Sunday, August 13, 2017

US Tax Reform for Jobs 2018 Sent to Senate Finance Committee

On August 11, 2017 Letter sent to: The White House, Secretary of the Treasury, US House Ways and Means Committee, Senator Durbin, US Senate Finance Committee, all Senators on the Finance Committee, and Congressman LaHood.

Healthcare and Tax Reform need to be passed as a comprehensive legislative package. We need to create a tax system that will create jobs in the United States that will build value added wealth in the United States. It is imperative that we grant tax incentives to US businesses that create decent paying jobs along with healthcare to its US employees which will grow the US economy and fix problems with the Affordable Care Act (ACA). The idea that lowering taxes will stimulate the economy and create decent paying jobs in the US is a ridiculous notion. Businesses will still seek out cheaper sources of labor along with a lower tax liability. The government should only reward US businesses with a large tax cut for those entities that actually create a livable wage for its US employees. Our US businesses are at a competitive cost disadvantage with foreign firms that do not pay healthcare cost on their foreign employees. We solve this problem by providing a healthcare subsidy to US businesses that pay a livable wage to its US workers from revenues collected from a US Value Added Tax (VAT) system.

First, we should implement a 20% Value Added Tax (VAT) on goods and services consumed in the US. The US Government will provide a subsidy for employee health insurance from VAT revenues to US businesses that create decent paying compensation packages to its US workers. Compensation package would include wages and employee benefits including health insurance. The US Government will provide a 15% subsidy on each employee compensation package starting at $35,000 and cap it at $70,000 for all employers (for-profit and not-for-profit entities including state and local governments). If a US worker is being paid a livable wage from their US employer and since the employee is a consumer paying VAT, the employee’s employer will receive a healthcare subsidy to purchase health insurance for such employee. This way the US Government can avoid accusations from the World Trade Organization (WTO) of this being an illegal subsidy to US businesses. US firms are paying health insurance on US employees which is an added cost that puts US firms at a competitive disadvantage with foreign firms that do not pay healthcare cost on their foreign employees. Allowing businesses to purchase health insurance on a large scale with the government subsidy in a competitive market system will allow for lower health insurance premiums and better healthcare coverage for employees. The system under the ACA is not an efficient or cost effective way for individuals to receive healthcare coverage. The goal of this overall legislative agenda of "Healthcare and Tax Reform" is to reduce the number of individuals receiving Medicaid under the ACA and solve the problem of the government mandate on US businesses (the healthcare subsidy to US businesses from US VAT revenues solves that problem).

Why don’t we go to a Universal Healthcare System as they have in some European countries? The problem with such a system is that government control creates healthcare inefficiencies. A free market system that fosters competition is the best route to go. Allowing businesses to purchase health insurance on a large scale with the government subsidy in a competitive market system will allow for lower health insurance premiums and better quality of healthcare coverage for employees.

For business Tax Reform we need to go to a Modified Territorial Taxation System. The top tax rate for individuals should be at 35%. So business entities (S-Corps, LLCs, and Partnerships) that flow through to individuals may be taxed at a 35% tax rate. Subchapter C Corporations (C-Corps: entities which income/loss does not flow through) will be taxed at a top rate of 20%. This will force businesses to convert to C-Corp status which will help simplify the tax system (administration of such system) by eliminating many flow-through entities. Many tax shelters and tax gaming strategies are done under flow-through entities and we should not promote the existence of such entities with lower tax rates.


Businesses will receive a phantom tax deduction (Compensation Bonus Deduction "CBD") of 20% on employee compensation package starting at $35,000 and cap it at $70,000 for a C-Corp and 15% for a flow-through entity.

                                                            Healthcare
                                           Top             Subsidy            CBD                      Asset
Taxable Entity Type          Tax Rate       $35K-$70K     $35K-$70K       Acquisition Expensing
C-Corp Entity                      20%               15%                 20%              2 times CBD
Flow-Through Entity            35%                15%                15%               2 times CBD
                                                                                                                                                                   
         
Remember a US business is already receiving a subsidy from VAT revenues to provide health insurance for their US employees (money pooled and solely set aside to purchase health insurance for employees with a compensation package greater than $35,000). So this health insurance subsidy money is netted against a firm's health insurance expense to reduce such expense up to a net zero expense. The phantom tax deduction of the CBD is to reward US businesses that create decent paying jobs and will replace the tax incentives such as the research tax credit and domestic production deduction. Also, the US Government should allow US businesses to expense capital asset acquisitions up to two times the CBD amount (2xCBD).

The effective tax rate of most businesses paying decent compensation packages with the CBD effect would be as follows:

Taxable Entity Type             Effective Tax Rate Range
C-Corp Entity                       single digits
Flow-Through Entity             high teens to low twenties

Ultimately we need to focus on providing US workers a decent compensation package with healthcare benefits to have a taxation system that will actually stimulate the US economy. I will point out previous or existing tax strategies that do not work. The Domestic Production Deduction (DPD) basically grants a 9% phantom deduction on Domestic Production Profit. So the less a business can pay its workers and make more profit off the low wage workers backs the more tax benefit such business gets with the 9% phantom deduction on such Domestic Production Profit. Earlier the Government allowed businesses to claim bonus depreciation expense of 50% of cost. This too did not stimulate the economy. Then we have the research tax credit which is difficult for both the taxpayer and government to implement because of its subjective rules. This research credit really has done little to increase the wage standard. Many businesses import cheap foreign labor into the US under the H1B visas for computer programming and claim such low cost activities for the research credit. Under my tax plan the business has to pay decent compensation first. Then it gets rewarded with a healthcare subsidy along with a CBD phantom deduction with the "asset acquisition expensing" at 2 times the CBD (2xCBD).

The effective VAT (net of US business cost savings) for US goods and services consumed in the US (because of the healthcare subsidy received by US businesses and lower effective business tax rate due to the CBD effect) will be far less than that of imported foreign goods and services consumed in the US. We need to go to a VAT tax on goods and services consumed in the US because many foreign nations charge VAT on US goods exported to such countries. With a lower business income tax in the US our exports can be competitive in foreign markets.

VAT and Business Income Tax Interplay
By reforming the US Tax System with a VAT system along with lower business income taxes we can be competitive worldwide. Let us have an example of a German firm that imports goods into the US subject to the US 20% VAT and has a German business income tax rate of 25%. Then we have a US firm that sells goods in the US subject to the US 20% VAT with a US business income effective tax rate of 8%. Both the US and German firms will pass along the business income tax cost on to the US consumer.

The German firm passes the 25% German income tax rate on to the US consumer (20% US VAT x 25% income tax = 5% VAT effect of German income tax passed onto consumer)

The US firm passes the 8% US effective income tax rate on to the US consumer

(20% US VAT x 8% income tax = 1.6% VAT effect of US income tax passed on to consumer)

That is a 3.4% tax savings to the US firm on the gross sales price in the US.


The next example is of a German firm that sells its goods Germany subject to the German 20% VAT and has a German business income tax rate of 25%. Then we have a US firm that imports goods into Germany subject to the German 20% VAT with a US business income effective tax rate of 8%. Both the US and German firms will pass along the business income tax cost on to the German consumer.

The German firm passes the 25% German income tax rate on to the German consumer (20% German VAT x 25% income tax = 5% VAT effect of German income tax passed onto consumer)

The US firm passes the 8% US effective income tax rate on to the German consumer

(20% German VAT x 8% income tax = 1.6% VAT effect of US income tax passed on to consumer)

That is a 3.4% tax savings to the US firm on the gross sales price in Germany.


Interest Expense
Next we need to focus on debt versus equity of a business. There should be limitations on the time period interest expense deduction for all businesses (C-Corp's and Flow-Through Entities). Let us consider calculations below.

= Taxable Income before CDB, 2xCBD, depreciation expense, and interest expense
- less: CBD (Compensation Bonus Deduction- Phantom Tax Deduction)
- less: 2xCBD (Asset Acquisition Expensing at two times CBD)
- less: Depreciation Expense
----------------------------------------------------------------------------------------------
= Taxable Income before Interest Expense
- less: Interest Expense Deduction (limited to 70% of Taxable Income before Interest Expense)
-----------------------------------------------------------------------------------------------
= Business Taxable Income
===============================================================

Any current interest expense deduction disallowed will be allowed to be carried forward into the future. This tax adjustment feature reduces the time factor tax benefit of interest expense with entities with low profits or losses.




Royalties Earned by US Businesses
We need to promote jobs in the US that create intellectual property within the US and prevent the shifting of intellectual property offshore outside the US. We do this by exempting a portion of royalty income subject to US income taxation. For example, we have a US business charging a royalty to a foreign firm (doesn’t matter if it is a related entity or not) for using intellectual property belonging to the US entity. We would allow the US firm to exclude a portion of the royalty income up to a percentage that equals the US Compensation Bonus Deduction (CBD) divided by overall US business expenditures (triple that result % and that is the amount of royalty income excluded).

 
Modified Territorial Income Tax System
Next, we need to go to a Modified Territorial Taxation System. Back in 2004 Congress passed legislation that allowed the repatriation of overseas earnings repatriated back to the US at a 5.25% tax rate. The largest benefactors of this repatriation like Pfizer and Ford cut jobs and closed plants in the US. Many firms used the money for stock buybacks and executive compensation. Allow US businesses to repatriate foreign earnings back at a flat 8% tax rate (with no foreign tax credits "FTC". Foreign tax credits should be eliminated under the new tax law).


Why Not Eliminate Business Income Tax Altogether and Just Have a VAT System?

There is a lot of interplay in our US Tax System that needs to be considered. Let us look at Walmart as an example. Walmart pays many of its employees substandard wages and many of their workers are on Medicaid, food stamps, and receive refundable Earned Income Tax Credits. So when I go into Walmart buying a good at $9.99 and thinking I got a great deal, in effect society and I are paying a lot more for that good considering the cost society incurs to support a low paid Walmart worker. That is why there needs to be a business income tax with a corresponding offset to compensate businesses that pay a livable wage. Since Walmart doesn’t pay a livable wage to a large segment of its workers it will be subject to a higher business income tax rate compared to other business entities that do pay a livable wage. This is only fair to compensate Federal and State Governments that subsidizes the low paid Walmart workforce.


Individual Income Tax
As for individual taxation, the top rate should be set at 35%. Taxation on capital gains would be taxed at ordinary tax rates but would allow for a 15% exclusion from income for risk taking on US investment activities. Dividends would be taxed at ordinary tax rates. To reward owner/investors that have firms paying decent compensation to its US employees, we should offer an incentive where up to 30% of the dividends (C-Corp distributions) are possibly exempt from taxable income. Take the C-Corp's CBD divided by C-Corp's current earnings & profits (E&P) to arrive at a percentage of distribution (%POD) that may be excluded from individual taxation. Then take the lesser of 1) %POD x distributions, 2) 15% of E&P, or 3) 15% of distributions, then double that amount (limited to 30%: 15% x 2 = 30%) to arrive at dividend distributions excluded from taxable income.

US businesses that pay decent compensation to its workers will be rewarded with a higher market stock value since up to 30% of dividend income may be excluded from US taxation by investors and many investors will seek out such stock in their portfolio.



Example: C-Corp Distribution
 

US C-Corp Taxable Income $1,000,000 subject to 8% effective tax rate ($80,000 tax).

20% of C-Corp earnings are distributed to investors ($1,000,000 x 20% = $200,000)

30% of $200,000 distribution is exempt from taxation ($200,000 x 70% taxable = $140,000 taxable)

Individual investor pays $49,000 income tax on dividends ($140,000 x 35% tax rate = $49,000).

Overall taxes paid on C-Corp $1,000,000 income is $132,000
 ($80,000 corporate + $49,000 individual)

Results in an overall tax rate of 13.2% on the C-Corp $1,000,000 income.

The argument of double taxation of a C-Corp is not a very valid one. The government should not promote the concept that all funds (100%) of a corporation(C-Corp) are subject to distribution. We do not want to promote the concept that the corporation is a personal "piggy bank" for investors where they can rape corporate funds at will. Substantial amount of funds are needed to be retained in a corporation for its future survival. A corporation is an entity with an indefinite life that exists for the public good. Corporate investors are to be good stewards not greedy thieves. 




Child Care Costs
The Tax Reform plan should exclude child care costs (such as daycare) from the US VAT. This is needed to assist parents who have young children and need such subsidy (No US VAT on child care).


Summary
The key foundation of this Tax Reform Plan is rewarding businesses that pay a livable wage to its US employees with a Compensation Bonus Deduction (CBD) that provides US businesses with a 1) phantom deduction that lowers the effective business tax rate, 2) allows such businesses to receive a healthcare subsidy from US VAT revenues 3) allows such businesses to expense a greater amount of capital asset acquisitions up to 2 times the CBD, 4) allows such businesses to exclude a portion of its royalty income, and 5) rewards the investors of such US corporation (C-Corp) that allows them to exclude a portion of dividend income, thus driving up the value of such US corporation stock that pays a livable wage to its US employees.

US Tax Reform for Jobs 2018

Letter sent on August 11, 2017 to the White House, Secretary of the Treasury, US House Ways and Means Committee, Senator Durbin, US Senate Finance Committee, all Senators on the Finance Committee, and Congressman LaHood.

Healthcare and Tax Reform need to be passed as a comprehensive legislative package. We need to create a tax system that will create jobs in the United States that will build value added wealth in the United States. It is imperative that we grant tax incentives to US businesses that create decent paying jobs along with healthcare to its US employees which will grow the US economy and fix problems with the Affordable Care Act (ACA). The idea that lowering taxes will stimulate the economy and create decent paying jobs in the US is a ridiculous notion. Businesses will still seek out cheaper sources of labor along with a lower tax liability. The government should only reward US businesses with a large tax cut for those entities that actually create a livable wage for its US employees. Our US businesses are at a competitive cost disadvantage with foreign firms that do not pay healthcare cost on their foreign employees. We solve this problem by providing a healthcare subsidy to US businesses that pay a livable wage to its US workers from revenues collected from a US Value Added Tax (VAT) system.

First, we should implement a 20% Value Added Tax (VAT) on goods and services consumed in the US. The US Government will provide a subsidy for employee health insurance from VAT revenues to US businesses that create decent paying compensation packages to its US workers. Compensation package would include wages and employee benefits including health insurance. The US Government will provide a 15% subsidy on each employee compensation package starting at $35,000 and cap it at $70,000 for all employers (for-profit and not-for-profit entities including state and local governments). If a US worker is being paid a livable wage from their US employer and since the employee is a consumer paying VAT, the employee’s employer will receive a healthcare subsidy to purchase health insurance for such employee. This way the US Government can avoid accusations from the World Trade Organization (WTO) of this being an illegal subsidy to US businesses. US firms are paying health insurance on US employees which is an added cost that puts US firms at a competitive disadvantage with foreign firms that do not pay healthcare cost on their foreign employees. Allowing businesses to purchase health insurance on a large scale with the government subsidy in a competitive market system will allow for lower health insurance premiums and better healthcare coverage for employees. The system under the ACA is not an efficient or cost effective way for individuals to receive healthcare coverage. The goal of this overall legislative agenda of "Healthcare and Tax Reform" is to reduce the number of individuals receiving Medicaid under the ACA and solve the problem of the government mandate on US businesses (the healthcare subsidy to US businesses from US VAT revenues solves that problem).


Why don’t we go to a Universal Healthcare System as they have in some European countries? The problem with such a system is that government control creates healthcare inefficiencies. A free market system that fosters competition is the best route to go. Allowing businesses to purchase health insurance on a large scale with the government subsidy in a competitive market system will allow for lower health insurance premiums and better quality of healthcare coverage for employees.

For business Tax Reform we need to go to a Modified Territorial Taxation System. The top tax rate for individuals should be at 35%. So business entities (S-Corps, LLCs, and Partnerships) that flow through to individuals may be taxed at a 35% tax rate. Subchapter C Corporations (C-Corps: entities which income/loss does not flow through) will be taxed at a top rate of 20%. This will force businesses to convert to C-Corp status which will help simplify the tax system (administration of such system) by eliminating many flow-through entities. Many tax shelters and tax gaming strategies are done under flow-through entities and we should not promote the existence of such entities with lower tax rates.

Businesses will receive a phantom tax deduction (Compensation Bonus Deduction "CBD") of 20% on employee compensation package starting at $35,000 and cap it at $70,000 for a C-Corp and 15% for a flow-through entity.
                                 

                                                          Healthcare
                                       Top              Subsidy             CBD                        Asset

Taxable Entity Type    Tax Rate   $35K-$70K   $35K-$70K   Acquisition Expensing
C-Corp Entity                 20%          15%          20%             2 times CBD
Flow-Through Entity            35%          15%          15%                2 times CBD

Remember a US business is already receiving a subsidy from VAT revenues to provide health insurance for their US employees (money pooled and solely set aside to purchase health insurance for employees with a compensation package greater than $35,000). So this health insurance subsidy money is netted against a firm's health insurance expense to reduce such expense up to a net zero expense. The phantom tax deduction of the CBD is to reward US businesses that create decent paying jobs and will replace the tax incentives such as the research tax credit and domestic production deduction. Also, the US Government should allow US businesses to expense capital asset acquisitions up to two times the CBD amount (2xCBD).

The effective tax rate of most businesses paying decent compensation packages with the CBD effect would be as follows:

Taxable Entity Type             Effective Tax Rate Range
C-Corp Entity                     single digits
Flow-Through Entity             high teens to low twenties

Ultimately we need to focus on providing US workers a decent compensation package with healthcare benefits to have a taxation system that will actually stimulate the US economy. I will point out previous or existing tax strategies that do not work. The Domestic Production Deduction (DPD) basically grants a 9% phantom deduction on Domestic Production Profit. So the less a business can pay its workers and make more profit off the low wage workers backs the more tax benefit such business gets with the 9% phantom deduction on such Domestic Production Profit. Earlier the Government allowed businesses to claim bonus depreciation expense of 50% of cost. This too did not stimulate the economy. Then we have the research tax credit which is difficult for both the taxpayer and government to implement because of its subjective rules. This research credit really has done little to increase the wage standard. Many businesses import cheap foreign labor into the US under the H1B visas for computer programming and claim such low cost activities for the research credit. Under my tax plan the business has to pay decent compensation first. Then it gets rewarded with a healthcare subsidy along with a CBD phantom deduction with the "asset acquisition expensing" at 2 times the CBD (2xCBD).


The effective VAT (net of US business cost savings) for US goods and services consumed in the US (because of the healthcare subsidy received by US businesses and lower effective business tax rate due to the CBD effect) will be far less than that of imported foreign goods and services consumed in the US. We need to go to a VAT tax on goods and services consumed in the US because many foreign nations charge VAT on US goods exported to such countries. With a lower business income tax in the US our exports can be competitive in foreign markets.



VAT and Business Income Tax Interplay

By reforming the US Tax System with a VAT system along with lower business income taxes we can be competitive worldwide. Let us have an example of a German firm that imports goods into the US subject to the US 20% VAT and has a German business income tax rate of 25%. Then we have a US firm that sells goods in the US subject to the US 20% VAT with a US business income effective tax rate of 8%. Both the US and German firms will pass along the business income tax cost on to the US consumer.

The German firm passes the 25% German income tax rate on to the US consumer (20% US VAT x 25% income tax = 5% VAT effect of German income tax passed onto consumer)
The US firm passes the 8% US effective income tax rate on to the US consumer
(20% US VAT x 8% income tax = 1.6% VAT effect of US income tax passed on to consumer)
That is a 3.4% tax savings to the US firm on the gross sales price in the US.

The next example is of a German firm that sells its goods Germany subject to the German 20% VAT and has a German business income tax rate of 25%. Then we have a US firm that imports goods into Germany subject to the German 20% VAT with a US business income effective tax rate of 8%. Both the US and German firms will pass along the business income tax cost on to the German consumer.
The German firm passes the 25% German income tax rate on to the German consumer (20% German VAT x 25% income tax = 5% VAT effect of German income tax passed onto consumer)
The US firm passes the 8% US effective income tax rate on to the German consumer
(20% German VAT x 8% income tax = 1.6% VAT effect of US income tax passed on to consumer)
That is a 3.4% tax savings to the US firm on the gross sales price in Germany.

Interest Expense

Next we need to focus on debt versus equity of a business. There should be limitations on the time period interest expense deduction for all businesses (C-Corp's and Flow-Through Entities). Let us consider calculations below.

= Taxable Income before CDB, 2xCBD, depreciation expense, and interest expense
- less: CBD (Compensation Bonus Deduction- Phantom Tax Deduction)
- less: 2xCBD (Asset Acquisition Expensing at two times CBD)
- less: Depreciation Expense
----------------------------------------------------------------------------------------------
= Taxable Income before Interest Expense
- less: Interest Expense Deduction (limited to 70% of Taxable Income before Interest Expense)
-----------------------------------------------------------------------------------------------
= Business Taxable Income
===============================================================

Any current interest expense deduction disallowed will be allowed to be carried forward into the future. This tax adjustment feature reduces the time factor tax benefit of interest expense with entities with low profits or losses.



Royalties Earned by US Businesses
We need to promote jobs in the US that create intellectual property within the US and prevent the shifting of intellectual property offshore outside the US. We do this by exempting a portion of royalty income subject to US income taxation. For example, we have a US business charging a royalty to a foreign firm (doesn’t matter if it is a related entity or not) for using intellectual property belonging to the US entity. We would allow the US firm to exclude a portion of the royalty income up to a percentage that equals the US Compensation Bonus Deduction (CBD) divided by overall US business expenditures (triple that result and that is the amount of royalty income excluded from taxable income).

Modified Territorial Income Tax System
Next, we need to go to a Modified Territorial Taxation System. Back in 2004 Congress passed legislation that allowed the repatriation of overseas earnings repatriated back to the US at a 5.25% tax rate. The largest benefactors of this repatriation like Pfizer and Ford cut jobs and closed plants in the US. Many firms used the money for stock buybacks and executive compensation. Allow US businesses to repatriate foreign earnings back at a flat 8% tax rate (with no foreign tax credits "FTC". Foreign tax credits should be eliminated under the new tax law).


Why Not Eliminate Business Income Tax Altogether and Just Have a VAT System?


There is a lot of interplay in our US Tax System that needs to be considered. Let us look at Walmart as an example. Walmart pays many of its employees substandard wages and many of their workers are on Medicaid, food stamps, and receive refundable Earned Income Tax Credits. So when I go into Walmart buying a good at $9.99 and thinking I got a great deal, in effect society and I are paying a lot more for that good considering the cost society incurs to support a low paid Walmart worker. That is why there needs to be a business income tax with a corresponding offset to compensate businesses that pay a livable wage. Since Walmart doesn’t pay a livable wage to a large segment of its workers it will be subject to a higher business income tax rate compared to other business entities that do pay a livable wage. This is only fair to compensate Federal and State Governments that subsidizes the low paid Walmart workforce.

Individual Income Tax
As for individual taxation, the top rate should be set at 35%. Taxation on capital gains would be taxed at ordinary tax rates but would allow for a 15% exclusion from income for risk taking on US investment activities. Dividends would be taxed at ordinary tax rates. To reward owner/investors that have firms paying decent compensation to its US employees, we should offer an incentive where up to 30% of the dividends (C-Corp distributions) are possibly exempt from taxable income. Take the C-Corp's CBD divided by C-Corp's current earnings & profits (E&P) to arrive at a percentage of distribution (%POD) that may be excluded from individual taxation. Then take the lesser of 1) %POD x distributions, 2) 15% of E&P, or 3) 15% of distributions, then double that amount (limited to 30%: 15% x 2 = 30%) to arrive at dividend distributions excluded from taxable income.

US businesses that pay decent compensation to its workers will be rewarded with a higher market stock value since up to 30% of dividend income may be excluded from US taxation by investors and many investors will seek out such stock in their portfolio.


Example: C-Corp Distribution

US C-Corp Taxable Income $1,000,000 subject to 8% effective tax rate ($80,000 tax).

20% of C-Corp earnings are distributed to investors ($1,000,000 x 20% = $200,000)

30% of $200,000 distribution is exempt from taxation ($200,000 x 70% taxable = $140,000 taxable)

Individual investor pays $49,000 income tax on dividends ($140,000 x 35% tax rate = $49,000).

Overall taxes paid on C-Corp $1,000,000 income is $132,000

($80,000 corporate + $49,000 individual)

Results in an overall tax rate of 13.2% on the C-Corp $1,000,000 income.


The argument of double taxation of a C-Corp is not a very valid one. The government should not promote the concept that all funds (100%) of a corporation(C-Corp) are subject to distribution. We do not want to promote the concept that the corporation is a personal "piggy bank" for investors where they can rape corporate funds at will. Substantial amount of funds are needed to be retained in a corporation for its future survival. A corporation is an entity with an indefinite life that exists for the public good. Corporate investors are to be good stewards not greedy thieves.

Child Care Costs
The Tax Reform plan should exclude child care costs (such as daycare) from the US VAT. This is needed to assist parents who have young children and need such subsidy (No US VAT on child care).

Summary
The key foundation of this Tax Reform Plan is rewarding businesses that pay a livable wage to its US employees with a Compensation Bonus Deduction (CBD) that provides US businesses with a 1) phantom deduction that lowers the effective business tax rate, 2) allows such businesses to receive a healthcare subsidy from US VAT revenues 3) allows such businesses to expense a greater amount of capital asset acquisitions up to 2 times the CBD, 4) allows such businesses to exclude a portion of its royalty income, and 5) rewards the investors of such US corporation (C-Corp) that allows them to exclude a portion of dividend income, thus driving up the value of such US corporation stock that pays a livable wage to its US employees.
 


Sunday, March 12, 2017

Tax Reform for Jobs 2017: Sent to White House and Congress

On February 24, 2017 sent to: The White House, Secretary of the Treasury, US House Ways and Means Committee, Senator Durbin, US Senate Finance Committee, all Senators on the Finance Committee, and Congressman LaHood.

We need to create a tax system that will create jobs in the United States that will build value added wealth in the United States. It is imperative that we grant tax incentives to US businesses that create decent paying jobs along with healthcare to its US employees which will grow the US economy and fix problems with the Affordable Care Act (ACA).

First, we should implement a 20% Value Added Tax (VAT) on goods and services consumed in the US. The US Government will provide a subsidy for employee health insurance from VAT revenues to US businesses that create decent paying compensation packages to its US workers. Compensation package would include wages and employee benefits including health insurance. The US Government will provide a 15% subsidy on each employee compensation package starting at $35,000 and cap it at $70,000 for all employers (for-profit and not-for-profit entities including state and local governments). This way the US Government can avoid accusations from the World Trade Organization (WTO) of being an illegal subsidy to US businesses. US firms are paying health insurance on US employees which is an added cost that puts US firms at a competitive disadvantage with foreign firms that do not pay healthcare cost on their foreign employees. Allowing businesses to purchase health insurance on a large scale with the government subsidy in a competitive market system will allow for lower health insurance premiums and better healthcare coverage for employees. The system under the ACA is not an efficient or cost effective way for individuals to receive healthcare coverage.

For businesses we need to go to a Modified Territorial Taxation System. The top tax rate for individuals should be at 35%. So business entities (S-Corps, LLCs, and Partnerships) that flow through to individuals may be taxed at a 35% tax rate. Subchapter C Corporations (C-Corps: entities which income/loss does not flow through) will be taxed at a top rate of 20%. This will force businesses to convert to C-Corp status which will help simplify the tax system (administration of such system) by eliminating many flow-through entities.

Businesses will receive a phantom tax deduction (Compensation Bonus Deduction "CBD") of 20% on employee compensation package starting at $35,000 and cap it at $70,000 for a C-Corp and 15% for a flow-through entity.
                                                           Healthcare
                                           Top             Subsidy            CBD                      Asset
Taxable Entity Type          Tax Rate       $35K-$70K     $35K-$70K       Acquisition Expensing
C-Corp Entity                      20%               15%                 20%              2 times CBD
Flow-Through Entity            35%                15%                15%               2 times CBD

Remember a US business is already receiving a subsidy from VAT revenues to provide health insurance for their US employees (money pooled and solely set aside to purchase health insurance for employees with a compensation package greater than $35,000). So this health insurance subsidy money is netted against a firm's health insurance expense to reduce such expense up to a net zero expense. The phantom tax deduction of the CBD is to reward US businesses that create decent paying jobs and will replace the tax incentives such as the research tax credit and domestic production deduction. Also, the US Government should allow US businesses to expense capital asset acquisitions up to two times the CBD amount (2xCBD).

The effective tax rate of most businesses paying decent compensation packages with the CBD effect would be as follows:

Taxable Entity Type             Effective Tax Rate Range
C-Corp Entity                              single digits
Flow-Through Entity             high teens to low twenties

Ultimately we need to focus on providing US workers a decent compensation package with healthcare benefits to have a taxation system that will actually stimulate the US economy. I will point out previous or existing tax strategies that do not work. The Domestic Production Deduction (DPD) basically grants a 9% phantom deduction on Domestic Production Profit. So the less a business can pay its workers and make more profit off the low wage workers backs the more tax benefit such business gets with the 9% phantom deduction on such Domestic Production Profit. Earlier the Government allowed businesses to claim bonus depreciation expense of 50% of cost. This too did not stimulate the economy. Then we have the research tax credit which is difficult for both the taxpayer and government to implement because of its subjective rules. This research credit really has done little to increase the wage standard. Many businesses import cheap foreign labor into the US under the H1B visas for computer programming and claim such low cost activities for the research credit. Under my tax plan the business has to pay decent compensation first. Then it gets rewarded with a healthcare subsidy along with a CBD phantom deduction with the "asset acquisition expensing" at 2 times the CBD (2xCBD).

Next we need to focus on debt versus equity of a business. There should be limitations on the time period interest expense deduction for all businesses (C-Corp's and Flow-Through Entities). Let us consider calculations below.

= Taxable Income before CDB, 2xCBD, depreciation expense, and interest expense
- less: CBD (Compensation Bonus Deduction)
- less: 2xCBD (Asset Acquisition Expensing at two times CBD)
- less: Depreciation Expense
----------------------------------------------------------------------------------------------
= Taxable Income before Interest Expense
- less: Interest Expense Deduction (limited to 70% of Taxable Income before Interest Expense)
-----------------------------------------------------------------------------------------------
= Business Taxable Income
===============================================================

Any current interest expense deduction disallowed will be allowed to be carried forward into the future. This tax adjustment feature reduces the time factor tax benefit of interest expense with entities with low profits or losses.

Next, we need to go to  a Modified Territorial Taxation System. Back in 2004 Congress passed legislation that allowed the repatriation of overseas earnings repatriated back to the US at a 5.25% tax rate. The largest benefactors of this repatriation like Pfizer and Ford cut jobs and closed plants in the US. Many firms used the money for stock buybacks and executive compensation. Allow US businesses to repatriate foreign earnings back at a flat 8% tax rate (with no foreign tax credits "FTC". Foreign tax credits are dead under the new tax law).

As for individual taxation, the top rate should be set at 35%. Taxation on capital gains would be taxed at ordinary tax rates but would allow for a 15% exclusion from income for risk taking on US investment activities. Dividends would be taxed at ordinary tax rates. To reward owner/investors that have firms paying decent compensation to its US employees, we should offer an incentive where up to 15% of the dividends (C-Corp distributions) are possibly exempt from taxable income. Take the C-Corp's CBD divided by C-Corp's earnings & profits (E&P) to arrive at a percentage of distribution (%POD) that may be excluded from individual taxation. Then take the lesser of 1) %POD x distributions, 2) 15% of E&P, or 3) 15% of distributions, to arrive at dividend distributions excluded from taxable income.

The effective VAT (net of US business cost savings) for US goods and services consumed in the US (because of the healthcare subsidy received by US businesses and lower effective business tax rate due to the CBD effect) will be far less than that of imported foreign goods and services consumed in the US. We need to go to a VAT tax on goods and services consumed in the US because many foreign nations charge VAT on US goods exported to such countries. With a lower business income tax in the US our exports can be competitive in foreign markets.

As for the US House Ways and Means Committee "Border Adjustment Tax Plan" it doesn't even address fixing the healthcare problem and the "Border Adjustment Tax Plan" hybrid tax approach (VAT/business tax) may be called into question by the WTO as being unfair.

Thursday, December 1, 2016

US Tax Reform Jobs 2017 Alternative Plan

We need to create a tax system that will create jobs in the United States that will build value added wealth in the United States. It is imperative that we grant tax incentives to US businesses that create decent paying jobs along with health care to its US employees which will grow the US economy.

First, we should implement a 20% Value Added Tax (VAT) on goods and services consumed in the US. The US Government will provide a subsidy for employee health insurance from VAT revenues to US businesses that create decent paying compensation packages to its US workers. Compensation package would include wages and employee benefits including health insurance. The US Government will provide a 15% subsidy on each employee compensation package starting at $35,000 and cap it at $70,000 for all employers (for-profit and not-for-profit entities). This way the US Government can avoid accusations from the World Trade Organization (WTO) of being an illegal subsidy. US firms are paying health insurance on US employees which is an added cost that puts US firms at a competitive disadvantage with foreign firms that do not pay healthcare cost on their foreign employees. Allowing businesses to purchase health insurance on a large scale in a competitive market system will allow for lower health insurance premiums.

For businesses we need to go to a Territorial Taxation System. The top rate for individuals should be at 35%. So business entities (S-Corps, LLCs, and Partnerships) that flow through to individuals may be taxed at a 35% tax rate. Subchapter C Corporations (entities which income/loss does not flow through) will be taxed at a top rate of 20%. This will force individuals to convert to C-Corp status which will help simply the tax system (administration of such system) by eliminating flow through entities.

Businesses will receive a phantom tax deduction (Compensation Bonus Deduction “CBD”) of 15% on employee compensation starting at $35,000 and cap it at $70,000. Remember, a US business is already is receiving a subsidy from VAT revenues to provide health insurance for their US employees (money pooled and solely set aside to purchase health insurance for employees with a compensation package greater than $35,000). So this health insurance subsidy money is netted against the US firm’s health insurance expense to reduce such expense up to a net zero expense. The phantom tax deduction of the CBD is to reward US businesses that create decent paying jobs and will replace tax incentives such as the research tax credit and domestic production deduction.  The effective tax rate of a C-Corp that pays decent compensation (CBD) to its US employees would likely be 11% or less (single digits).  Allow US businesses to expense capital asset acquisitions up to the CBD amount. Also, this CBD along with the healthcare subsidy from VAT revenues will help deter the import of foreign goods and services (from nations with a cheap labor base but with higher taxes) into the US by making such imports less attractive to US businesses. Foreign imports consumed in the US will be subject to the 20% VAT and the higher foreign business income taxes imposed by the foreign governments on such importers will make the effective cost of such imported goods higher to US consumers.

Again, we need to go to a Territorial Taxation System.  Back in 2004 Congress passed legislation that allowed the repatriation of overseas earning repatriated back to the US at a 5.25% tax rate. The largest benefactors of this repatriation like Pfizer and Ford cut jobs and closed plants in the US. Many firms used the money for stock buybacks and executive compensation. Allow US businesses to repatriate foreign earnings back at an 8% tax rate but allow an amount of repatriated funds to be excluded from income in an amount that equals the US compensation bonus deduction (CBD). Thus, we are offering incentives to US businesses that will entice them to invest in US workers.

As for individual taxation, the top tax rate should be set at 35%. Taxation on capital gains would be taxed at ordinary tax rates but would allow for a 15% exclusion from income for risk taking on US investment activities. Dividends would be taxed at ordinary tax rates. To reward owner/investors that have firms paying decent compensation to its US employees, we should offer an incentive where up to 15% of the dividends (C-Corp distributions) are possibly exempt from taxable income. Take the C-Corp’s CBD divided by C-Corp earnings & profits (E&P) to arrive at a percentage of distributions (%POD) that may be excluded from individual taxation.  Then take the lesser of 1) %POD x distributions, 2) 15% of E&P, or 3) 15% of distributions, to arrive at dividend distributions excluded from taxable income.

Friday, November 11, 2016

Tax Reform For Jobs 2017

Radical changes need to be made to both health care and taxes to stimulate the economy. Both Democrat and Republican leaders in the US Government need to cooperate with each other and lead the change in tax reform and health care. Free trade is essential for a vibrant economy with no trade barriers.

First we eliminate income tax on all US businesses and only tax distributions (including wages, dividends, and any kind of distribution) from such businesses at the individual level. Institute a value added tax (VAT) on goods and services consumed in the US by individuals at a 20% rate. Reward US businesses that pay decent compensation package (wages and benefits) to its US employees. From VAT revenues provide a 15% subsidy on each employee compensation package starting  at $35,000 and capped at $70,000. This subsidy  basically helps US businesses provide health insurance for its US employees. 

This is the only plan that helps us compete with foreign nations with cheap labor force. Let us look at China with a cheap labor force. China taxes its business with a 25% income tax rate. If the US imposes a 20% VAT on Chinese goods consumed in the US, both the VAT and Chinese business tax effectively increases the cost of Chinese goods to US consumers. US businesses will be able to provide decent paying jobs in the US and compete globally if it has no income tax and receives a subsidy for paying a livable wage to US employees. A US business paying decent compensation will have an effective VAT on goods and services consumed in the US approximately around 8%-10% (20% VAT less the subsidy).

As for US individual taxes the top tax rate bracket should be capped at 35% with dividends and long term capital gains being taxed at ordinary tax rates. Allow a 15% exclusion of long term capital gains from taxation for investor risk taking. This tax reform plan will simplify taxes where no business flow-thru (profit or loss) passes through to an individual and will eliminate aggressive tax planning and tax shelters. 

These are the basic building blocks which are needed to stimulate our economy. I have 29 years of Federal income tax experience.


Saturday, June 4, 2016

Tax Reform For Jobs 2016

Radical tax reform is needed to save our US economy and the middle class. First, we need to go to a 20% value added tax (VAT) for goods and services consumed within the US. Next, we need to eliminate all income taxes on all US businesses. Only when cash and property is distributed from a business to an individual then such distributions (including any type of distribution, dividends, wages, royalties, and interest) will be taxed to such individual at regular income tax rates. Dividends and capital gains would no longer be afforded lower tax rates for individuals. The individual tax rate brackets and tax rates should remain unchanged.

To maintain the standard of living in the US and compete in a global economy with cheap labor markets we need to eliminate business income tax and provide a subsidy to businesses that pay decent compensation to its US employees. Compensation would include wages and benefits like health insurance, 401K, and life insurance provided to US employees. US businesses will be paying taxes to the US Treasury for the employer’s share of employment taxes (FICA and Medicare). The subsidy paid to a US business will be based on compensation paid to an employee which includes wages and benefits. A business paying a compensation package staring at $40,000 will receive a 15% subsidy for such employee. Compensation package over $65,000 will be limited to a subsidy at 15% of $65,000 ($9,750).

This subsidy will help US businesses provide health care coverage for its employees. This is a better plan for US health insurance coverage which involves businesses being purchasers of health insurance products which creates market competition of insurance and medical coverage. Many foreign countries have universal health coverage funded by taxation, but the US should fund a substantial amount of its US health coverage privately through subsidies to US businesses.

The subsidy to US businesses will in part be funded by the 20% US VAT. US exports are not subject to US VAT but are usually subject foreign VAT. Remember the US VAT will also include foreign imports (goods and services) consumed within the US.  Instituting a VAT system in the US will put us on equal footing with other countries who tax US imports into foreign nations with a foreign VAT. With no US income taxes on businesses (along with the US subsidy) our foreign exports will be able to compete at an advantage in foreign markets of foreign countries that have a business income tax.

Let us look at China imports with cheap labor costs. China imposes a business tax rate of 25% on its own businesses. If the US has a 20% US VAT on all goods and services consumed in the US and along with the  Chinese income tax on its own businesses these two  taxes together will greatly increase the price of Chinese goods to US consumers. Even though US goods and services will be subject to the same 20% US VAT, US businesses will not be subject to any income tax and will receive a government subsidy for decent compensation paid to its US workers.  The 15% subsidy to US businesses will greatly reduce the price effect of the 20% VAT on US goods and services consumed within the US.

The subsidy of US compensation will not be made to any governmental agency or to any charitable organization. Governmental agencies are subsidized by taxes and charitable organizations are subsidized by charitable contributions which are tax deductible for Federal Income Tax purposes for individual taxpayers.

All US businesses will file a world-wide information tax return showing an income statement, balance sheet, and statement of cash flow along with a listing of all US employee compensation by each employee in order for such business to receive the government subsidy. The US Government should examine the business information tax return along  with analyzing books and records to ensure that all distributions are properly accounted for or look for money or property being diverted to any individual from US taxation.

Also, the US Government will analyze each business balance sheet to make sure that there are no excessive accumulations of cash and investment retained above reasonable needs for the operations of such business. The US Government already has Code Section 531 that imposes an Accumulated Earnings Tax on subchapter C corporations that  have excessive earnings retained as evidenced by excessive accumulations of cash and investment above reasonable needs for the operations of such business. US businesses need to invest in business operations that create jobs and not just hoard cash or cash equivalents. This same law should apply to all US businesses once all US businesses taxable income is no longer subject to US taxation.

Individual income tax returns should be simplified. Since businesses profits will no longer be taxed, we will not have any flow-thru entities (such as partnerships, S-Corps, and LLCs) being reported on individual tax returns. This too will eliminate tax shelters with fictitious losses showing up on individual tax returns since no business profits or losses will be reported. Only distributions from a business will be reported as income on a individuals tax return. Rental activities may or may not be reported as a separate business entity, but if not reported as a stand alone business entity any rental loss will no longer be allowed as a loss on an individual tax return. With the new tax law change regarding business entities being reported as stand alone entities, no losses should appear on any individual income tax return except that of a capital loss.

Any distribution not properly reported by a business or an individual such unreported distribution will be subject to income tax to the individual who received the distribution benefit and a 10% penalty tax to the business not properly reporting the distribution.  Also, for activity of a business and/or individual not filing tax returns or information tax returns such individual will be taxed on unreported income when the cash hoard or property is discovered by the US Government.

Tuesday, July 2, 2013

Tax Reform for Jobs 2014

Radical tax reform is needed to save our US economy and the middle class. First, we need to go to a 20% value added tax (VAT) for goods and services consumed within the US. Next, we need to eliminate all income taxes on all US businesses. Only when cash and property is distributed from a business to an individual then such distributions (including all distributions, dividends, wages, royalties, and interest) will be taxed to such individual at regular income tax rates. Dividends and capital gains would no longer be afforded lower tax rates for individuals. The individual tax rate brackets and tax rates should remain unchanged.

To maintain the standard of living in the US and compete in a global economy with cheap labor markets we need to eliminate business income tax and provide a subsidy to businesses that pay decent compensation to its US employees. US businesses will be paying taxes to the US Treasury for the employer’s share of employment taxes (FICA and Medicare). The subsidy paid to a US business will be based on compensation paid to an employee which includes wages and benefits (like health insurance). So a business paying a compensation package of $35,000 to $44,999 will receive a 10% subsidy, payment of $45,000 to $54,999 will receive a 15% subsidy, and payment of $55,000 to $65,000 will receive a 20% subsidy. Compensation over $65,000 will be limited to a subsidy at 20% of $65,000.

The subsidy to US businesses will be funded by the US VAT. US exports will not be subjected to US VAT but are usually subject to foreign VAT. Remember the US VAT will also include foreign imports (goods and services) consumed within the US.  Instituting a VAT system in the US will put us on equal footing with other countries who VAT tax US imports. Let us look at China imports that have cheap labor costs. China imposes a business tax rate of 25% on its own businesses and along with the 20% US VAT imposed on foreign imports these two added taxes will greatly increase the price of Chinese goods to US consumers. Even though US goods will be subject to the 20% US VAT, US businesses will have goods and services not subject to any income tax and will receive a government subsidy for decent compensation paid to its US workers which will reduce the effect of the US VAT of US goods and services consumed in the US.

All US businesses will file a world-wide information tax return showing an income statement, balance sheet, and statement of cash flow along with a listing of all US employee compensation by each employee in order for such business to receive the government subsidy. The US Government should examine the business information tax return along  with analyzing books and records to ensure that all distributions are properly accounted for or look for money being diverted from US taxation distributed to any individual. This tax reform will keep US multinational corporations from leaving the US and may draw other foreign corporations into the US.