Jeremy Weltmer

The Obama Small Business Tax Hikes:<br> Pictures Tell 1000 Words

Posted by Jeremy Weltmer, Ryan Ellis on Tuesday, August 24th, 2010, 2:57 PM PERMALINK

To raise taxes on the top 3 percent of small businesses is to raise taxes on two-thirds of small business profits.

Click here to view chart

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Obamacare Poses New Threats to Health Savings Accounts

Posted by Jeremy Weltmer on Friday, August 6th, 2010, 3:45 PM PERMALINK

As the House Republican Committee reported;

Enacted in 2003, Health Savings Accounts (HSAs) combine a tax-free account to pay for routine medical care with a low-cost insurance policy with a higher deductible.  Since most American families live on fixed incomes, HSAs/high deductible health plans allow American families to send less of their money to insurance companies and put more money into a tax-free HSA to pay for routine care now or save for future health care needs.  

As of May 2010, approximately 10 million Americans were covered under HSA plans:

  •  Individual Market:  2.1 million
  • Small Group Market:  2.9 million
  • Large Group Market:  4.9 million

According to the 2010 Consumer Health Savings Update, American families have $8.4 billion in HSAs to use for their health care now or in the future. 

ObamaCare’s Impact on HSAs

Tax Increases:  ObamaCare raises taxes on HSAs and makes them less consumer friendly: 

  • January 1, 2011:  Over-the-counter (OTC) drugs and other household health care items cannot be reimbursed tax-free from HSAs without a prescription.  This will increase taxes on American families by $5 billion.
  • January 1, 2011:  Penalty for non-qualified withdrawals from HSAs increases from 10 percent to 20 percent.  There is no “hardship” exception.  This will increase taxes on American families by $1.4 billion.

Regulatory Concerns:  Some other provisions of ObamaCare and how the Department of Health & Human Services (HHS) chooses to implement them can hurt families that use HSAs currently to satisfy their health care needs:

  • “Actuarial value” definition:  Under ObamaCare, health insurance plans are supposed to pay for at least 60 percent of the expected cost of covered benefits, on average (i.e., the “actuarial value”).  The actuarial value takes into account the benefit package, deductible, copayment, and coinsurance differences for each plan.  High-deductible plans typically have lower actuarial values than old-school health insurance plans or HMOs because they are not designed to pay for routine expenses.  However, some high-deductible plans are combined with a health savings account, which is intended to pay for routine medical care.  It is essential that HHS consider both the employer and employee annual HSA contributions when it sets the standards for determining whether these plans meet the minimum 60 percent actuarial value requirement.  Failure to include the annual contributions in the actuarial value or failure to include it properly could determine whether HSAs will survive under ObamaCare.    
  • Medical loss ratio (MLR) definition:  Lower-premium, high-deductible health plans are designed to pay fewer low-dollar, up-front medical bills than high-cost, low-deductible plans.  This makes it more challenging for high-deductible plans to meet the minimum medical loss ratio requirements in ObamaCare.  Will HHS consider the unique qualities of HSAs/HDHPs when MLRs are calculated?
  • “Essential benefits” definition:  ObamaCare requires health plans to cover “essential benefits,” which are supposed to follow “typical” employer plans.  These plans usually have rich benefits, such as first-dollar coverage for preventive care.  Despite CBO’s conclusion that preventive care actually increases health care spending without saving money, ObamaCare requires health plans to cover a comprehensive list of preventive services with no cost sharing.  After HSAs were enacted in 2003, the United States Department of Treasury issued regulations, which allow (but not require), HSA/high-deductible health plans to cover certain preventive services.   It is important that HHS define “preventive care” services consistent with the definition used by the Treasury Department for HSA/high-deductible health plans so these plans can remain “HSA-qualified.”  However, requiring HSA/high-deductible health plans to cover all preventive services on a first-dollar basis will force people to send more money to the insurance company and leave less money for their HSA.  
  • “Grandfathering:”  According to several HSA providers, customers with HSAs keep their policies for a longer period of time than old-school insurance plans.  They cite smaller rate increases, free choice of doctors, and overall higher customer satisfaction with HSAs as the reasons for a higher retention rate.  The Obama administration has already admitted that up to 69 percent of people with employer-provided coverage will be forced to drop their current coverage on January 1, 2014, when ObamaCare’s mandates and requirements start.  Will existing HSA plans be grandfathered or will the administration force satisfied customers to cancel their HSA?

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Point-by-Point Rebuttal to Geithner Tax Speech

Posted by Jeremy Weltmer on Wednesday, August 4th, 2010, 6:12 PM PERMALINK

[PDF Version]

Today, Secretary of the Treasury Timothy Geithner delivered a speech at the Center for American Progress, laying out the case for the Obama Administration’s tax hike proposals.   Americans for Tax Reform has released a point-by-point rebuttal, below:

GEITHNER CLAIM #1:  "The debate we now confront is whether to extend tax cuts for the middle class, which are due to expire at the end of the year;  and whether to allow tax cuts for the top two percent of Americans, those with annual household incomes of at least $250,000, to expire, as scheduled."

FACT:  Actually, current law calls for a tax hike on everybody.

President Obama has had 18 months to stop tax increases on working families.  Why hasn't he done it, and why should we believe him when he's already raised taxes on the "middle class" in Obamacare?

GEITHNER CLAIM #2:  "Now some have argued that even if only a few percent of small business owners make over $250,000, these few make up a vast amount of supposedly small business income.  This argument apparently counts anyone who receives any type of partnership or business income as if they were a small business.  By this standard, every partner in a major law firm and every principal in a major financial institution would count as a separate small business. A CEO who has board fees or speech fees would also count as a small business owner under this overly broad definition."

FACT:  There are eight million partners and S-corporation shareholders in America.  Are they all "fake entrepreneurs?"

GEITHNER CLAIM #3:  "We believe the best way to do that is by allowing the tax rate for the top two percent to go back to levels seen at the end of the 1990s, a time of remarkable growth and economic strength."

FACT:  Both current law and the Obama budget call for higher taxes than those seen in the 1990s.

GEITHNER CLAIM #4:  “[Extending tax cuts for the top 2 percent would be among the least effective forms of stimulus]because the top 2 percent are the least likely to spend those tax cuts, certainly not in comparison to the 98 percent of Americans who make less than $250,000 per year.  While they would surely welcome an extended tax cuts, it's not likely to change their spending habits.”

FACT:  In fact, as the New York Times reports, “the top 5 percent in income earners — those households earning $210,000 or more — account for about one-third of consumer outlays, including spending on goods and services, interest payments on consumer debt and cash gifts, according to an analysis of Federal Reserve data by Moody’s Analytics. That means the purchasing decisions of the rich have an outsize effect on economic data”.

GEITHNER CLAIM #5:  "And America is a less equal country today than it was ten years ago, in part because of the tax cuts for the top 2 percent put in place in 2001 and 2003.  The most affluent 400 earners in 2007 – who earned an average of more than $340 million dollars each that year – paid only 17 percent of their income in tax, a lower rate than many middle class families."

FACT:  Actually, the IRS reports that the top 1 and 5 percent of income earners paid a larger share of total income taxes at the end of the decade than at the beginning.  The top 1 percent (those earning more than $400,000) paid 37 percent of all income taxes in 2000, but 40 percent in 2007 (latest data year).  The top 5 percent (those earning more than $160,000) paid 56 percent of all income taxes in 2000, but 61 percent in 2007. 

In other words, the tax code got more progressive over the past decade, not less.  The top income earners in America (which includes a majority of small business profits) are paying a higher share of income taxes than ever before.  The bottom half of earners pay virtually no income tax whatsoever (less than 3 percent of income taxes paid.

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Obama Administration Called Out on Cooking the Books in Obamacare

Posted by Jeremy Weltmer on Monday, August 2nd, 2010, 3:36 PM PERMALINK

Americans for Tax Reform has recieved the following from a Senate staffer who wishes to remain un-named:

The Spectator blog reports on a conference call held this morning by HHS Secretary Sebelius to promote a new report regarding the health law’s impact on Medicare.  Questioned about claims by the Centers for Medicare and Medicaid Services’ chief actuary that the Medicare reductions in the law “cannot be simultaneously used to finance other federal outlays and to extend the [Medicare] trust fund” solvency, Secretary Sebelius replied that

There are two different operating methods of looking at this, and the CMS actuary in the report that you cite differs in his strategic opinion from every accounting methodology that’s used for every other program in the federal budget, that has traditionally used for Medicare.  And he has a different interpretation that is not agreed upon by either the Congressional Budget Office or the OMB or traditionally in Congress.

Unfortunately for the Secretary, however, the Congressional Budget Office has on numerous occasions confirmed that any claims the law will improve Medicare’s solvency revolve around notional double-counting under federal budgetary conventions.  A January CBO letter found that “the majority of the [Medicare] trust fund savings…would be used to pay for other spending and therefore would not enhance the ability of the government to pay for future Medicare benefits.”  And in a March letter, CBO quantified the amount of that double-counting, estimating that, if the law’s Medicare savings were actually set aside to improve the solvency of the Medicare trust fund (as opposed to being used for other spending), the bill would increase the deficit by $260 billion over its first ten years alone.

In other words, the CBO agrees with the CMS actuary that the same money the same money can’t be used twice – once to expand coverage, and a second time to extend the life of the Medicare trust fund.  The Secretary’s statement that “there are two different operating methods of looking at this,” and that CBO disagrees with the Administration’s own actuaries on the impact of this budgetary double-counting, is demonstrably FALSE.

Sadly, this morning’s conference call does not represent the only time the Administration has been accused of presenting misleading information to seniors.  The Secretary’s comments come on the heels of a new TV ad campaign led by Andy Griffith to promote the health care law, which the non-partisan said used “weasel words” and made promises “just as fictional as the town of Mayberry was when Griffith played the local sheriff.”

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Zakaria Misses Both the Facts and the Boat on Taxation

Posted by Jeremy Weltmer on Monday, August 2nd, 2010, 11:16 AM PERMALINK

In a recent Newsweek editorial, Fareed Zakaria betrays the degree to which he has bought in to the class-warfare that U.S. tax policy has become, both through his blatantly untrue statements and his sympathetic tone to sucking as much revenue as possible out of those who contribute the most to the economy.

First, he claims that “the Bush tax cuts remain the single largest cause of America’s structural deficit—that is, the deficit not caused by the collapse in tax revenues when the economy goes into recession,” which belies all the economic data. As Brian Reidl of the Heritage Foundation asserted in theWall Street Journal,

Sen. John Kerry (D., Mass.)…has long blamed the tax cuts for having "taken a $5.6 trillion surplus and turned it into deficits as far as the eye can see." That $5.6 trillion surplus never existed. It was a projection by the Congressional Budget Office (CBO) in January 2001 to cover the next decade. It assumed that late-1990s economic growth and the stock-market bubble (which had already peaked) would continue forever and generate record-high tax revenues. It assumed no recessions, no terrorist attacks, no wars, no natural disasters, and that all discretionary spending would fall to 1930s levels.

The projected $5.6 trillion surplus between 2002 and 2011 will more likely be a $6.1 trillion deficit through September 2011. So what was the cause of this dizzying, $11.7 trillion swing?...CBO's 28 subsequent budget baseline updates since January 2001… reveal that the much-maligned Bush tax cuts, at $1.7 trillion, caused just 14% of the swing from projected surpluses to actual deficits (and that is according to a "static" analysis, excluding any revenues recovered from faster economic growth induced by the cuts).

The bulk of the swing resulted from economic and technical revisions (33%), other new spending (32%), net interest on the debt (12%), the 2009 stimulus (6%) and other tax cuts (3%). Specifically, the tax cuts for those earning more than $250,000 are responsible for just 4% of the swing. If there were no Bush tax cuts, runaway spending and economic factors would have guaranteed more than $4 trillion in deficits over the decade and kept the budget in deficit every year except 2007.

Yet having left the realm of reality, Zakaria then goes on to make sweeping generalizations about what should be done in this economic fantasyland.

He goes on to say that “the impact of marginal shifts in tax rates on growth is pretty unclear,” citing that “Clinton raised taxes in 1992 and ushered in a period of extraordinarily robust growth. Bush cut taxes massively in 2001 and got meager growth in return. Three tax cuts enacted since the financial crisis have done little to spur growth.” From this dubious information, he calls for Congress “to do what it does so well—nothing” and allow the largest tax hike in history across the board.

But, he suffers from crucially flawed information. As Arthur Laffer the renowned economist articulates,

Anyone who is familiar with the historical data available from the IRS knows full well that raising income tax rates on the top 1% of income earners will most likely reduce the direct tax receipts from the now higher taxed income—even without considering the secondary tax revenue effects, all of which will be negative.

When President Kennedy cut the highest income tax rate to 70% from 91%, revenues also rose. Income tax receipts from the top 1% of income earners rose to 1.9% of GDP in 1968 from 1.3% in 1960. Even when Presidents Harding and Coolidge cut tax rates in the 1920s, tax receipts from the rich rose. Between 1921 and 1928 the highest marginal personal income tax rate was lowered to 25% from 73% and tax receipts from the top 1% of income earners went to 1.1% of GDP from 0.6% of GDP.

Or perhaps you'd like to see how the rich paid less in taxes under the bipartisan tax rate increases of Presidents Johnson, Nixon, Ford and Carter? Between 1968 and 1981 the top 1% of income earners reduced their total income tax payments to 1.5% of GDP from 1.9% of GDP.

In speaking about only the tax rate on the top end, Laffer gets at the cripplingly progressive nature of the U.S. tax system, which results in almost half of all Americans facing no tax liability whatsoever while those in the economy who create jobs and spur investment shoulder the burden. As Zakaria admits, “The top 3 percent of Americans,” which includes the majority of small businesses, “contribute almost 50 percent of federal income taxes,” and they will face a massive tax hike at the end of this year.

In his advocacy for higher taxes, Zakaria essentially argues that the best way to help an alcoholic is to guarantee him a steady supply of alcohol to keep things on an even keel, given that the U.S. debt crisis results entirely from overspending. As Reidl states,

The fact is that rapidly increasing spending will cause 100% of rising long-term deficits. Over the past 50 years, tax revenues have deviated little from their 18% of gross domestic product (GDP) average. Despite a temporary recession-induced dip, CBO projects that even if all Bush tax cuts are extended and the AMT is patched, tax revenues will rebound to 18.2% of GDP by 2020—slightly above the historical average. They will continue growing afterwards.

Spending—which has averaged 20.3% of GDP over the past 50 years—won't remain as stable. Using the budget baseline deficit of $13 trillion for the next decade as described above, CBO figures show spending surging to a peacetime record 26.5% of GDP by 2020 and also rising steeply thereafter.

Putting this together, the budget deficit, historically 2.3% of GDP, is projected to leap to 8.3% of GDP by 2020 under current policies. This will result from Washington taxing at 0.2% of GDP above the historical average but spending 6.2% above its historical average.

The facts remain clear—one cannot call for both growth and higher taxes; they are mutually exclusive. If Zakaria wishes so fervently to pay more money to the government, he is welcome to donate to the Treasury here. Those who do advocate “soaking the rich” have no interest in expanding the pie, but in taking one person’s piece and handing it to someone else. The U.S. has not changed in the slightest since Reagan asserted on October 27, 1964 that “we have so many people who can't see a fat man standing beside a thin one without coming to the conclusion the fat man got that way by taking advantage of the thin one.”

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ATR Submits Proposals to the American People through "America Speaking Out"

Posted by Jeremy Weltmer on Thursday, July 29th, 2010, 12:18 PM PERMALINK

On June 30, 2010, Grover G. Norquist testified before the Simpson-Bowles National Commission on Fiscal Responsibility and Reform as President of Americans for Tax Reform. The Commission ostensibly exists to bring fiscal prudence to Washington, but because it refuses to recognize that the U.S. suffers from an over-spending crisis, it will return with new and innovative ways to saddle the American population with a crushing tax burden after the election cycle.

To combat the Commission’s misconceptions, Norquist outlined the reasons why the present fiscal crisis comes from an overspending problem, not from deficits, why tax rates should not be raised, and several ways to cut spending and foster growth. His complete set of proposals can be found here.

ATR has also posted his suggestions to America Speaking Out, a community initiative for ideas and consideration by engaged citizens and legislators, and ATR encourages all to read and interact with the plans offered. All of the proposals have the tag “atr” and can be found here.

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The U.S. Income Tax Is Already Steeply Progressive

Posted by Jeremy Weltmer on Tuesday, July 27th, 2010, 4:54 PM PERMALINK

  • As of 2006, the tax burden of the top 1 percent of taxpayers exceeds the tax burden of the bottom 95 percent combined. Moreover, according to the National Taxpayers Union, households in the top 5% by income have been paying about 60% of the federal income tax bill for years.
  • Income taxes as a portion of a person’s total tax liability is 7.9 times larger for the top 20 percent of taxpayers as opposed to the bottom 20 percent, while payroll taxes as a portion of a person’s total tax liability remains relatively constant across the entire population.
  • Many low-income individuals who owe no taxes because of the standard exemption, the personal exemption, the child credit, and the earned income credit end up making a profit off of filling out a return through “refundable” credits, of which the earned income credit is the most common. Moreover, one can collect these “refunds” whether or not one owes any taxes, which disincentivizes upward mobility.
  • As the New York Times reports, “the Top 5 percent in income earners — those households earning $210,000 or more — account for about one-third of consumer outlays, including spending on goods and services, interest payments on consumer debt and cash gifts, according to an analysis of Federal Reserve data by Moody’s Analytics. That means the purchasing decisions of the rich have an outsize effect on economic data.”
  • In 2009, approximately 47 percent of U.S. households paid no federal income taxes. While 2009 had fewer households owing taxes than other years due to some allegedly temporary tax breaks and a lagging economy, the Tax Foundation reports that close to 40 percent of households owe no federal income taxes in an average year. According to the IRS, 67 percent of Single Head of Household returns in 2005 had no tax liability whatsoever.
  • The proportion of American tax returns that incur no tax liability increased by 59 percent between 1989 and 2007, the latest year for which full analysis is available.

Because so much of the tax burden ends up coming down on the top end, those individuals and small businesses with the most ability to create jobs and spur investment end up devoting much of their capital and effort to sheltering themselves from taxes. Only by recognizing that the top end of the tax scale comprises the engines of economic growth can the U.S begin to incentivize hiring, investment, and upward mobility instead of punishing success.

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Grover Norquist Outlines Recommendations to the Obama Debt Commission

Posted by Jeremy Weltmer on Tuesday, July 27th, 2010, 1:21 PM PERMALINK

On June 30, 2010, Grover G. Norquist testified before the National Commission on Fiscal Responsibility and Reform as the President of Americans for Tax Reform. He outlined both the reasons why the present debt crisis comes from an overspending problem, not from deficits, why tax rates should not be raised, and several ways to cut spending and foster growth.

Below is his testimony with links to ATR’s proposed solutions:

[PDF of Testimony]

Why the Problem Is Not Deficits—It Is Spending

Reasons Not to Raise Taxes

Growth: The Only Way to Raise Tax Revenues Over Time

Ideas to Reduce Spending

  1. Resurrect the Byrd Committee.
  2. Give the public five days to read bills before a floor vote. 
  3. Put every federal transaction and contract online in real time.
  4. Term limit appropriators. 
  5. Sitting Congressmen and Senators should not be able to name buildings or other monuments to themselves, and none should be named for them while they are still living.
  6. Block grant education funding and welfare to the states.
  7. Freeze the salary and benefit levels of federal employees.
  8. Require all eligible federal employees to compete for their job with a private sector bidder.
  9. Only hire one new federal employee for every two that retire from government employment.
  10. Repeal the Davis-Bacon Act.
  11. Reform farm subsidies along the lines of the 1996 “Freedom to Farm” Act.
  12. Leave defense cuts on the table.
  13. Stop using “emergency” spending loopholes to get around budget rules.
  14. Freeze discretionary spending at FY 2008 levels.
  15. Don't Bail Out the Post Office Pension Plan

Ideas to Increase Federal Revenues by Increasing Economic Growth

  1. Increase legal immigration.
  2. Enact worldwide free trade. 
  3. Replace tax “depreciation” with full business expensing. 
  4. Cut marginal tax rates. 
  5. Make all expiring tax cuts permanent.
  6. Move from worldwide to territorial taxation of overseas income.
  7. Congress should stay home.
  8. Don’t import Europe’s labor laws.
  9. Inventory and sell all non-essential government assets.
  10. The Federal Communications Commission (FCC) should halt its misnamed “Net Neutrality” proceeding


Testimony of Grover G. Norquist

President, Americans for Tax Reform

To: The National Commission on Fiscal Responsibility and Reform

June 30, 2010

Chairman Bowles and Chairman Simpson:

Thank you for inviting me to testify today on Americans for Tax Reform’s solutions to the nation’s over-spending crisis.  Americans for Tax Reform is a non-partisan, non-profit taxpayer advocacy organization committed to lower taxes and less government.   We receive no government funding.

The Problem Is Not Deficits—It Is Spending

A “deficit” is merely the difference between total taxes and total spending.  Just focusing on the deficit ignores whether a fiscal crisis is predominately on the tax side or the spending side.  The proper metric is not deficits—it is spending.

100 percent of the fiscal crisis we face is due to an over-spending problem in Washington.  Federal tax revenues have averaged approximately 18 percent of GDP since 1970.  According to the Congressional Budget Office (CBO), tax revenues over the next decade will climb back to this historical average—even if all expiring tax relief is extended, and the AMT is indexed to inflation.  Clearly, taxes are not causing the deficit—spending is.

Since 1970, spending has averaged about 21 percent of GDP (giving a structural budget deficit of 3 percent of GDP).  According to CBO, federal spending will exceed this level for the entire decade, averaging 23 percent of GDP. 

Don’t Raise Taxes

President Obama famously said that: “No family making less than $250,000 per year will see any form of tax increase.”  That has not been the result thus far, as documented on ATR’s “Obama Tax Hike Exemption Card.”  He has also said that this commission should leave all options on the table.  I am urging you today to remove any further tax hikes on these families from your considerations.

To date, 173 Congressman and 33 senators have taken ATR’s “Taxpayer Protection Pledge,” which obliges them to rule out any income tax increase. This pledge is a necessary, but not sufficient, condition for reducing government spending.  Only when tax hikes are convincingly and permanently taken off the table will politicians in Washington, DC and state capitals begin to limit spending.

I would also urge you to reject a value-added tax (VAT), a proposal which has been floated by prominent Obama Administration officials and allies.  The average VAT rate in Europe grew from 5 percent in 1970 to 20 percent today, in concert with higher taxes on income, profits, and businesses.  “VAT” is French for “big government.”

One bad idea that the Commission should reject is a “public option” for tax preparation (where the IRS would compete with private sector tax preparers or even send completed returns to taxpayers).   Not surprisingly, there's only one reason liberal politicians and policy wonks want to see this--tax revenue goes up.  They'll tell you it's because everybody (including tax preparers) cheats.  The reality is that a Bigfoot-sized government tax preparer would be just too intimidating to take on.  It should be up to the IRS to challenge the assertion of the taxpayer, not the other way around.  To socialize tax preparation (which would be the effect of this policy, much as a public option in health care would have destroyed private insurance over time) would reverse the dynamics of how our entire tax system works.

Spending Restraint: Stop Spending So Much Money

The solution to this over-spending problem is spending restraint and stronger economic growth.  The best way to measure the impact of spending (and the compliance costs of regulations) is found in a study my organization conducts known as “Cost of Government Day” (COGD).  This measures how long Americans have to work before they have paid for the total cost of government—spending and regulations. 

Since Democrats took control of Congress in 2006, COGD has moved forward from July 10th to August 11th.  During the Reagan Administration, by contrast, it fell from July 20th in 1982 to July 2nd in 1988.

Given the dual nature of the present overspending problem, leaders must pursue both long and short term solutions. Long-term spending restraint is best achieved by reforming the long-term entitlement programs and enacting meaningful budget constraints as found in Congressman Paul Ryan’s (R-Wis.) “American Roadmap” plan.

In the shorter run, the RSC balanced budget plan is notable for not raising taxes or letting tax relief expire and returning discretionary spending to the FY 2008 approved level (that is, pre-bailouts).  

It should be noted that spending restraint was conspicuously absent from the last two “bipartisan budget deals”:

  • In 1982, President Reagan and Congressional Democrats agreed on a plan that promised to cut $3 in spending for every $1 in tax hikes.  All the tax hikes went through.  Spending, though, grew from $808 billion in 1983 to $1.06 trillion in 1988.  This is more than 2 percentage points above the inflation rate.
  • In 1990, President Bush and Congressional Democrats agreed on a plan that promised to cut $2 in spending for every $1 in tax hikes.  All the tax hikes went through (including a hike in the top income tax rate).  Spending, though, grew from $1.25 trillion in 1990 to $1.52 trillion in 1995.  This is also faster than the growth of inflation.

There is a long list of states and countries where a “tax hike solution” has been tried and has failed: Greece, Portugal, Italy, Venezuela, Argentina, Zimbabwe, Japan in the 1990s, California (under both Gray Davis and Arnold Schwarzenegger), New York, New Jersey—the list goes on and on.

Economic Growth: The Only Way to Raise Tax Revenues Over Time

Long-term economic growth is the only way to raise tax revenue over time.

CBO projects that every 0.1 percentage point increase in real economic growth over the next decade would increase federal tax revenues by $247 billion.  Therefore, 1 percentage point of higher growth should increase tax revenues by $2.5 trillion over the same decade.  This is $2.5 trillion of higher tax revenue from growth, not higher taxes. Moreover, these numbers come from the outdated static tax scoring methods used by the CBO rather than dynamic scoring, which better predicts the benefits of tax rate cuts.

How realistic is a pro-growth “boost” of this level?  Some examples to cite which bring this home are relatively-recent reductions in tax rates.  Over the past half-century, real economic growth has averaged 3 percent annually.  Yet:

  • In 1978, the capital gains tax rate was cut from 39 to 28 percent.  Over the next two years, real economic growth averaged 4.4 percent
  • When President Reagan’s reduction in the top rate from 70 to 50 percent and his reduction in the capital gains rate from 28 to 20 percent was fully phased-in by 1983, economic growth averaged 5.3 percent over the next three years.  The Dow Jones Industrial Average more than doubled from 1983 to 1987.
  • When President Clinton and the Republican Congress cut the capital gains tax from 28 to 20 percent in 1997, economic growth averaged 4.6 percent over the next three years.  The Dow grew by more than 50 percent from the time of the tax cut to the year 2000.
  • When the capital gains and dividends tax rate was cut from 20 percent (38.6 percent in the case of dividends) to 15 percent in 2003, economic growth averaged 3.1 percent from 2004-2007 (after a sluggish 1.8 percent average in the three years prior).  The Dow grew by approximately 75 percent over this era.

Take decisive action to pursue long-term growth. Uncertainty about future government actions when there is a consensus that government action may lead to a less desirable economic climate cripples growth and speculation. To prevent this slowdown, lawmakers must plot a long-term solution that lends itself to growth rather than working piecemeal year-by-year.

Ideas to Reduce Spending

  1. Resurrect the “Byrd Committee.”  One good idea for spending restraint is to restore a committee that once existed, the Joint Committee on Reduction of Nonessential Federal Expenditures (known in the post-War years as the “Byrd Committee”).  First proposed in 1941, the committee was a bipartisan, joint committee with subpoena powers that focused only on making rescissions in federal spending. Its proposals enacted over $38 billion (in 2010 dollars) in savings. The fatal flaw in many other “fiscal commissions” is this lack of narrow focus – only when tax hikes are taken off the table are meaningful spending cuts made. Any recommendations from a committee modeled on the Byrd Committee should be privileged and require an up-or-down vote on the floor. To give an idea of the sort of spending that this committee might curb, the federal government made at least $98 billion in improper payments in 2009, Medicare spends $47 billion (12.4 percent of its budget) annually improperly or fraudulently, and Congress recently spent $2.4 billion on 10 new jets that the Pentagon claims it does not need and will not use. With regards to duplicate programs, the Government Accountability Office reports hundreds of wastefully duplicated programs in areas as wide ranging as economic development, serving the disabled, helping at-risk youth, early childhood development, funding international education, and providing safe water. Indeed, according to the Bush administration OMB's PART program reviews, 22 percent of all federal programs, costing a total of $123 billion per year, fail to show any positive impact on their target populations.
  2. Give the public five days to read bills before a floor vote.  Congress should enact a five-day waiting period before passing any new or amended legislation.  This “cooling-off” time might have prevented $350 billion in President Bush’s TARP, $350 billion in President Obama’s TARP, over $500 billion in the so-called “stimulus” bill, $183 billion more in discretionary spending in FY 2010, and $794 billion in healthcare “reform.”
  3. Put every federal transaction and contract online in real time.  Every federal transaction, contract, and grant should be available online in real time.   A spending transparency portal is an important tool that can be used to cut waste, locate inefficiencies and empower the people whose money is being spent, the taxpayers,  as fiscal watchdogs.  This was debuted successfully by Governor Rick Perry of Texas.  Missouri, Kansas, and Oklahoma also have good transparency initiatives.
  4. Term limit appropriators.  Those serving on the Appropriations Committee should be limited to no more than six (6) years on that committee, as is already the case with members of the Budget Committee.
  5. Sitting Congressmen and Senators should not be able to name buildings or other monuments to themselves, and none should be named for them while they are still living.  This encourages Congressmen and Senators to direct pork/earmark projects with more energy, and other Members feel peer pressure to support the projects (with an eye toward their eventual “legacy” vote later on).
  6. Block grant education funding and welfare to the states.  All remaining welfare programs—Medicaid, food stamps, etc.—should be block-granted to the states, the same way that AFDC was in 1996.  The cost growth of the block grant should be something less than current law’s cost trajectory. Likewise, the block granting of education funding allows for each state to pursue its own solution and experiment, much as Canadian provinces did when education was federalized. As the Cato Institute has reported, this experimentation led to innovation, including school vouchers and charter schools, and Canadian students generally outperform their U.S. peers in reading, math, and science.
  7. Freeze the salary and benefit levels of federal employees.  Scholars at the American Enterprise Institute and the Heritage Foundation have estimated that federal employees earn $14,000 more than their private sector counterparts in salary and benefits (even when controlling for factors such as education level, age, etc.).  The pay and benefits disparity is 30 to 40 percent.  In the aggregate, bringing federal employee compensation in line with the private sector would save $47 billion per year.  Government salary and benefits should be frozen until the private sector has a chance to catch up.  The new government in the United Kingdom recently announced a two year pay freeze for the highest-earning 72 percent of government employees.  Moreover, taxpayers presently match federal employees’ pension contributions 14 to 1 as reported by Third Way, exemplifying the massive chasm between public sector and private sector benefit packages. To make matters worse, government employees owe over $3 billion in unpaid taxes from 2008.
  8. Require all eligible federal employees to compete for their job with a private sector bidder.  According to the Office of Management and Budget, some 850,000 federal employees (one-third of all federal employees) have jobs that are commercial in nature, and could be performed by a private contractor.  The Heritage Foundation estimates that the mere act of competing all these jobs would save taxpayers $27 billion annually.  The act of competing forces government employees to become more lean and efficient, so even a low success rate by contractors has big savings for taxpayers. To make maters worse, the present lack of competition actively hurts small businesses as well; every White House Conference on Small Business has identified unfair government competition as one of the leading concerns for small business owners. Moreover, as reported by the Business Coalition for Fair Competition, Congress and the White House continue to enact policies that exacerbate this crowding-out of commercial activities by government.
  9. Only hire one new federal employee for every two that retire from government employment.  Over time, the federal workforce can be reduced simply by not filling half the job slots which come up because of retirement.  The positions not filled can be consolidated or privatized.  According to our research, the career savings for each federal slot not filled would range from just under $5 million (low-cost employees) to just under $14 million (high-cost employees), with an average savings of $7 million per employee.  If attrition was used to shed just 10 percent of the current federal workforce, it would save taxpayers nearly $2 trillion over the next forty years.
  10. Repeal the Davis-Bacon Act.  Other policies that inflate spending include the Davis-Bacon Act, a Depression-era wage subsidy law that artificially inflates the cost of federal construction contracts by mandating workers are paid no less than local prevailing wages. However, there is a high frequency of errors in data the Wage and Hour Division (WHD) of the Department of Labor (DOL) uses to calculate rates; the survey WHD conducts is self-reported and therefore the results could be biased; a wide gap in time between surveys, long times needed to complete and publish surveys – consequently wage determinations are outdated. The Beacon Hill Institute found that, on average, the WHD inflates wages by 22 percent, increases construction costs by 9.91 percent and raised construction costs by $9 billion in 2009. Repealing the Act could save $9.5 billion over 2002-2011 and decrease mandatory spending by $255 million in the same period. By enacting this cost savings, government could do more with less in terms of infrastructure construction and maitenance.
  11. Reform farm subsidies along the lines of the 1996 “Freedom to Farm” Act. Farm subsidies distort the market by inducing farmers to overproduce, which further perpetuates the cycle of taxpayers subsidizing the small, well-off group of farm owners. According to the Cato Institute, the largest 10 percent of recipients receive almost 72 percent of all farm subsidy outlays. Moreover, this wasteful injection of government into the economy distorts international trade and reduces competition. When New Zealand, an economy significantly based on agriculture, boldly repealed its farm subsidies in 1984, it met initial resistance, but farm output, productivity, and profitability have soared since.
  12. Leave defense cuts on the table.As with all other federal departments, the Department of Defense contains waste. Likewise, US military spending in constant dollars presently exceeds Cold War levels, and there remains room to pare the budget, especially since a Government Accountability Office audit of 95 Pentagon weapons systems showed combined cost overruns of $295 billion.
  13. Stop using “emergency” spending loopholes to get around budget rules.  A recent paper by Veronique de Rugy of the Mercatus Center demonstrates the various ways in which lawmakers hide spending, the most pernicious and expensive being labeling spending as “emergency,” and therefore spending off-budget or avoiding budgetary rules.

    Both parties have used this technique to spend abusively. President Bush used it for most of the war supplemental in Iraq and Afghanistan, and Congressional Research Service data obtained by the office of Senator Tom Coburn (R-Okla.) finds that emergency spending has increased deficits by almost $1 trillion since the 111th Congress was seated in January 2009 as reported by the Cato Institute.

    In determining what constitutes emergency spending, Keith Hennessey, a former economic advisor to George W. Bush, offers a pragmatic political definition: “it’s whatever you can get away with labeling as an emergency.”

    However, the Office of Management and Budget created a test with a fairly high bar by in 1991. According to Hennessey, all five of these conditions had to be met:

    1. Necessary; (essential or vital, not merely useful or beneficial)
    2. Sudden; (coming into being quickly, not building up over time)
    3. Urgent; (requiring immediate action)
    4. Unforeseen; and
    5. Not permanent.

    To restore fiscal responsibility and accountability, Congress needs to adhere to this standard, both to reduce spending and to account for spending that exists better.

  14. Freeze discretionary spending at FY 2008 levels. Freezing federal spending at the FY 2008 amounts would return the federal government to pre-bailout and “stimulus” spending levels. Such a spending reduction would bring the budget into balance by 2013 and cut the national debt nearly in half by 2010, even assuming that Congress extends the 2001 and 2003 tax cuts and indexes the Alternative Minimum Tax for inflation. In contrast to the President’s current promise to “freeze” spending at FY 2011 levels, this would ensure the recent spending bonanza is not enshrined in the nation’s fiscal outlook in perpetuity.
  15. Don't Bail Out the Post Office Pension Plan.  The Postal Service's Office of Inspector General claims that the USPS has paid more than $75 billion into the pension fund that should have instead been paid for by taxpayers.  As such, USPS defenders are calling for a $75 billion taxpayer-funded bailout of the postal employee pension plan.  This would then free up USPS resources for a further bailout of the healthcare plan.  An easy "no" for Congress should be a retroactive bailout of the USPS pension.  If the USPS wants to make their pension more sustainable, they should shift toward a defined contribution system like the Thrift Savings Plan.

Ideas to Increase Federal Revenues by Increasing Economic Growth

  1. Increase legal immigration.  Legal immigration needs to be higher in order to provide the economy with enough labor as the Baby Boomers retire.  High-skilled visas, for example, should rise from too few today to 1 million.
  2. Enact worldwide free trade.  Free trade is an important component to long-run economic growth.  Tariffs are taxes on international commerce.  To enact free trade is to cut taxes on that commerce.  More trade globally means more prosperity for everyone—consumers and producers.  The “Doha Round” should be passed.  End Big Labor’s chokehold on our trade policy by ratifying all outstanding free trade agreements (Panama, Columbia, South Korea, etc.)
  3. Replace tax “depreciation” with full business expensing.  Businesses should be allowed to immediately-expense all capital purchases, rather than have to subject them to “depreciation” deductions.  This would spur productivity and help ratchet up economic growth.
  4. Cut marginal tax rates.  It is vital to economic growth to cut marginal tax rates on individuals and businesses.  In particular, the corporate income tax (the highest in the developed world at 35 percent) should be no higher than Europe’s 25 percent average.  The capital gains and dividends tax should be eliminated.  The top individual marginal income tax rate (where two-thirds of small business profit taxes are paid) should be reduced from 43.4 percent (after next year’s expiration of the 2001 tax relief and

    Obamacare’s new 3.8 percent Medicare tax) to 25 percent.  This will ensure that the economy will grow faster –and CBO has said that faster economic growth of even one percentage point would lead to $2.5 trillion in new tax revenue.

    Lower marginal rates work.  They worked in the 1920s when President Coolidge cut rates until President Hoover raised taxes and helped create the Great Depression.  They worked in the 1960s when President Kennedy cut rates until Presidents Johnson and Nixon raised taxes to pay for Vietnam abroad and spending at home.  They worked in the 1980s when President Reagan cut rates until President George H.W. Bush raised taxes and ended the Reagan boom.  They worked in the 2000s when a GOP Congress cut rates in 2001 and 2003 on individuals, businesses, capital gains and dividends until the Democrats took over Congress in 2007 under the promise to let them go up.
  5. Make all expiring tax cuts permanent.Given the positive effects of lower tax rates on growth, economic efficiency, and tax revenues, tax cuts should not be set to sunset when crafting legislative proposals, and those that are scheduled to expire should be made permanent.
  6. Move from worldwide to territorial taxation of overseas income.  The United States is one of the last countries to tax its citizens and businesses on a “worldwide” basis.  This opens up U.S. taxpayers to potential double taxation on overseas earnings.  This has led to a complex system of deferrals, deductions, and credits to mitigate this reality.  Congress should conform our tax regime to the way the rest of the world taxes international-source income: we should only tax that income earned in the territory of the United States.  Back in 2005, Congress allowed companies to repatriate overseas income with very minor double taxation effects for one year.  The result was the repatriation of $318 billion of deferred overseas earnings, resulting in a windfall in corporate taxes of $18 billion.  Another round of low-tax or even tax-free repatriation would be a good idea for both economic growth and increasing tax revenue without raising taxes.
  7. Congress should stay home.  Another simple way to give markets confidence is for Congress to simply not be in session.  According to the “Congressional Effect Fund” (a mutual fund which invests in the broad stock market when Congress is out of session, and divests when it meets), the stock market averaged annual growth of 0.94% on the days when Congress was in session from 1965 through 2009.  On days when Congress is out of session, however, average annual growth was 16.04%.   
  8. Don’t import Europe’s labor laws.  It doesn’t help prospects for fiscal restraint or economic growth when Congress tries to import Europe’s labor laws.  Senator Judd Gregg (R-N.H.) has introduced S. 1611, the “Public Safety Employer-Employee Cooperation Act of 2009,” which gives collective bargaining rights to “first responder” employees.  This drives up the cost to taxpayers at the state and local level, empowers unions to lobby for tax dollars and unsustainable pensions, and generally contributes to higher spending at all levels.
  9. Inventory and sell all non-essential government assets.  The federal government owns approximately 650 million acres of land, almost one-third of the area of the US, yet it has no current, accurate inventory of its real property according to the Business Coalition for Fair Competition. Moreover, the Bureau of Land Management has identified approximately 3.3 million acres of land deemed suitable for sale to non-federal entities, yet it has not sold that land. By the estimates of the Heritage Foundation, Washington spends $25 billion annually maintaining unused or vacant federal properties. Unless there is a direct national security or other compelling reason to retain these assets, they should be inventoried and sold.  This would provide a one-time boost to government revenue without raising taxes.  In addition, the privatized assets should help increase profits for their purchasers, who will in turn pay higher taxes on these profits.
  10. The Federal Communications Commission (FCC) should halt its misnamed “Net Neutrality” proceeding to regulate broadband Internet under Title II of the Communications Act of 1934.  As information technology and telecom investments account for a massive 47.3 percent of all non-structure capital investments in the United States, studies have found that the FCC’s proposed regulations could decrease GDP by between $62 and $80 billion over the next five years.  This could eliminate as many as 500,000 to 700,000 jobs.  It could also raise the price of consumer bills by as much as $55 per month, shrinking demand and curtailing additional broadband expansion and adoption.  This will needlessly result in lower tax revenue.

Long-term spending reforms and short-term spending discipline working in concert with pro-growth economic policy is the only recipe for prosperity and responsible government.

Finally, this commission should release its findings no later than thirty (30) days prior to the election this fall so that candidates running for office can declare whether they support lower taxes and less spending (as the American people do), or whether they support higher taxes and bigger government (as the Washington spenders do).

Thank you for allowing me to testify today.

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Japanese Voters Reject VAT Hike

Posted by Jeremy Weltmer on Monday, July 26th, 2010, 1:41 PM PERMALINK

In Japan’s recent parliamentary election, the ruling Democratic Party of Japan lost seats to the party that they replaced last election as voters took a decisive stand against the high-tax proposals advanced by the Prime Minister. He had proposed a significant tax hike to the national VAT, and his party received a sharp rebuke for it.

As the Wall Street Journal reported, “Mr. Kan made his party's prospects tougher with an unpopular pre-election pledge to boost the [Japanese VAT] to rein in the country's outsize borrowing, thinking that Japan's voters would understand the severity of its fiscal conditions and appreciate his honesty.”

Yet just as one can expect of the struggling Democratic Party here in the U.S., he refused to lay the blame on failed and unpopular policy. “The prime minister admitted after Sunday's election that the strategy didn't work. ‘My discussion on the consumption tax was received by the voters as rather abrupt,’ a sober-faced Mr. Kan said at his news conference. ‘I, myself, feel that a big reason [for the defeat] was I didn't explain it well enough.’”

It seems that Messers. Kan and Obama have something in common: an inability to consider that voters do not look favorably on lawmakers’ desires to increase tax rates, or in Mr. Obama’s case, impose a national VAT. While the implementation of the Japanese subtraction-method VAT differs substantially from the European-style VAT suggested by Obama’s advisors and officially still on the table in spite of its crippling effects, both leaders seem incapable of conceiving of a government constrained in what it can extract from the economy. One can only hope that the significance of the public’s will as expressed in elections will eventually sink in for the sake of those voters who gave these men their jobs.

For more information on the perils of a VAT in the U.S., examineATR’s Anti-VAT Toolkit.

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Lead Democrats Speak Out Against Obama Tax Hikes

Posted by Jeremy Weltmer on Thursday, July 22nd, 2010, 2:49 PM PERMALINK

Sen. Kent Conrad (D-N.D.), in an interview with Dow Jones Newswires, asserted that Democrats should cancel plans the largest tax hike in history at the end of the year. At this point, income tax rates are scheduled to increase for all Americans, dividend tax rates are scheduled to increase to the tax levels of general income (a move that will devastate the nation’s retirees), capital gains tax rates are set to rise, and the death tax will return at its absurd level of 55 percent (which breaks up family businesses and costs American jobs).

Conrad cited chronic unemployment and turmoil in European debt markets as reasons to remain circumspect about the tax increases. “As a general rule, you don't want to be cutting spending or raising taxes in the midst of a downturn,” Conrad said. “At the same time, we know that very soon we've got to pivot and focus on the deficit," he said. "But it probably is too soon to cut spending or raise taxes.”

In speaking out on behalf of the American taxpayer, Conrad represents the most senior Democrat to call for extension of the present tax rates as he serves as the Chairman of the Senate Budget Committee and sits on the tax-writing Finance Committee. By doing so, he stands in contrast to President Barack Obama, Senator Reid, and Speaker Pelosi, all of whom have asserted their desires to extend the rates to middle class families while soaking the rich. He has been joined in doing so in the Senate by Sen. Ben Nelson of Nebraska, who supports extending the tax rates now to preserve economic stability and recovery. Moreover, House Democrats like Rep. Michael McMahon of New York, who said that “we're not creating jobs, and raising taxes now would not be a great idea,” and Rep. Gerry Connolly of Virginia, who said that “I think the recovery is sufficiently fragile that we ought to leave tax rates where they are,” indicate a trend of Democrats seeing the prudence of not raising taxes now.

Yet the proclaimed aspirations of the Democratic leadership leave something to be desired in comparison with those protesting this tax hike, given that Obama has already broken his pledge not to raise taxes on families making less than $250,000 and given that Reid and Pelosi have had a Democratic Congress since 2008 and have done nothing to prevent the tax hike except extend non-binding promises. Perhaps Conrad’s decision to act prudently along with Nelson and half a dozen House Democrats may send a message to his superiors that they have become alienated from both good policy and public sentiment.

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