The tax reform plans of the two Democratic candidates for President say a lot about our outdated federal tax system. It was designed for the industrial economy, early 20th century. Both candidates promise reform, but their plans just diddle around the edges. Neither of them addresses some major reasons the federal tax system imposes far more pain than necessary on 99% of Americans and one’s so enormously expensive that just one part of it would require sweeping changes across the medical and insurance industries, and make no mistake, they are needed, but making those changes given today’s hyper-partisanship, isn’t as conducive as they would be following a Great Depression or World War when Congress is more amenable to sweeping change.
Aside from the enormous difference in approaches, the Democratic candidates cling to the existing system, which was adopted in four stages between 1909 and 1924 – an era of big American factories churning out pollution producing raw materials like coal and steel.
To be fair, since Donald Trump doesn’t know the difference between macroeconomics (governmental) and microeconomics (business or individuals), anything he proposes is worthless. He actually suggested that he would seek to “settle” our government debts like a business going broke; that kid of ignorance that Mr. Trump would inflict upon U.S. and global economies, would eliminate scores of advantages like the significant income the U.S. makes by being the world’s reserve currency. But the Democratic candidate’s plans would also add sand to the gears of our obsolete economics rather than adapt to the digital era and our knowledge economy.
Take federal tax projections for collections (2016) $3.6 trillion; that’s a half trillion less than the $4.1 trillion the Republican-led Congress has already appropriated to spend. This 2016 deficit automatically increases the debt; one they still blame on Obama, despite Republicans’ majority in both houses of Congress.
Additionally, individual income tax will raise about $1.8 trillion while corporate income tax will account for only about $419 billion. Payroll taxes for Social Security and Medicare, plus unemployment, tariffs and some small safety net programs will generate about $1.1 trillion more.
Regarding the U.S. debt, now approximately $19 trillion, headlines and Trump’s uninformed masses focus on the amount the U.S. owes China. But few know that the Social Security Trust Fund, (your retirement money), owns more of the national debt than anyone. The U.S. Treasury, which manages the U.S. debt, splits it into two broad categories: Intragovernmental Holdings,($5.329 trillion), and Debt Held by the Public ($13.751 trillion).
What neither candidate, nor most Americans, realize is that nearly 30% of the Federal debt, including proportional interest, is owed to 230 other Federal agencies, most of that to the Social Security Trust Fund. George W. Bush’s unnecessary wars stand as the only wars in U.S. history which weren’t funded by dedicated T-Bonds. The over $2 trillion cost was borrowed from Social Security to specifically hide the cost from the public.
Other SS Trust Fund debtors: Office of Personnel Management, the Military Retirement Fund, Medicare, other public retirement funds, (i.e., lifetime pensions and benefits for legislators) etc. Another 50% is held by non-federal U.S. public entities. And there is no circumstance that would have all that debt come due at one time; this principle that drives at the core of microeconomics (business should be able to pay off its debts if liquidated).
Macroeconomic principles is completely different because countries don’t ever liquidate. They also loan other branches cash, control currency, the U.S. sells dollars to foreign countries who do not have their own currency as the current world reserve currency, and issues bonds or sells treasuries when there are requests for T-Bond or T-Bill purchases.
The Federal Reserve has no authority to “print money” unless there is a request from a bank, an investor country, or broker through the Treasury Department. A strict domestic “inventory” of dollars is maintained and actual new bills are printed by the Treasury Department as worn out/disfigured dollars are destroyed. This inventory is how the U.S. Treasury discovered that the Department of Defense literally misplaced $2 billion in cash in Iraq, which has never been found.
The details below show who owns U.S. T-Bills, T-Bonds, etc. All have specific and an enormous range of due dates. Any early calls lose the interest accumulated unless stipulated otherwise. All amounts are as of April 15th, 2016:
- Foreign investors – $6.2 trillion (all in T-Bonds and Treasury Bills as a safe haven)
- Federal Reserve – $2.461 trillion (loaned to banks)
- Mutual Funds – $1.056 trillion
- State and Local Government, including their pension funds – $1.2 trillion
- Private Pension Funds – $1.4 trillion
- Non-FDIC Banks – $515 billion
- Insurance Companies – $793 billion
- U.S. Savings Bonds – $174 billion
- Other investors – $1.198 trillion
- Debt to other U.S. government entities (mostly DOD) $2.4 trillion
- Various interest on the above- $1.6 trillion
Fundamental reform, however, recognizes the realities of the 21st-century economy and is still increasingly urgent. Most wealth is no longer held in property and physical assets as they were 30 years ago, but in the patents, formulas, computer programs, applications, contracts and other digitized instruments, under the auspices of broadly categorized intellectual property.
Physical property, is taxed locally, (state, city, etc.) but intellectual property is digitized and can be held anywhere, including that most untaxed place of all–NoWhere Land where it’s untaxed completely (i.e., the Panama Papers). Again, given that Mr. Trump demonstrates ignorance of the differences between debt the U.S. posses, and business debt, I’ll only address the Democratic candidates’ plans, and what I feel they are missing.
Bernie Sanders plan, the Tax Policy Center (TPC) estimates, would increase federal revenues over the next 10 years by $15.3 trillion. He would do it through higher payroll taxes, which make workers more expensive to employers, and through a carbon tax. The payoff would be in how it is spent; on making education a priority, less interventionism, etc.
However, the TPC has analyzed twenty+ computer models, and Mr. Sanders’ “Medicare for all” proposal, and even with the tax increases, unless medical costs are somehow drastically reduced, the shortfall would be $17 trillion over ten years. Assuming favorable court challenges if the laws were even passed, inherent with changing the pricing structure of the entire medical industry, a conservative estimate of the shortfall between funding and cost is $17 trillion and would be vehemently challenged for decades. With the plan’s current lack of detail, it’s impossible for me to see how it could be implemented barring a national, catastrophic event.
Sanders would also limit itemized deductions to 30.2% of income and impose a tax rate of 52% on incomes above $250,000 annually, roughly the top 3%.
Medicare for all would absolutely have potentially enormous benefits to the public by lifting the burden of healthcare on small employers and eliminating barriers to job mobility while presumably lowering costs overall, but quantifying those will not make up for the enormous shortfall which must be addressed.
Hillary Clinton favors a minimum 30% tax rate on incomes about $1 million, plus a 4% surtax on incomes above $5 million. Clinton would add more tax credits to cover such items as out-of-pocket healthcare costs and taking care of elderly parents. Clinton would also would double the time that assets must be held to two years before they qualify for the low tax on Capital Gains and would curtail the methods by which multinational companies earn profits in the United States, but legally report them as tax-deductible expenses –expenses paid to their offshore subsidiaries.
The net effect of the Clinton proposals would be relatively modest. The TPC, estimates the Clinton plan would raise an additional $1.1 trillion of federal revenue over the next decade, or the equivalent of eliminating the budget deficits for the first two years.
What the plans omit: What neither plan would do is address the gaping loopholes by which the wealthiest Americans reduce their tax bills. The heart of which is “deferral of income”, which turns the immediate liability of their income tax into a zero interest loan on the deferred income that the top 1% enjoys, financed by those who pay yearly on salaries, wages and self-employment. Tax complexity to some degree is unfortunately necessary, but skewing the laws so that only the wealthy can take advantage of deferring income is patently biased.
Social Security and Medicare taxes are also skewed in favor of the wealthy because wages are only fully taxed up to $118,500 gross (for 2016). Everything over that is exempt. The ceiling should be removed entirely with not only all wages being subject to both SS and Medicare for the employee portion, but all sources of income should be subject to SS and Medicare at the same rate as wages.
Although not directly tax related, another egregious omission by the candidates is yet another GOP attempt to steal taxpayer money. The GOP has blatantly tried to destroy the U.S. Post office, which could serve yet another vital service to the poor and middle class working Americans as a low cost alternative to payday lenders.
I am especially disappointed by Sanders’ omission to include as part of his platform. The Postal Service should have authority to make what’s known as “payday” loans, but at non-usurious interest rates. Predatory lenders typically charge annual APR rates of 400% for two weeks; or $10-$30 for every $100 borrowed.
Senator Liz Warren has proposed a similar provision to the one I first suggested in March, 2014. The Post Office, which already sells money orders, could put these predatory companies out of business overnight by making the same loans for a small fraction of the fee while helping the non-profit Post Office with expenses.
One last gigantic omission: There should be no borrowing from the SS/Medicare Trust Fund that is specifically for Americans’ retirement safety net, funded by U.S. citizens and employers on each employee’s behalf. Even then there should be a six month limit of time for using the funds which then must be returned to the Social Security Trust Fund.
If Congress and the Treasury to offer War Bonds to fund a war effort, which is how every war, including the Revolutionary War, were financed except George W. Bush’s Afghanistan and Iraq wars, then so be it.
Unfortunately, we have a large swath of the population that feels it has become experts in financial policies for which they have only a 140-character knowledge basis. Add a Congress that seeks only to extend their respective comfy positions that are exempt from many of the laws they pass for the general public and the result is this idiotic mess that we have for this election cycle.
The U.S. economy is the mother lode of macroeconomics in which any single policy change will have massive effects on countless citizens, our national viability, and other nations. A government cannot, by definition, be run like a business. I will never believe that Republicans care about fairness, equality or their constituency’s wellbeing, much government’s role in keeping these above their self-interest. But I do expect Democrats and the politicians they elect to have detailed implementation plans, not just big ideas, before they make promises that aren’t mathematically feasible.
Harvey A. Gold