as much as 4 to 5 times the federal revenues as the President’s plan.

What our US ETCs would do is institutionalize in our tax code a reality that exists in our society but that is not yet institutionalized in our tax code. That reality is: All things being equal, someone who employs people in the US is more important to our nation than is someone who does not. Therefore, we should reward and incentivize private sector employment in our tax code in order to create more of it. Monetary incentives motivate!

The beauty of this tax policy is that the math always works for us. That is, even within the highest income stratums, those who employ people are always a relatively small percentage of each stratum. For example, within all of the income that is produced by all those within the top 2% of US income earners, the point where the President wants to raise personal income tax rates, only 19% of all that income is the profits of any business that is taxed as personal income that has one or more employees in the US. For the top 1% of US income earners this number is about 21%. For the top 5% this number is about 16%, and for the top 10% it is about 12%. Therefore, the math always works for us. The greater we make the effective tax rate difference between wealthy people who do not employ in the US, versus all entrepreneurs who do, the more private sector jobs and/or government tax revenues will be raised! If there is only one thing that all economists across the spectrum agree on, it is that incentives matter.

Our C Corporation tax plan would also use the same US ETCs, but use them in a slightly different way that is revenue neutral and that also provides more of an award for C Corporations that hire in more socially responsible ways. This is done by making the US ETCs worth only $.04 on the dollar, but allowing C Corps to exercise these tax credits to an even lowered effective tax rate than within our personal income tax plan. Plus, C Corps that have a higher mean wage than the prevailing wage of the geographic areas where they employ would be awarded a tax credit tax that is worth more than $.04 on the dollar and/or they could exercise the credit to an even lower tax rate.

While our C Corporation tax plan would appear to be revenue neutral if statically scored, the plan would incentivize the creation of enough new private sector jobs that a significant amount of new tax revenues would be raised. To read all about our personal income and C Corporation tax plans, along with our capital gains, FICA, and environmental tax plans, visit ThirdWayProgressives.org.

Now that our US ETCs have been explained, let us see why they would be even more efficient and would develop even more prosperity than would the rightfully popular R&D tax credits and early write offs of capital expenses. There are two primary questions to ask when it comes to comparing tax incentives and credits. The first is: In relation to the cost of the incentive, how well does the incentive achieve what it was enacted to achieve? The second is: How easy is it for the IRS to police the tax incentive?

Starting with policing, it is obvious that our US ETCs would be one of the easiest tax incentives of all to police. This is true primarily because nothing is more comprehensively documented in the area of tax policy than are W-2’d employee expenses. They are comprehensively documented, using multiple forms of documentation, from both the employer and employee, and on both the state and federal government levels.

Sure it is all too common for undocumented workers to use phony forms of documentation to work in the US. However, if an employer were to exercise a US ETC for employee expenses given to an undocumented worker in the US, at least these employee expenses would be going to someone working in the US and therefore most of this wage would be spent in the US. This is not true for many tax incentives that can be taken for expenses that are actually spent in a foreign nation. Further, it would be very easy to require, as a prerequisite for exercising a US ETC, that employers use the IRS’s E-Verify System. Also, in a very important way the US ETC would actually create an incentive for employers to pay higher taxes. This is because all those employers in the US who are currently paying employees under the table and not paying FICA taxes would have an incentive to claim all of their employee expenses and pay FICA taxes in order to exercise the US ETC. This is because a US ETC could not be exercised without an almost equivalent FICA tax being paid; the US ETC being worth more to the employer than the existing FICA tax expense. Avoidance of FICA taxes by employers has been a growing problem, and it will become even more so the higher we raise FICA tax rates.

Secondly, R&D and capital expenses are much harder to pin down and define, and are therefore much harder to police as tax incentives. It is much harder to determine whether a business expense is an R&D expense or simply a general businesses expense. This is both true for employee expenses that are said to be used for R&D and capital expenses that are said to be used for R&D. Capital expenses can also be problematic in this regard. With every capital expense the IRS must ask, are these expenses actually legitimate business expenses or personal expenses used by those running or owning a business? Further, many hands on investigations are needed by the IRS to determine whether a capital expense is being used in the US or in a foreign country. Whereas again, nothing in tax policy is more clearly cut than W-2’d employee expenses up to the FICA tax cap.

Regarding the effectiveness of US ETCs, R&D tax credits, and early capital expense write offs, all three have the primary goal of increasing private sector jobs in the US, yet once again it can be shown that the US ETC is superior. For one, because as is shown above that it is easier to make certain that more of the US ETC is spent in the US, more of the federal expense of the US ETC will be spent in the US than would the federal expenses for the other two tax incentives. This will mean that the US economy will grow more with US ETCs. Also, and very importantly, there is nothing to mandate in law that R&D expenses that are spent in the US will mean that whatever new technologies and ideas that are generated by this R&D will lead to jobs in the US rather than jobs in a foreign nation. The same is true for capital expenses that are used in a foreign country but written off as though they were spent in the US. The US ETC does not have this problem.

One of the great aspects of R&D tax credits and early capital expense write offs is that they primarily help manufacturing businesses, and manufacturing businesses typically pay on average a higher wage than do most other business sectors of the economy. Yet our US ETCs also accomplish the same thing. For one, within our current C Corporation tax plan, a tax credit could be worth more than $.04 on the dollar and/or a lower possible tax rate could be achieved if the mean wage of a business is above the prevailing wage of the geographic area where they are employing in the US. The same could be true with our personal income tax plan if desired. Secondly, more and more evidence shows that manufacturers find it more efficient and productive to conduct their R&D and make their capital expenses where they do their manufacturing. Therefore, if we were to enact US ETCs and therefore create more of an incentive to manufacture in the US, more R&D and capital expenses would follow this manufacturing into the US, even without an R&D tax credit and early capital expense write offs!

Our overall tax plan also contains a capital gains and FICA tax plan, together raising $558 billion in new federal revenues in the first 10 years. Our capital gains tax plan alone, and statically scored, would raise over 63% more federal revenues than President Obama’s capital gains tax plan. Statically scored, our overall tax plan would raise $1.25 trillion over 10 years versus the President’s tax plan and the Deficit Commission’s tax plan that would raise $700 billion and $925 billion over 10 years respectively. Our overall tax plan would create or save over 11,553,000 private sector jobs between 2013 and 2020, while studies propose that the President’s overall tax plan would create the loss of over 6,243,000 jobs through that same period (1). It is safe to say that the Deficit Commission’s tax plan would create the loss of even more jobs. If this jobs data were then dynamically scored into these federal revenue projections, our tax plan would raise as much as four to five times the federal revenues as the other two tax plans! For much more information on all components of our tax plan, visit ThirdWayProgressives.org.

The last reason why the US Employee Tax Credit is the best tax incentive is that it is one of the few, if not the only, tax incentive that could set the political stage for a grand compromise between Republicans and Democrats. The US ETC, along with our overall tax plan, would lead to the best case scenario for income taxes going up after the 2012 election! For more information on why this is so, read our paper, “A Compromise Where America Wins”, that can be found at the Weekly Blog section of our website, ThirdWayProgressives.org.

1.   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

A Compromise Where America Wins

By Tom Pallow of Third Way Progressives, 3/14/11

It is obvious that we cannot continue to extend the debt limit every two weeks from now until October 1. Therefore, we need to create a compromise extension of the debt limit with the Republicans in a way that most benefits the American people and therefore our party. The key to developing such a beneficial compromise is to have policies to offer the Republicans that the American people will want and that Republicans cannot refuse in exchange for commitments we want, and very importantly, offering them so that they occur in the proper sequence.

For example and to start with in this sequence, it is clear that the Republicans are going to be extremely persistent when it comes to demanding that the federal government cut $61 billion out of this year’s budget. This is especially true given the American people’s concern about our deficit, and the fact that $61 billion is only about 3% of our projected 2011 deficit. However, the American people will also be nervous about the projected 400,000 or more jobs that will be lost in 2011 and the 700,000 fewer jobs by the end of 2012 due to the $61 billion cut (1). Our best policy would be to offer, in exchange for cutting the $61 billion, the tax cuts in our FICA tax plan. These tax cuts would only cost about $14 billion in the first year, but they would also generate more than 400,000 jobs in the first year. Therefore, we would be increasing the amount of jobs in the US while cutting $47 billion in federal spending. At the same time we would also be able to argue that we are shrinking the size of the federal government while we are increasing the size of the private sector. Given that the size of the federal government in relation to our overall GDP is now the highest it has been since WWII, this would be a good thing. It would bring confidence to the private credit markets, and therefore bring even more economic growth.

Very importantly, as part of this compromise sequence, we would require that a vote be taken in 2013 regarding the tax increases in our FICA tax plan. This would entail taking the FICA tax cap up to 90% of American incomes or at about $180,000. This tax increase would generate about $336 billion over 10 years. Plus we would propose that non-C Corporation business owners with US employees would be able to exercise US Employee Tax Credits in a way that would allow them to drop their overall tax bill to as if the FICA tax cap had not been raised. This would create an even greater incentive for wealthy individuals to employ in the US. Details of our FICA tax plan can be found at our website, ThirdWayProgressives.org.

This brings us to the second major step in our road to American recovery. This step would be to immediately enact the tax cuts in the personal income and capital gains portion of our tax plan. By enacting these tax cuts now we would be creating absolute certainty within the private sector that neither Democrats nor Republicans would be working to raise taxes on American job creators. In fact, American job creators would be certain from that moment on that Democratic Party tax policy would be to lower their effective tax rate, especially those who hire in the most socially responsible ways. Such certainty, along with our FICA tax cuts, would create an environment that would be very conducive to private sector job growth in the US. The tax cuts in the personal income and capital gains portion of our plan would only cost about $10 billion in the first year and $105 billion over 10 years. So this year we would still be cutting over $37 billion in federal spending.

However, in exchange for all the above tax cuts we would push for all of the tax increases in our overall tax plan. We could achieve this one of two ways. Our first effort should be to, in exchange for all of the above tax cuts, enacting some or all of the tax increases in our plan this year, with the tax increases scheduled to go up in 2013. Of course the Republicans would probably not agree to these tax increases, but we would embarrass them for stopping the future tax increases as part of a tax package that would grow the economy now. Nonetheless, the Republicans may not agree to any tax increase, even if they are scheduled to increase in 2013. Therefore, we should enact all the tax cuts in our plan this year, and have all the Democrats and President Obama run in 2012 on enacting all of the tax increases in our plan in 2013.

It might appear absurd that we would run on tax increases in 2012, but there are three factors that would make this a winning issue for us. One, the American people are very concerned about the federal deficit and debt, and they know that tax increases will have to be part of closing our fiscal gap. Two, after one year of federal budget cuts many more Americans will be fine with raising taxes on the wealthy if it means less government cuts. Thirdly, and by far most persuasive, Democrats will be able to make the argument that the higher the tax rates are raised on the wealthy who do not employ Americans, while the lower are tax rates on those who do, the more private sector jobs and federal tax revenues will be generated! This is because, for example within all of the income that is produced by the top 2% of US income earners, only about 19% of all that income is the profits of any business that is taxed as personal income that has one or more employees in the US (2,3&4). And remember, within our FICA tax plan we would also let employers lower their overall tax bill through exercising our US Employee Tax Credits. For more information on all of our tax plans visit ThirdWayProgressives.org.

Our overall tax plan will raise more federal revenues than any other tax plan, $1.25 trillion over 10 years versus $925 billion and $700 billion over 10 years for the Deficit Commission’s plan and President Obama’s 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 (5). While it would be very surprising if studies showed that the Deficit Commission’s tax plan did 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 and Deficit Commission’s plans would do the opposite! If all three tax plans were dynamically scored our tax plan could easily raise up to 4 to 5 times as much federal revenues as the other two plans!

Yet, even given the fact that our tax plan would raise enough to cover about 50% of our deficit gap, we will still need to do other things to completely control our debt. Hence, the rest of the fiscal gap will need to be closed by other means but tax increases. The key here for Democrats is to emphasize moving government resources into more efficient activities that help to grow the private sector. Many of these ideas can be found on the “Weekly Blog” section of our website, ThirdWayProgressives.org, especially within the paper titled, “The US Employee Tax Credit, the Environmental Fair Tax, Industrial Policy, and Saving Our Healthcare System and Our Budget: A Democratic Budget Outline.” Remember, the variables to keep track of when it comes to our budget deficit are our federal revenue and spending in relation to overall GDP. Therefore, the more we can grow the private sector, the better will be our federal revenue and spending to GDP numbers.

Yet even with an increase in GDP, at least in the short run some cuts will have to be made. The best cuts to be made in the short run are in those areas that cost us the most but would be cuts that would least slow the economy, like Medicare, Medicaid, and Social Security. These cuts would also be best made in a sequence that least adversely affects the economy but best puts the credit markets at ease. Such a policy would be to raise the retirement age for all those 55 or younger to age 67. This policy would send the message to the credit markets and the rest of the world that we are getting serious about our debt. At the same time this policy would not pull any consumer demand out of the economy.

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 be age 60 and the average American woman lived to be 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 aren’t 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 quicker we make this change the better, so it would be best to make this change this year. The vast majority of the American people will see this as real leadership and reward Democrats for it. Plus, the American people will vote for us in 2012 to raise the FICA tax cap in 2013.

The most complicated issue for us to settle optimally is healthcare. 2012, both the election and congressional hearings, should feature healthcare as the main issue. President Obama pulled an ingenious move by challenging the governors to come up with a healthcare plan that would insure as many people as his healthcare bill. By doing this, President Obama has opened up the ability for states to experiment in ways that both progressives and conservatives only dreamed of doing during the healthcare debate of the last two years.

For example, more progressive states will now be able to create a public insurance option. These states could then create an association, and along with Medicare and Medicaid, use their bulk purchasing power to lower their overall healthcare costs.

Along with such innovations as above, it is just as important that the federal government make it as easy as possible for people to be able to buy health insurance across state lines. Given past interpretations of the commerce clause, there is no way that the states should be able to make their healthcare regulations so idiosyncratic that states have so few 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 the private and public options. Healthcare is an art. Doctors and health providers should not have to make amends for educated, but still artistic decisions that go bad. They should only have to pay for decisions that even a lay person would know to be incompetent, or if they withhold information.

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 the 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 or public option health provider employs virtually all employees in a hospital or a wing of a hospital. State and federal law can help there. 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.

Right now American politicians have to accept that many of its states are not going to except a “big government solution” for anything while other states will demand them. A key to good government in the future is to provide both options where they are wanted so that much more competition exists.

The sequence for how we reform the just passed healthcare law is of great consequence. Democrats should spend 2011 passing the above proposed tax and Social Security reforms. Yet the primary issue in 2012 should be about saving and optimizing Medicare and Medicaid, and about reforming the newly passed healthcare bill. There should be congressional hearings on these issues in late 2011 and early 2012. By the summer of 2012 President Obama and the Republican presidential candidate should be competing to sell voters on competing proposals to reform the new healthcare bill and Medicare and Medicaid. It would be unfortunate, and politically to their disadvantage, if the Republicans, unlike we Democrats, proposed insuring less Americans than would the Affordable Care Act. If we can come up with a reform of the Affordable Care Act that is acceptable to our base and independents, Democrats will win in 2012 if they run on this reform. Then in 2013, the party that wins the presidency, along with those in Congress, should structure into law the healthcare plan of the winning party. Whatever law, or amendments to existing law, that are drafted in 2013 should not go into law until 2015. In this way the American people would have one final vote in the election of 2014 regarding what they thought of the legislation that was written in 2013.

Given that our nation now faces major problems that need to be solved, the best way to solve our biggest social and economic problems is to allow the American people to have elections that best determine the solutions that are enacted. The timelines and sequences of the proposed legislation in this paper achieve that.

Also, it is evident that we are now in a period of American history where Americans want many of our lingering and difficult problems to be solved, like healthcare, a lack of increase in real incomes for our poor and middle class, and our federal debt. Therefore, the American people are going to reward the politicians and party that run on very specific and workable solutions to these problems, and not political dogma! The American people will reward the party that pushes a positive agenda and not just fear of what the other party will bring. President Obama would greatly benefit by running on the above policies and the above sequence of enacting them into law, but more importantly America would greatly benefit. Wouldn’t that be great if we led, and ran on, and forced the other party to run on, proactive agendas rather than just fear of the other party! Now that would really be progress. That would be progressive.

1. Mark Zandi, Moody’s Analytics: A Federal Shutdown Could Derail the Recovery, February 28, 2011.

2. 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.

3. The World Top Incomes Database, Facudo Alvaredo, Tony Atkinson, Thomas Piketty, January 2011.

4. US Census Bureau, Statistics of US Businesses: 2008 : All industries US.

5. Obama Tax Hikes: The Economic and Fiscal Effects,  Published  onSeptember 20, 2010 by William BeachRea Hederman, Jr.John Ligon,Guinevere Nell and Karen Campbell, Ph.D. Center for Data Analysis Report #10-07

Keynes, Today, Obama, the VAT, and the Future of Prosperity

By Tom Pallow of Third Way Progressives, 2/24/11

For almost a century now the US and the rest of the developed capitalist world has relied on Keynesian economics as a way of increasing consumer demand and job growth in the economy. The understanding of the need for something like a Keynesian stimulus in order to increase consumer demand dates back to the writings of Karl Marx in 1864 with Das Kapital. Marx did not invent the concept of Surplus Value, but he did popularize the concept. Surplus Value points to the fact that, in aggregate in an industrial economy, in order for businesses to make a profit, they must charge more for their products than what they pay their employees. Marx’s fix to the problem of Surplus Value was so absurd that only the poorest, least literate, least democratic, and lacking of a fourth estate, countries of the world accepted his fix. Yet the problem of Surplus Value is why, once the most developed economies of the world became primarily industrial by the early 1900’s due to the mechanization of farm equipment, railroad expansion, and the electrification of industry, that these economies all enacted progressive income taxes between 1910 and 1915. The progressive income tax was needed to redistribute income from the wealthy to the poor and middle class in order to compensate for Surplus Value and keep consumer demand up.

Economists around the turn of the century popularized the idea of the progressive income tax. In America it was enacted into law in 1913, yet with a modest rate of 7%. It was up to John Maynard Keynes with his General Theory of Employment, Interest, and Money in 1935 that brought forward the intellectual framework that allowed the top progressive income tax rate to stay so high until the 1980’s.

The primary dynamic leap in understanding that Keynes genius brought to the world of economics and policymaking was his description of his, Greater Propensity to Save. This, Greater Propensity to Save is simply a more detailed description of Surplus Value. It points to the fact that very wealthy people have a propensity to save a much higher percentage of their income then do the poor and middle class, and that through this Greater Propensity to Save consumer demand is slowly pulled out of the economy. As consumer demand is pulled out of the economy businesses will lay employees off. This will further depress consumer demand, and the cycle will continue downward. An example of the Greater Propensity to Save is the fact that, in the US today the top 5% of income earners save on average of about 30% of their income, while the bottom 95% of earners save on average about 3% of their income. The top 1% of US income earners generally save about 50% to 60% of their income.

Keynes argued that it is up to the government to help increase consumer demand via the government borrowing, then spending, then paying for that borrowing via a progressive income tax. This was a strong enough argument during the economic chaos of the Great Depression, which had just fallowed the roaring 20’s, to greatly increase the height and base of the progressive income tax. Keynes had the right tax solution for his time only to the extent that his sole intellectual rival on the political/economic right were the followers of the 120 year old Say’s Law and conclusions typically derived from that law. Say’s conclusions in simplest form stated that the natural and quickest way for a recession to end is to have an economies workers except less pay. This idea had always been painful to accept, but in the economic chaos of the 1930’s, with no farms for workers to go back to and live off of, this solution was unacceptable.

So Keynes eliminated in the developed world the ability of a government to rely on followers of Say’s Law as the only way to get out of a recession. However, it now can be said that, with the current British government and the Republicans here, such ideas are coming back. They are now only beginning to look like an alternative because the Keynesian, New Deal coalition that has guided the left since the New Deal appears to be falling apart. Further, due to our new, highly competitive, high tech, global economy, there exists no traditional Keynesian method of stopping this deterioration. Therefore, President Obama appears that he might now be trying to transform and add to our Democratic coalition, but he is moving far to slow and not in any clear and workable direction.

This transformation is needed for the survival of the Democratic Party, but most importantly, for the prosperity of our people! In order to understand how best to achieve this transformation, it is very helpful to see the shortcomings of Keynes’s analysis, but most importantly we must understand how Keynes’s solutions are no longer applicable given our highly competitive, high tech, global economy that has seen an effective 20 fold increase in global trade since Keynes’s day.

One of two primary shortcomings of Keynes’s work as it relates to today is that, in his needed zealotry while lobbying for government stimulus spending, he advocated for absolutely any type of government spending as a way to increase consumer demand. Keynes used to make the somewhat humorous argument that, during a recession, it would be better for a government to bury money in the ground and have unemployed people dig it up so that they could spend that money to stimulate the economy, than it would be for the government to do nothing. Such thinking has influenced Keynesianism over the past almost 80 years. Yet today, in our highly competitive, high tech, global economy, we can no longer afford the degree of economic inefficiency that comes with such thinking.

The other shortcoming of Keynes’s work has also become even more problematic with the increasing competitive nature of our global economy. This shortcoming deals with Keynes analysis of the wealthy’s savings that is not detailed enough to have use within the realities of our global economy. This shortcoming exists because Keynes did not distinguish between wealthy income that was produced by individuals through employing fellow citizens so that this income is more likely to be invested in ways that employ more fellow citizens, and wealthy income that is not generated via employment and is therefore more likely to be saved in ways that do not increase employment and/or will only go into purchasing luxury goods for wealthy individuals.

In regards to a deeper analysis of the savings of the wealthy, for example, only about 19% of all of the income that is made by the top 2% of income earners in the US is the profits of any private business that is taxed as personal income that has one or more employees in the US (1,2&3). This means that today, we can lower taxes on American employing, private businesses through our US Employee Tax Credits, while we raise personal income tax rates on the wealthy who do not employ in the US. Since 19% is so much smaller than the remaining 81%, taxes can be raised on this 81% of the top 2% of US income earners and much new federal revenues can be raised. Meanwhile, effective personal income tax rates on the 19% of the top 2% of incomes who employ in the US can go down. Very importantly to remember, the greater the difference in effective tax rates between those who employ fellow citizens, and those who do not, all else being equal, the greater there will be an incentive to employ in that economy and the more tax revenue will be raised! It is only increases in the demand for labor in the private sector, along with increases in productivity or quality of production that raises real incomes for the poor and middle class. The specifics of this personal income tax plan can be found at our website, ThirdWayProgressives.org.

In regards to the wealthy’s savings that effect a capital gains tax, Keynes did not distinguish between savings that go into the four primary investments that create jobs, and all other investments that are simply speculative paper trades. These four primary investments are: One, venture capital funds and projects. Two, stocks bought at IPO or secondary offering. Three, bonds bought at first issue. Four, the underwriting of any of the above three investments.

Once again, like with the personal income tax data, the math works for us. Generally, only about 3% to 12% of all financial gains within our financial markets are generated from these four investments (4&5). Very importantly, with our capital gains tax plan, that can also be found at ThirdWayProgressives.org, the businesses invested in as part of these financial investments would have at least 5% of their total global expenditures consisting of US employee expenses that would qualify for our US Employee Tax Credits. Also, just like with our personal income tax, the greater the effective tax rate difference that exists between those engaged in simple speculative savings, and our four financial investments that drive job growth in the US, the more jobs will be created in the US and the more government revenues will be raised! The higher the capital gains tax rate is on gains from speculative, paper investments, and the lower is the tax rate on gains from the four primary investments, with our minimum employment qualifications, the more the government will raise in tax revenue, and the faster the economy will grow and the more jobs in the US will be created! This added economic growth, along with an increase in fiscal stability that our capital gains tax plan will bring to the federal government and those state governments that also enact our capital gains tax plan, will add even more to government tax coffers.

Our FICA tax plan would also increase government revenues throughout the US while greatly increasing American jobs and economic growth. We also have a C Corporation tax plan that would do the same. Both plans can also be found at ThirdWayProgressives.org in the Weekly Blog section. The reality is that today, in our new global economy, we still have to compensate for Surplus Value and the Greater Propensity to Save, and the most efficient way to do this is through the progressive income tax because all other forms of taxation are much more regressive. However, in today’s highly competitive global economy the progressive income tax must be contoured to the realities of this type of economy.

For many of the reasons stated above, the VAT tax is a very bad idea. A VAT raises the cost of doing business and the cost of capital for businesses. Very importantly, it does not take long for businesses to learn how to pass the cost of the VAT onto consumers, which makes the VAT very regressive and pulls consumer demand out of the economy. Then, if many VAT exceptions are made to try to make the VAT less regressive, the tax raises much less revenue, and an already bureaucratic and hard to enforce tax becomes even more bureaucratic and hard to enforce.

Yet, even though our overall tax plan is much more efficient than a VAT, and even though it raises more government revenues than President Obama’s or the Deficit Commission’s tax plan, $1.25 trillion over 10 years versus $700 billion and $9.25 billion over 10 years respectively just when statically scored and four to five times the revenues when dynamically scored, our federal, state, and local governments cannot be as inefficient with future Keynesian stimulus’s as has been too often the case over the past 80 years. In several ways President Obama appears now to be trying to make our government spending more effective and efficient while trying to build a broader Democratic Party coalition. Given these new efforts, we must encourage him, support him, and guide him to those extra steps that will ensure that his entire program will be successful.

The Obama budget does begin to move in this correct direction of directing government spending towards those investments that greatly increase private sector jobs growth and productivity. His idea to greatly increase to $148 billion in 2012 the governments R&D assistance to among other things, “create transformative technologies”, is a very positive move, as is his proposed “Manhattan Project” for critical clean energy research.

However, given that the administration has said that their budget plan is a starting point for negotiations, given that the President’s 2012 budget will be 9.5% more than the Democrats proposed 2011 budget, and given that the Republicans now control the House, the final 2012 budget will need to have much less spending than what the President has offered. Therefore, the future cuts in the President’s budget should not come from areas that either most adversely affect the poor and middle class, or are those areas that most increase private sector job growth and productivity. Things like the Home Heating Oil Assistance Program should not be cut. Such a cut will create actual pain for many poor, and/or it would lower demand in the economy because many poor would have to restrain current spending to purchase oil.

Therefore, what is left to be cut are those investments that do not hurt the poor or economic mobility and that are not yet proven to add to the nation’s productivity. More accurately, we should first cut those investments that have not been proven to pay for themselves over time above the rate of inflation, and are not sustainable without future federal moneys. Such an expenditure would be the President’s high speed rail proposal that has a price of $56 billion over six year. In this time of possible austerity, much unbiased research would have to be made that showed that the high speed rail system would pay for itself once it was built in order for such an expenditure to be justified. After all, if the middle class and wealthy are not willing to pay high enough fares to pay for a high speed rail system, and meanwhile the poor will still opted for much less expensive bus rides, then why should a new rail system be built? At this time it would be much more efficient to increase the amount that is put into the new, Infrastructure Bank. The Infrastructure Bank would be more likely to fund projects that wind up paying for themselves.

Putting off high speed rail might depress and anger some of the special interest groups that support us, but favoring them over the supporters of cheaper home heating oil or public/private R&D collaborations that will bring high paying private sector jobs to the US will only mean many Democratic Party losses in 2012.

President Obama has a long way to move regarding several aspects of the 2012 budget. How he handles these questions this year will greatly determine if he has a second term. That is, how President Obama adjusts Keynesian economics to the realities of the global economy will determine, in regards to domestic policy, whether he is considered a transformative and successful president, or a failure. Our version of Keynesianism for a global economy has long been called qualityism.

Keynesianism for a global economy, or qualityism, can be explained in a simple way by differentiating between how traditional Keynesianism taxes and spends, versus how qualityism taxes and spends. Old Keynesianism uses a blunt ax to tax all of the wealthy equally. It spends in ways that do increase consumer demand, but not optimally. It does not spend optimally because it does not demand that it’s investments pay for themselves and too often it makes the decision on how moneys are spent when that is not desired. Too often over the past almost 80 years Keynesian spending has created government projects that have to be perpetually funded with little return, and too often the government chooses how to spend stimulus moneys when the poor and middle class would rather make these spending decision on their own via a tax cut or an increase in the Earned Income Tax Credit.

Qualtyism believes that the wealthy should be taxed using the precision of a scalpel. Wealthy income that is hiring employees in the US and investing in ways that employ in the US should receive a lower tax rate. All other wealthy income should have its tax rate go up. Regarding spending, qualityism suggests that, unless government spending generates an overall financial return above inflation, the stimulus spending should be left to the poor and middle class via lower taxes and/or the EITC. Other government stimuli should be left for investments that produce a return and create real technological advancements for the economy, or education expenses that empower people to generate more revenue than the cost of the education. For example, many of our federal expenditures in the area of basic medical research have been shown to reproduce three dollars in the economy for every dollar spent. History is full of, and developed economies have always relied upon, government assisted technologies that have greatly added to the prosperity of the private economy. Most often war was the motivator for these achievements. We cannot afford to, nor should we have to or want to, rely on war for this motivation in the future!

Qualityism is different in many ways from capitalism. For one, qualityism acknowledges that wealth needs to be redistributed to the poor and middle class, both for the economy to be more prosperous and to make incomes more egalitarian. Qualityism believes that the best and most efficient way to do this is through the progressive income tax, but a progressive income tax that is contoured to a global economy. Using tax incentives through progressive income, capital gains, and C Corporation taxes, businesses will be incentivized to create more and higher paying jobs. The higher the demand for labor in the private sector and increases in productivity will, for all classes in the economy, bring more prosperity, a higher quality of life, and the freedom to have more time off with friends and family. Unlike laissez faire capitalism, qualityism believes that government spending can add to the economic prosperity of a nation, and that this is best done through the advancement of new technologies. The government can do this best through fully financing basic research and coordinating with the private sector in applied R&D. Along with our environmental tax plans that can also be found at ThirdWayProgressives.org, this government R&D assistance will make the economy more environmentally sustainable, prosperous, and egalitarian. The economy and society will be of higher quality!

When the economy first moved from primarily agricultural to primarily industrial, new social and economic thinkers had to arise to solve new problems. Today, we live in an entirely different economy compared to what existed just 40 years ago. With the fall of the Soviet Union and communism, the developed world has been opened to a new cheap labor market of 4 billion people. Add in new technologies that make outsourcing as fast as the speed of light and increased productivity in manufacturing, and we have experienced an effective 12 fold increase in global trade in the US and for the rest of the developed world since 1967. This has been every bit the change that occurred when the developed world moved from primarily agricultural to primarily industrial. With this change, new social and economic thinkers must arise to solve new and unique problems. Consider qualityism the first attempt at doing so.

  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. “Recent Changes in US Family Finances” Federal Reserve Bulletin.
  5. Jay R Ritter, University of Florida, “Initial Public Offerings”