Healthcare and Tax Reform need to be passed as a comprehensive legislative package in a bi-partisan fashion. 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 our healthcare system. 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. The US Government should provide a 15% healthcare subsidy to all US employers for their US workers' compensation starting at $15 per hour and capping it at employee earnings at $25 per hour (this includes for-profit and not-for-profit entities including state and local governments). Employers who do not pay the minimum wage of $15 per hour will not receive any tax benefit. 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.
Healthcare Subsidy
$15/hour x 2,080 annual hours = $31,200 + Healthcare Cost per employee = Compensation Package (lower limit)
$25/hour x 2,080 annual hours = $52,000 + Healthcare Cost per employee = Compensation Package (capped)
Wages over $25/hour will be limited to $25 per hour
Compensation Package x `15% = Healthcare Subsidy (given to businesses from VAT Revenues)
The healthcare subsidy would be limited to the lessor of 15% of the compensation package or actual healthcare expense.
Compensation Tax Benefit (CTB)
$15/hour x 2,080 annual hours = $31,200 + Healthcare Cost per employee = Compensation Package (lower limit)
$25/hour x 2,080 annual hours = $52,000 + Healthcare Cost per employee = Compensation Package (capped)
Wages over $25/hour will be limited to $25 per hour
Compensation Package x `20% = Compensation Tax Benefit (CTB)
The Compensation Tax Benefit (CTB) will equal a portion of corporation taxable income that will be taxed at an 8% tax rate. So if a corporation has taxable income of $1,000,000 and a CTB of $400,000, the $400,000 of the profits will be taxed at 8%.
Healthcare Subsidy and Compensation Tax Benefit
If both spouses work at two different places and both are paid a livable wage but one spouse is carrying the healthcare insurance (where one business is paying the premiums) the other business must contribute its share to the other company for the family plan or it will receive no tax benefit (CTB lower tax rate benefit or healthcare subsidy).
For a business to receive the CTB lower tax rate benefit and healthcare subsidy it must pay a livable wage and provide or pay health insurance for its employee. Both a livable wage and healthcare coverage is a requirement for the tax benefit and healthcare subsidy to be given to any business.
Congress should mandate the minimum amount of employer funding of healthcare like 75% employer share of policy costs or some other amount. Congress should set a minimum type of healthcare coverage under such plans for which the employer will receive a healthcare subsidy and receive the Compensation Tax Benefit (CTB).
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 taxation. It can be royalty income from any source (related or unrelated entity).
Royalty Exclusion % = (CTB + Healthcare Subsidy) / Total US expenses
Royalty Income x Royalty Exclusion % = Royalty Income Excluded
Business 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). Allow only 70% of Taxable Income before interest expense as a tax deduction. The remainder of interest expense not allowed is allowed as a carry forward into future tax years.
Business Taxable Income Computation
Taxable Income Before Interest Expense (Healthcare expense reduced by healthcare subsidy)
Less: Interest Expense (limited to 70% of Taxable Income before Interest Expense)
Taxable Income Before Royalty Income Exclusion
Less: Royalty Income Exclusion
Equals: Taxable Income
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Business Tax Computation
Taxable Income--------------------------$1,000,000
Compensation Tax Benefit--------------$400,000----at 8% Tax Rate----------$32,000 Tax
Healthcare Subsidy------------------------$300,000----at 8% Tax Rate----------$24,000 Tax
Healthcare exceeding Subsidy----------$10,000----at 8% Tax Rate---------------$800 Tax
Remainder of Taxable Income---------$290,000----at 25% Rate C-Corp----$72,500 Tax
Totals-----------------------------------------$1,000,000------------------------------------$129,300 Tax
(effective rate 12.93%)
Note: this example does not account for royalty exclusion tax savings
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 10%. 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 US consumer)
The US firm passes the 10% US effective income tax rate on to the US consumer
(20% US VAT x 10% income tax = 2% VAT effect of US income tax passed on to US consumer)
That is a 3% 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 10%. 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 German consumer)
The US firm passes the 10% US effective income tax rate on to the German consumer
(20% German VAT x 10% income tax = 2% VAT effect of US income tax passed on to German consumer)
That is a 3% tax savings to the US firm on the gross sales price in Germany.
VAT and Healthcare Subsidy Interplay
Example:
Gross Sales @ 130% of US Compensation Package $100 x 20% = $ 20.00 VAT
US Compensation Package $(70) x 15% = $(10.50) Healthcare Subsidy
Effective VAT Rate to US Businesses $ 9.50 effective rate 9.5%
Most US businesses that pay a livable wage along with providing healthcare would most likely pay an effective VAT rate ranging from 8% to 12%.
Whereas, foreign imports into the US are taxed at a 20% VAT. US consumers who purchase foreign imports in the US are still funding our US healthcare system through the VAT they pay in which a portion of that VAT becomes a healthcare subsidy to US employers for the benefit of US workers.
Territorial Taxation System
US C-Corporations should only be taxed on a territorial system where only income is taxed within the US and US territories. Controlled Foreign Corporations (CFCs) and Foreign Branches are not subject to US taxation. But some foreign gross income may be deemed taxable to the US C-Corporation. Foreign Tax Credits will no longer be allowed in subchapter C-Corporation tax computations.
The main tax avoidance game played involves US versus Foreign inter-company transactions in which larger shares of expenses are kept in the US while larger portions of associated revenues are shifted overseas to low tax jurisdictions. The simple solution is to have a Deemed US Tax (DUST). This will solve the problem of US taxpayer's hiding or shifting large amounts of income in low tax jurisdictions and stateless income.
Deemed US Tax (DUST)
Worldwide Gross Receipts: US and Foreign (FGN) $ Worldwide Gross Receipts
Less: Foreign Income Tax (see footnote A) $ (Foreign Income Tax)
Equals: Modified Worldwide Gross Receipts $ Modified Worldwide GR
US Modified Expenses $xxx US% (see footnote B)
Foreign (FGN) Expenses $yyy FGN %
Total Worldwide Expenses $zzz 100 % x US% (% of Total Expense)
= Deemed US Gross Receipts $ Deemed US Gross Receipts
Less: US Expenses (includes healthcare exp net of subsidy) $ (US Expenses)
Equals:Deemed Operating US Taxable Income $ Deemed Operating US TI
+ Worldwide Investment & Capital Gain Income X US% $ US Investment & Captl Gain
Equals:Deemed US Taxable Income $ Deemed US Taxable Income
Less: Exempt Amount
10% of Deemed US Taxable Income (see footnote C) $ (Exempt Amount)
Less: Modified US Taxable Income (see footnote D) $ (Modified US Taxable Income)
Equals: DUST Taxable Income $ DUST Taxable Income
DUST Tax Rate (C-Corp Rate at 25%) x 25% DUST tax rate
Equals: Deemed US Tax (DUST) $ Deemed US Tax (DUST)
====================
10% of Deemed US Taxable Income (see footnote C) $ (Exempt Amount)
Less: Modified US Taxable Income (see footnote D) $ (Modified US Taxable Income)
Equals: DUST Taxable Income $ DUST Taxable Income
DUST Tax Rate (C-Corp Rate at 25%) x 25% DUST tax rate
Equals: Deemed US Tax (DUST) $ Deemed US Tax (DUST)
====================
footnote A: Foreign Income Tax
Worldwide Gross Receipts are excluded in the amount that equals foreign income taxes paid.
These Gross Receipts are deemed to pay foreign income taxes.
footnote B: US Modified Expenses
+ US Expenses (Total US Expense includes healthcare expense net of subsidy)
Less: Compensation Tax Benefit (CTB)
Less: Healthcare Costs (Healthcare subsidy and healthcare costs over subsidy amount)
Equals: US Modified Expenses
========================
CTB and Healthcare costs are adjusted in reducing total US Expenses in arriving at US Modified Expenses because these tax subsidies create larger compensation expense in the US. We should not penalize US businesses for this increase in US compensation when determining Deemed US Gross Receipts. That is why US expenses are reduced when determining the allocable percentage in arriving at Deemed US Gross Receipts from Worldwide Gross Receipts.
US Modified Expenses (does not include Federal Income Taxes)
Foreign (FGN) Expenses (does not include Foreign Income Taxes) already allowed in footnote A
footnote C: Exempt Amount
10% of Deemed US Taxable Income is allowed to be exempt from DUST.
A small amount is allowed to be invested worldwide in low tax jurisdictions to benefit the cash flow of US corporations for such US business to be competitive worldwide.
footnote D: Modified US Taxable Income
+ US Taxable Income
+ US Royalty Income Exclusion
Equals: Modified US Taxable Income
===========================
Worldwide Investment & Capital Gain Income
Worldwide Gross Receipts are excluded in the amount that equals foreign income taxes paid.
These Gross Receipts are deemed to pay foreign income taxes.
footnote B: US Modified Expenses
+ US Expenses (Total US Expense includes healthcare expense net of subsidy)
Less: Compensation Tax Benefit (CTB)
Less: Healthcare Costs (Healthcare subsidy and healthcare costs over subsidy amount)
Equals: US Modified Expenses
========================
CTB and Healthcare costs are adjusted in reducing total US Expenses in arriving at US Modified Expenses because these tax subsidies create larger compensation expense in the US. We should not penalize US businesses for this increase in US compensation when determining Deemed US Gross Receipts. That is why US expenses are reduced when determining the allocable percentage in arriving at Deemed US Gross Receipts from Worldwide Gross Receipts.
US Modified Expenses (does not include Federal Income Taxes)
Foreign (FGN) Expenses (does not include Foreign Income Taxes) already allowed in footnote A
footnote C: Exempt Amount
10% of Deemed US Taxable Income is allowed to be exempt from DUST.
A small amount is allowed to be invested worldwide in low tax jurisdictions to benefit the cash flow of US corporations for such US business to be competitive worldwide.
footnote D: Modified US Taxable Income
+ US Taxable Income
+ US Royalty Income Exclusion
Equals: Modified US Taxable Income
===========================
Worldwide Investment & Capital Gain Income
Cash from worldwide investment and net capital gains is fungible. We are only concerned with where assets are currently used and where expenses are claimed.
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 CTB 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 10% effective tax rate ($100,000 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 $149,000
($100,000 corporate + $49,000 individual)
Results in an overall tax rate of 14.9% 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.
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 CTB 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 10% effective tax rate ($100,000 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 $149,000
($100,000 corporate + $49,000 individual)
Results in an overall tax rate of 14.9% 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.
Refundable VAT Credit for Working Class People
Finally, there would have to be a Refundable VAT credit for working class people on their individual income tax returns so we don't have a VAT tax on basic essential living costs one needs for basic survival. There would have to be developed a VAT Credit Table (based on filing status and # of dependents) for a refundable credit for basic essential living costs for working Americans.
Also, there would need to be an increase in child care credit to account for VAT.
VAT Credit and Child Care Credit would be phased out for higher wage earners and the well-to-do.
Summary
Both the poor and the rich in the US contribute to the problem of cheap foreign goods imported into the US. The poor buy cheap foreign goods which lowers their ability to obtain a livable wage. The rich profit off cheap foreign imports by not paying a livable wage by foregoing goods built in the US. My tax plan gives plenty of rewards for businesses who pay a livable wage along with healthcare insurance to its US workers.The VAT system I have proposed will help alleviate that problem of cheap foreign imports. The lower wage earners pay the VAT but get it back as a refundable VAT credit.
A VAT system in which portion of VAT revenues would subsidize healthcare for businesses that pay a livable wage will make our businesses competitive worldwide and create better paying job in the US. The healthcare subsidy from VAT revenues does not violate WTO rules and in effect is kind of tariff on foreign imports (making foreign goods more expensive than US goods). Of course the WTO can't argue it is solely a subsidy to US businesses because the same subsidy is given to tax exempt and state/local government entities).
This tax reform system offers many incentives to US businesses that pay a livable wage like 1) healthcare subsidies, 2) lower tax rates (CTB) on certain portion of business profits, 2) exclusion of a portion of royalty income for intellectual property created in the US, and 4) portion of dividend income exclusion for investors who invest in C-Corps that pay a livable wage to its employees. We really need to have a solid tax system that rewards good business behavior that strengthens the creation of a middle class workforce.
Flow-Thru Entities
Finally, I believe flow-thru entities (like S-Corps, LLCs, and partnerships) should receive a Compensation Tax Benefit (CTB) tax rate at 11.2% versus 8% for C-Corps [ (35% individual rate / 25% C-Corp Rate) x CTB C-Corp rate of 8% = 11.2%) ]. This same rate should apply for the profits that mirror the healthcare subsidy and healthcare cost greater than the subsidy.
I have over 33 years of Federal Income Tax experience. I grant permission to anyone to use this write-up however they see fit.
Jon Dolen
