Wednesday, October 12, 2016

Shared Economic Growth - A Proposal for Tax Reform, lead page
A proposal for smart tax reform

Restoring America's economy, job
 security, and middle-class market power through smarter, fairer tax policy that favors work over financial speculation

This website, which dates back well before the financial crisis of 2008, provides extensive background from across the political spectrum that explains what is fundamentally wrong with our economy, and offers a simple, three page piece of legislation that would go a long way towards fixing it. If you are tired of a do-nothing government that  acts like our problems can't be solved, please spend some time with this site and encourage others to do the same, and then to contact their legislators to demand action.

Saturday, October 1, 2016

Action Page

This can happen. The Chairman of the Senate Finance Committee is planning to publish a tax reform proposal based on the dividends paid deduction. Let your two Senators and U.S. Representative know that you want the fair, effective and revenue-positive Shared Economic Growth proposal!

How? Go to the U.S. Senate website , choose your state at the top right corner to find your Senators, and under each one choose the "contact" option and click on the link. In the message submission form that pops up, enter your information, then copy the text below and paste it into the body of your message. (Feel free to customize it to add your own thoughts), then hit "submit.

Now, do the same thing for your U.S. representative by going to and entering your zip code in the Find Your Representative box. Choose your representative, and from their home page choose Contact to bring up the message form. Again, enter your details, paste in the text below, and hit submit.

If you have time, please also copy the text into a fax, using either a fax machine or the free fax service at , and send it to Senator Orrin Hatch, Chairman of the Senate Finance Committee, at 202-228-0554 . Chairman Hatch is working on a tax proposal based on the dividends-paid deduction to be issued in the next few months. We want to help him to get it right.

If you are a user, please also sign our petition

It's fast, it's easy, and it will help to save our economy!

Cut and paste the text below:

Please sponsor the Shared Economic Growth tax reform proposal. The bill text is at the link below, and a full explanation can be found at Only Shared Economic Growth can do all of the following in a revenue-positive manner:
1.     Make the U.S.A. the most attractive location on the planet for American companies to locate their high-value operations, so that American workers would regain market power;
2.     Allow corporations to bring cash home to invest in those high-value operations;
3.     Enable American firms to compete effectively against their foreign rivals;
4.     Provide a benefit to middle-class workers who do the right thing and save money for their children’s educations and for retirement;
5.     Avoid increasing the deficit today, and  provide substantial additional revenues and private savings in order to help prevent a fiscal crisis as the baby boomers retire;
6.     Eliminate the incentive for corporations to take on too much destabilizing debt by eliminating the tax advantage of debt financing;
7.     Improve the efficiency of our economy by unlocking cash and encouraging its rapid flow to the most efficient investments;
8.     Put an end to corporate tax shenanigans and solve the problem of corporate tax shelters and the complexities of transfer pricing enforcement;
9.     Put C corporations on the same tax footing as pass-through entities, without double taxation of corporate earnings, eliminating tax distortion of entity choice;
10.  Increase corporate responsiveness to shareholders and regulators;
11. End the practice of compensating corporate executives for artificial “growth” that consists only of retaining earnings rather than paying them out as dividends; and
12. Improve the efficiency of our allocation of talent by eliminating the strong tax preference for pursuing unproductive – and often destructive - speculation rather than productive work, while at the same time improving the fairness of our tax system 

The text of the Bill can be found at

Thank you.

Friday, September 30, 2016

Draft Bill and Summary

A Bill
To amend the Internal Revenue Code of 1986 to remove incentives to shift employment abroad, and to remove hidden taxes on retirement savings and provide equitable taxation of earnings.


This Act may be cited as the “Shared Economic Growth Act of 2016”.


(a) Part VIII of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended by adding the following new section:

“251. (a) General Rule. In the case of a corporation, there shall be allowed as a deduction an amount equal to the amount paid as dividends in a taxable year of the corporation beginning on or after January 1, 2017.
(b) Limitation of benefit to tax otherwise payable.
1)     The deduction under this section may not exceed the corporation’s taxable income (as computed before the deduction allowed under this section) for the taxable year in which the dividend is paid, decreased by an amount equal to 2.85 times any tax credits allowed to the corporation in the taxable year.
2)     Where the deduction otherwise allowable under this section in a taxable year exceeds the limitation provided in paragraph 1 of this subsection, the excess may be carried back and taken as a deduction in the two prior taxable years or forward to each of the 20 taxable years following the year in which the dividends were paid. However, the total deduction under this section for dividends paid during the taxable year plus carryovers from other taxable years may not exceed the limit provided in paragraph 1 of this subsection. Rules equivalent to those provided in paragraphs 2 and 3 of subsection 172(b) of this subchapter shall govern the application of such carryover deductions.
3)     No amount carried back under paragraph 2 of this subsection may be claimed as a deduction in any taxable year beginning on or before December 31, 2016.
(c)   Consolidated groups. In the case of a group electing to file a consolidated return under section 1501 of this Subtitle, the deduction provided under this section may be claimed only with respect to dividends paid by the parent corporation of such consolidated group.”

(b) Subparagraph (b)(1)(A) of Section 243 of Part VIII of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended to read as follows:

            “(A) if the payor of such dividend is not entitled to receive a dividends paid deduction for any amount of such dividend under section 251 of this Part, and if at the close of the day on which such dividend is received, such corporation is a member of the same affiliated group as the corporation distributing such dividend, and”.

(c) Section 244 of Part VIII of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is repealed for tax years beginning after December 31, 2016.

(d) Subparagraph (a)(3)(A) of Section 245 of Part VIII of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended to read as follows:
            “(A) the post-1986 undistributed U.S. earnings, excluding any amount for which the distributing corporation or any corporation that paid dividends, directly or indirectly, to the distributing corporation was entitled to receive a deduction under section 251 of this Part, bears to”.

(e) Subsection 1(h) of Part I of Subchapter A of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is repealed for tax years ending after December 31, 2016.

(f) Subsection (a) of Section 901 of Part III of Subchapter N of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended to read as follows:
“(a) Allowance of credit
If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960.  However, in the case of a corporation, no credit shall be allowed under this section or under section 902 for foreign taxes paid or accrued, or deemed to have been paid or accrued, in tax years beginning after December 31, 2016. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against any tax treated as a tax not imposed by this chapter under section 26(b).”
This amendment shall override any contrary provision in any existing income tax convention.


(a) Subchapter A of Chapter 3 of Subtitle A of the Internal Revenue Code of 1986 is amended by adding a new Section 1447 to read:
“1447(a) General rule. In the case of dividends paid to any non-resident individual or corporation by a United States corporation that claims a deduction under Section 251 with respect to such dividend, the payor shall deduct and withhold from such dividends the tax shall be equal to 30 percent of the gross amount thereof, in addition to any other tax withheld with respect to such payment under this subchapter. The imposition of this 30 percent withholding tax on dividends shall override any contrary restriction in any income tax convention.
(b) Alternative additional tax. In lieu of the withholding tax provided under subsection (a), a payor corporation may instead elect to forego the benefit of the dividends-paid deduction under Section 251 with regard to so much of the dividends as would otherwise be subject to withholding under subsection (a), and instead to withhold from such dividends an amount of tax equal to the top rate of corporate income tax under Section 11 multiplied by the amount of such dividends, and to apply the tax thus withheld as a prepayment of the payor corporation’s tax liability. Any tax so withheld under this subsection (b) shall act as an incremental final tax on the relevant shareholder that may not be reduced.

(b) Section 871 of Subchapter N of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended by redesignating subsection (n) as subsection (o) and adding a new subsection (n) to read:
“(n) Additional 30 percent tax on deductible dividends paid to nonresident alient individuals.
(1)   General rule. In the case of dividends paid to any non-resident alien individual by a United States corporation that claims a deduction under Section 251 with respect to such dividend, there is hereby imposed for each taxable year a tax equal to 30 percent of the gross amount thereof, in addition to any other tax imposed with respect to such payment under this subchapter. The imposition of this 30 percent tax on dividends shall override any contrary restriction in any income tax convention.
(2)   Exception. In the case of any dividend for which the payor corporation elects the alternative final tax under Section 1447(b), the 30 percent tax under paragraph (1) of this subsection shall not apply.
(3)   Alternative election to pay individual income tax at the highest individual rate. If the non-resident alien taxpayer elects to treat the dividend income otherwise taxable under paragraph (1) of this subsection as income connected with a United States business, and further agrees to pay tax thereon at the highest rate provided under Section 1, then the  30 percent tax under paragraph (1) of this subsection shall not apply.”

(c) Section 881 of Subchapter N of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended by redesignating subsection (f) as subsection (g) and adding a new subsection (f) to read:
“(f) Additional 30 percent tax on deductible dividends paid to foreign corporations.
(1)   General rule. In the case of dividends paid to any foreign corporation by a United States corporation that claims a deduction under Section 251 with respect to such dividend, there is hereby imposed for each taxable year a tax equal to 30 percent of the gross amount thereof, in addition to any other tax imposed with respect to such payment under this subchapter. The imposition of this 30 percent tax on dividends shall override any contrary restriction in any income tax convention.
(2)   Exception. In the case of any dividend for which the payor corporation elects the alternative final tax under Section 1447(b), the 30 percent tax under paragraph (1) of this subsection shall not apply.
(3)   Alternative election to pay income tax at the highest icorporate rate. If the foreign corporate taxpayer elects to treat the dividend income otherwise taxable under paragraph (1) of this subsection as income connected with a United States business, and further agrees to pay tax thereon at the highest rate provided under Section 11, then the  30 percent tax under paragraph (1) of this subsection shall not apply.”


(a) Section 1 of Part I of Subchapter A of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended by adding the following new subsection:

“1(h) (1) (a) Tax imposed. There is hereby imposed a tax of 7.65 percent on so much of the adjusted gross income for the taxable year of that exceeds--
(A)  $500,000, in the case of
(i) every married individual (as defined in section 7703) who makes a single return jointly with his spouse under section 6013;
(ii) every surviving spouse (as defined in section 2(a)); and
(iii) every head of a household (as defined in section 2(b)), ;
(B) $250,000, in the case of
(i)    every individual (other than a surviving spouse as defined in section 2(a) or the head of a household as defined in section 2(b)) who is not a married individual (as defined in section 7703); and
(ii) every married individual (as defined in section 7703) who does not make a single return jointly with his spouse under section 6013;
(C) $7,500, in the case of every estate and every trust taxable under this subsection.

 (b) Credit for hospitalization tax paid. There shall be allowed as a credit against the tax imposed by this subsection so much of the amount of hospitalization tax paid by the individual with respect to his wages under subsection 3101(b) and to his self-employment income under subsection 1401(b) of this Title as exceeds the following amounts:
A)    In the case of individuals described in subparagraph (1)(A) of this subsection, $14,500; and
B)    In the case of individuals described in subparagraph (1)(B) of this subsection, $7,250.



Subsection (k) of Section 168 of Part I of Subchapter A of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986 is amended by adding the following new paragraph:
“168(k)(8) Expensing of investments made from post-2016 earnings. In the case of a corporation subject to tax under Section 11, any qualified U.S. property purchased or constructed from the reinvestment of taxable income accrued in taxable years beginning after December 31, 2016, which income was not offset by a dividends-paid deduction under section 251 or by tax credits, the allowance under subsection (k)(1)(A) of this section shall be 100 percent rather than 50 percent. The Secretary shall prescribe regulations providing for the creation and maintenance of eligible reinvestment accounts, such that taxable income not offset by the Section 251 deduction or credits shall be an addition to the account and investments qualifying for the 100 percent allowance shall be a subtraction from the account, and corporate taxpayers may treat otherwise eligible investments as funded by such earnings to the extent of the positive balance in the reinvestment account.”

Shared Economic Growth – Bill and Computations Summary

The Shared Economic Growth bill allows a corporate dividends paid deduction, restricted to taxable income otherwise reported decreased by  2.85 times any credits claimed, so that the deduction may only reduce tax to zero. Excess reductions could be carried back 2 years and forward 20, so there would be incentive to pay out earnings with 2 years. Subsection 2(a) of the bill makes this change, with Subsections 2(b), (c) and (d) making certain conforming changes to the existing corporate dividends received deduction provisions.

In 2010 corporations paid tax of $223 billion, so offsets of up to $223 billion would be required for static revenue neutrality. The first and most natural offset is individual tax payable on the dividends paid. In order for the proposal to work, special rates for dividends and for capital gains on equity would need to be eliminated, so that these dividends would be taxed at full 2017 individual rates. Subsection 2(e) repeals these special rates, but does not otherwise upset the incentives provided for certain special categories of capital gains. This would have provided an offset of $74 billion without altering the various special capital gains exemption and rollover provisions.  As a practical matter, this offset is only feasible in conjunction with the allowance of a dividends paid deduction, since such a deduction eliminates double taxation on the corporate side and thus eliminates any legitimate argument in favor of the capital gains rate benefits.
Subsection 2(f) provides an offset mechanism that is only possible in conjunction with enactment of a dividends paid deduction. Because the deduction would effectively eliminate taxation of corporate income, including foreign income, it would no longer be necessary to allow a corporate credit for foreign taxes paid. A deduction could be permitted instead with the same bottom line effect. However, allowance of a deduction would impel corporations to pay out more dividends in order to eliminate the corporate level tax on the foreign income, which in turn increases the offset at the individual level. With this provision, the individual level offset from full 2011 rate taxation of the dividends needed to reduce corporate tax to zero would be some $54 billion, after factoring out shareholders not subject to tax.

Section 3 provides another offset only feasible in conjunction with a dividends paid deduction. Foreign investors are effectively paying the 35% U.S. corporate level tax on their investment earnings. Congress would not have to let them have the benefit of the dividends paid deduction, since U.S. resident shareholders would have to pay full rate tax on such dividends. So, Section 3 imposes a 30% incremental withholding tax on dividends paid to foreign shareholders. This offset amounts to some $33 billion. The provision provides certain alternative elections that would be unlikely to be used but which would establish that the incremental tax would be appropriate under the principles of America’s tax treaties, essentially leaving the foreign shareholders in the same economic position that they are in now and keeping them on a level with U.S. shareholders.

Section 4 provides the final offset, subjecting individual income over $500,000 a year to an Adjusted Gross Income tax equivalent to the individual portion of the FICA taxes that ordinary wage earners pay. At a 7.65% level, with an allowance crediting the Obamacare taxes that were implemented since the first version of this proposal was explained to Congress, this levy would offset the revenue attributable to dividends paid to non-taxable retirement plans, so in effect this levy is requiring high income individuals to pay a supplemental tax similar to FICA taxes that supports non-social security private and state pension savings, thereby taking pressure off of the social security system. This is an optional element of the proposal, but it seems like good and fair policy. This provides an offset of $57 billion. Moreover, because these retirement savings will ultimately be paid out and taxed, this would increase revenue by at least some $22 billion per year on a static basis as the pension income is paid out (after accounting for Roth IRAs etc.) This additional revenue will be important as the baby boomers move through retirement and the government is looking for revenues to pay off the deficit in social security funding.

Section 5 provides an optional add-on. Because Shared Economic Growth would make it attractive for corporations to invest in U.S. operations, it would also be desirable to allow them to retain some of their earnings to make such U.S. investments rather than squeezing out too much in dividends, so that we could encourage the most rapid rebuilding of the U.S. economy. Section 5 therefore allows corporations to take a 100% immediate deduction for their investment in qualified U.S. property made from their post-2016 taxable earnings not paid out as dividends. While prior investment expensing initiative were not notably successful in increasing investment, they were in the context of an overall U.S. climate that made investments unattractive. Expensing could be expected to be much more successful at encouraging investment under Shared Economic Growth, and given that it is a relatively short-term timing benefit, the cost to the government would be low (essentially interest on 35% of the investment amount over less than 7 years at the U.S. Treasury borrowing rate). Further, because Shared Economic Growth could be expected to encourage accumulated foreign earnings to be brought home, either producing taxable income that neutralizes this expensing benefit at the corporate level or incurring additional shareholder-level tax when paid out as dividends, there should be more than enough incremental revenue to offset the cost of the timing item.  

Wednesday, June 1, 2016

Why Capitalism and Globalism Together Crush Workers

Properly run and regulated, a capitalist economy can be a good thing. The person with a bright idea forms a corporation, people with spare savings from their productive jobs buy shares, and useful new projects and good-paying new jobs appear for the benefit of all. Americans are trained to think of that ideal image, but we are not encouraged to push for the things that are necessary to ACHIEVE that image.

In any form of economy, the profit of an enterprise flows by default to some sort of an owner. In Big State Socialism, that owner is the government. In humane socialism, it is social collectives of like-minded people who have pooled their resources of money and labor, rather like the initial founders of a start-up business. In capitalism, the profit flows to capital, i.e. to the people who put up investment money. Labor, the workers in the enterprise, only get as much as their market power enables them to demand.  If you have too high of a ratio of would-be workers to jobs, the amount of the profit going to labor will fall, and so more will go to capital.

In America over the last 40 years, automation, the reduction in stay-at-home parents, heavy immigration of would-be workers with no money to spend, and globalization have all combined to reduce the market power of workers, without anybody doing anything useful to re-balance the system. So, the share of income flowing to capital has risen, as can be seen in this chart.
Capital in America sits mainly in the hands of a a very elite group of individuals. You have heard of "the 1%", but the bottom half of the top 1% are mostly professional people who work hard for a living. Capital, people who make their money off of their or, often, off of other people's money (think hedge fund managers and the like), are concentrated in the top 1/10%. Despite their purchases of fantastic homes, yachts, and so on, those folks don't spend a very high percentage of their income. They have so much they couldn't spend it if they made it a full-time job.

That creates a problem. The issue with our economy is not a lack of capital. Corporations are sitting on unprecedented piles of cash. Trillions of dollars are invested in all kinds of unproductive speculation chasing anything that looks remotely like a decent return on investment. No, there is plenty of capital, but what we are short on is good productive investments. Why is that? It is because our consumer economy is short on demand. The incomes of normal families have been flat to declining since 1973. Consumers are maxed out on debt. New college graduates drowning in student loans who hope to buy houses at unaffordable prices strain to find dollars to spend on consumption. All those consumers would be happy to spend more money, to generate the demand that would get the economy going, if they had it, but they don't. Why? Because the share of money going to rich capitalists, the people who don't spend all their money, has been increasing rapidly. That concentration of wealth is sucking the life out of our economy. That hurts all Americans, including, ironically, the wealthy, who could actually be better off if there was enough healthy consumer demand to allow the economy to grow as fast as it could.

Where does globalization come in? This can be seen through some math that nobody talks about. Say that a business can sell 5 widgets for $20 each, to earn $100. Say further that all of that money went to labor, so that the employees pocketed the $100. Now they could go out in the market and buy 5 widgets, or $100 worth of something else, from some other business, with the employees of that business earning $100 (assuming, for the sake of simplicity, that there are  no material costs) that they in turn spend. That economy will produce full-out. Now bring in the capitalist, Junior Warbucks, who instead pays the workers only $50 and takes $50 for himself, spending $20 on his yacht and keeping $30 to use for unproductive speculation.  That sucks out $30 worth of demand with each round, reducing production and growth.

Now bring in another country, perhaps Thailand.  On day 1, workers in Thailand offer nice Jasmine rice for sale, and workers in America say "hey, that's nice stuff, I will buy $10 worth of that." So the workers in Thailand get $10, the American workers have $40 left to spend on U.S.-made products, and Junior Warbucks spends $20 on U.S. made stuff and holds back $30 like before. So now $60 still gets recycled in the U.S. economy, creating demand, while the Thai workers get $10 that they didn't get before, which means a lot to them.

But now Junior Warbucks gets an idea. Instead of paying $50 to U.S. workers, he can move the widget plant to Thailand and get those Thai workers to do the job for $5, leaving another $45 of profit for himself.  So now the U.S. workers get nothing, and can spend nothing. The Thai workers get $5, and they have to be glad to take it because the business of selling Jasmine rice to American workers just evaporated, since those workers can't afford that exotic luxury any more. Junior still only needs $20 for his yacht, so now he uses $75 for unproductive speculation. So, only the $20 that Junior spends on his yacht gets recycled in the U.S. economy, not the $60 from before. The U.S. economy shrinks, and the Thai economy drops from $10 to $5.

The important thing to note here is that the good-paying jobs in the U.S. made it possible for BOTH the U.S. workers and the Thai workers to be better off. When those jobs moved to Thailand at lower wages, both countries suffered, because money that could have been recycled into jobs and productive enterprise was instead sucked out of the system and used to bet on bond prices, oil futures, collateralized debt obligations, credit default swaps, buying politicians, and the other nonsense that has replaced productive activity in America. This is globalization gone wrong; it goes wrong when globalization is used to shift income out of the hands of labor and into the hands of capital.

Shared Economic Growth aims to pull valuable activity back into America to increase the market power of American workers, causing money to flow back into the hands of labor rather than capital. Further, the offsets are structured to allow workers to earn more on their savings, again boosting the amount of healthy consumer demand in America, allowing for stable growth rather than the weak and unsustainable  debt-fueled artificial growth we've been relying on for the past 16 years.  As money shifts from unproductive speculation to productive labor, everyone will benefit, not just in America but in other countries that use their own resources to produce things that these newly-empower American workers want. That is healthy capitalism, the balanced kind that works for everyone, the kind that built the healthy America of the 50s and 60s. We need to take the steps necessary to regain that balance. Shared Economic Growth is the right first step.

Monday, February 29, 2016

Count the Benefits

Shared Economic Growth
Count the Benefits

·       Reverses the current incentive to locate high value jobs off shore. Today net profit can be increased 54% purely by having operations outside of the U.S.  Reversing this incentive will increase the demand for American workers and drive up wages.  Want evidence that this helps? Look at the growth in average hourly direct pay for production workers in manufacturing for 3 low tax countries. Between 1980 and 2004, Irish wages grew from 67.6% of the U.S. level to 107.5%. Swiss wages grew from 117.9% of the U.S. level to 141.6%, and . Singaporean wages grew from 14.5% to 35.6%, despite the fact that Singapore increasingly used imported Malay day labor while the native Singaporeans moved into white collar jobs.
·       Eliminates the incentive to hold cash off shore. Today there is a penalty of up to 35% for bringing cash into the U.S. economy. Corporations accumulate hundreds of billions off shore each year to avoid this penalty. Removing that penalty would add liquidity to our economy as those hundreds of billions flow home.
·       Eliminates the incentive to over-leverage corporations by putting debt and equity on an equal tax footing. Corporations borrow too much today, reducing their stability, because they have a tax motive to do so.
·       Increases the equity returns to hard-hit IRAs, 401(k)s, and other retirement savings by up to 54%, restoring the value of savings and rewarding responsible middle class people who live within their means and save for the future. 
·       Unlike the current bail-outs that are subsidizing operations that have failed, it provides incentive to place high profit winning operations in the U.S., revitalizing our economy. We should build our economy on stars, not on dogs.
·       Reduces the current over-focus on speculative growth and returns attention to solid cash income.
·       Eliminates the tax incentive to keep cash locked in corporations, liberating investment dollars to flow to the best overall prospects.
·       Stops the use of an individual tax subsidy that applies equally to investments in foreign operations, redirecting those dollars to our own economy.
·       Shuts down tax abuses.
·       Best of all, Shared Economic Growth does all of this without adding a dollar to the deficit and while improving the fairness of our income tax structure.

Wednesday, February 24, 2016

Shared Economic Growth: No Tricks, Just a Powerful Tool to Change America

Shared Economic Growth:
No Tricks, Just a Powerful Tool to Change America

Shared Economic Growth is a simple 3 page bill that keeps the well established enforcement mechanisms of our income tax system in place, and improves them by eliminating incentives for corporate tax and capital gains abuses. It replaces a losing war to control corporate income with a simple, easily enforced tax on 1099 income.

Corporations are allowed a deduction for dividends they pay out, limited to the amount of their pre-deduction tax liability. To the extent that they elect to pay out dividends, they are thus freed from U.S. tax.

Favorable tax rates on capital gains and dividends are eliminated. This causes the dividend deduction to be self funding for dividends paid to individuals. Because corporate earnings are increased by up to 54% due to the lack of U.S. tax, lower bracket shareholders come out ahead, and upper bracket shareholders come out close to even on this trade.

Foreign portfolio investors are subjected to an offsetting 35% withholding tax, holding them neutral

Currently the U.S. gives corporations a dollar-for-dollar credit for taxes paid to foreign countries, making them care less about the tax those countries impose. Most of our trading partners do NOT allow their corporations a credit for U.S. tax, making their companies shy away from high U.S. tax rates. They exempt foreign income. Because Shared Economic Growth would eliminate U.S. corporate level tax on both foreign and domestic income, we could change the foreign tax credit to a deduction, effectively matching our trading partners and complying with our treaty obligations, while forcing more dividends to be paid to - and taxed to - shareholders.

To make up for the revenue loss on dividends flowing to IRAs, 401ks, and defined benefit retirement plans, individual income over $500,000 a year is subjected to a tax at the rate of the employee FICA tax imposed on middle class wage income - a tax that people currently don't pay on most of  that over $500,000 income. The all-in effective income tax rate on persons earning over $500,000, including state taxes, would still be less than 40% on average. This improves the fairness of federal funding for overall retirement security. And, since the tax revenue lost on dividends paid to retirement savings accounts is only temporary, the net tax dollars collected from this offset will be recycled back to help the government to get through the coming Social Security funding crisis. Both personal retirement savings AND tax revenues for Social Security would be increased.  

Sunday, March 17, 2013

Jordan Weiss in Tax Notes with similar thoughts

March 25, 2013
A Tax Increase Republicans and Democrats Should Embrace
by Jordan P. Weiss
Summary by Tax Analysts®
Jordan P. Weiss lauds David Cay Johnston's approach to revising the accumulated earnings tax, calling it a "common-sense approach," and offers a few suggestions of his own for further tax reform.
Full Text Published by Tax Analysts®
To the Editor:
I woke up this morning to yet another newspaper article bemoaning the accumulation of offshore earnings of United States corporations. A few weeks past, David Cay Johnston gave readers a common-sense approach to the accumulated earnings tax to, in part, ameliorate the issue. Johnston, "How the Accumulated Earnings Tax Can Stimulate Growth," Tax Notes, Mar. 11, 2013, p. 1265 2013 WTD 47-21: Viewpoint. An approach he concluded would provide better returns for investors, more jobs for Americans, and encourage entrepreneurial spirit. While common sense is increasingly uncommon in the current tax debates, everyone seems to agree that we need to bring the cash held offshore by American corporations back home. In that spirit, I offer the following suggestions (to be coupled with Mr. Johnston's proposed accumulated earnings proposal):
·         Make the dividend of the offshore foreign earnings tax deductible to the corporation.
·         Impose a 30 percent final withholding tax on the dividend, even to 401(k)s and tax-exempt organizations.
·         Eliminate the foreign tax credit on the dividend.

If the dividends of the foreign earnings held offshore are deductible to corporations, essentially we would have eliminated corporate tax on such earnings. Corporations would be hard-pressed to complain about the high United States tax rate on such earnings.
A 30 percent withholding tax, call it the "Buffett tax," would apply to the dividend, which ought to make even the most hardened Democrat support the tax. It would be fairly easy to draft mechanisms to make sure we are only subjecting the foreign earnings to the withholding tax.
We would have corporate integration (a single level of tax) on such foreign earnings which ought to make even the most hardened Republican support the tax.
The tax-exempts might complain; however, they are getting a larger distribution because of the lack of corporate tax on such earnings.
Shareholders will certainly demand the cash dividends, and corporate boards will hold onto such cash at their peril.
Corporate raiders will eye the cash hoards and merger and acquisition activity would be enhanced.
Capital reallocation to its most productive uses will occur.
The tax would be borne mostly by "millionaires and billionaires" who own most of the stock.
And as concluded by Mr. Johnston, we would provide better returns for investors, more jobs for Americans and encourage entrepreneurial spirit.
It might just bring some of those earnings back home!
Very truly yours,

Jordan P. Weiss
Mar. 19, 2013

Saturday, March 9, 2013

Shared Economic Growth: Discouraging Corporate Misdeeds, Empowering People

Making Corporations More Responsive


Enron. WorldCom. Global Crossing. One could fill a page with the names of corporate scandals in which companies fooled investors and left employees without jobs or pensions. The Sarbanes-Oxley accounting controls legislation was supposed to help with this problem, but try downloading the annual report for a corporation and see if you can tell whether or not the corporation is truly profitable. There is one foolproof way to tell, and that is by asking the same question that led truly savvy investors to spot Enron's troubles well before the company's collapse: Is the company generating cash? The Shared Economic Growth proposal would require any company seeking the benefit of the dividends paid deduction to pay its taxable earnings, in cash, to its shareholders. It would be impossible to hide behind complex accounting or confusing jargon - either the company would have the money, or it would not. If a company wanted more cash to invest, it would need to convince the public to buy new stock. Any company that had failed to respond to previous investor demands to "show them the money" would need to do some serious explaining in order to persuade anyone to invest their hard-earned cash in it. Wouldn't that increase your confidence in your investments?


We have all read the stories of corporate CEOs who were paid $50 million while their corporations tanked. In some cases, the executives' poor performance had no consequences at all. In others, CEOs were forced out, but with additional huge severance packages to soothe the pain of parting. What can shareholders do in reaction? They can refuse to vote for the director candidates that the corporation offers, but they cannot vote for alternatives. They can sell their shares and take a loss, but the corporation still keeps its cash. The shareholders, for the most part, are effectively powerless.

The same holds true when a company abuses its employees, creates an environmental disaster, cheats the U.S. government, or otherwise misbehaves. Except in the rare case where a government agency imposes a truly serious fine, there is no effective mechanism for the American people to force corporations to be good citizens.

Under the Shared Economic Growth proposal, however, corporations would lose 35% of their earnings unless they paid them out as dividends. That would create heavy pressure for a company to give up its cash. If it wanted more cash to invest a grow, the company would need to go to the market and convince people that it deserved their investment dollars. It would come to you, an investor, and ask you to trust it with your money.

If a corporation wasted its investors' money on under-performing executives or if it was caught doing something evil, would you invest? The public would finally have a real source of control. Companies that misbehaved would see their funding dry up.

Wouldn't that be a good thing?

Shared Economic Growth: Why Changing a 35% Tax Increases Returns on Savings by 54%

How a 35% Tax Takes Away a 54% Opportunity

The U.S. corporate income tax is imposed at a 35% rate. So, for $100 of pretax earnings, a corporation will pay tax of $35, leaving $65 to pay to its shareholders.

To see the real impact of removing this burden through a dividends paid deduction, however, you need to turn these numbers around and look at them from the point of view of the shareholder currently receiving $65, or from the point of view of the corporation currently earning $65 after tax from its U.S. operations. If you receive $65 after tax now, removing the U.S. corporate tax burden will allow you to receive $100. That is an increase of $35 over the $65 you had before. That's a 54% increase - the amount of money you receive will increase by more than half.

If that is money flowing into your pension fund or tax free college fund, your earnings will grow much faster.

From the point of view of a corporation today, it means that it can boost its profits by 54% just by firing its American workers and 
moving the operations abroad. Trying to address this problem by repealing deferral, as some have suggested, would not work, because then we would have a situation where a foreign corporation would be able to earn an automatic 54% profit by buying a U.S. corporation, firing the old U.S. headquarters staff, and making it a foreign owned corporation. Only Shared Economic Growth will reverse this insane incentive and encourage companies to create good jobs here in America.

Wouldn't that be best?

Shared Economic Growth: Attract Valuable Jobs, Don't Force Them to Be Sold

Eliminating Deferral Is A Bad Idea

The current American corporate tax system, like the corporate tax systems of most countries, taxes corporations more lightly on their foreign earnings than on their U.S. earnings. Most of our competitor nations have what is called a territorial tax system, under which foreign earnings are never taxed. We have a deferral system, under which most foreign subsidiary earnings can be protected from U.S. tax until they are paid up to the U.S. parent as dividends. This, of course, provides a
bad incentive. All U.S. corporations have an incentive to move their high value, high profit activities out of the U.S. in order to enjoy a lower tax rate, and earn up to 54% more profit. For this reason, some people in our government have proposed getting rid of deferral and taxing the worldwide income of U.S. corporations currently.

This may sound like a nice idea, but think it through. The U.S. is not unique anymore. We no longer have all the money - in fact, we are heavily indebted to other countries. We no longer have our gigantic technical edge - that lead has faded and we now import more goods of all kinds, including high technology goods, than we export. If our corporations are unable to compete, they will be forced into bankruptcy or will be bought out by foreign rivals.

Consider both common sense and experience. Consider a company that currently has significant foreign activities in tax friendly countries. Suppose that we now end deferral and subject all of its worldwide income to a 35% tax. Suddenly, the corporation is 35% less profitable than it used to be. Put another way, suddenly the corporation would be
54% more valuable if it were owned by a foreign parent. Do you think it will survive as a U.S. owned corporation, or will it be bought out and have all its U.S. headquarters jobs eliminated?

Eliminating Deferral in the Real World

Now consider experience. Our country has seen two cases where deferral was eliminated for particular industries or parts of industries, and in both cases, the results were exactly what you would expect.

First, in the insurance industry, U.S. based companies must pay full, current U.S. tax on all income from insuring U.S. risks, even if they reinsure those risks with a foreign affiliate, i.e. even if a foreign subsidiary takes on the risk of loss. Foreign based insurance companies insuring U.S. risks don't have that problem - they reinsure with a foreign affiliate and avoid U.S. tax. A coalition of insurance companies recently sent a letter to the House Ways and Means Committee leaders that did not ask for relief from taxation for the companies in question, but instead that tax be imposed on profits
earned by their foreign competitors from insuring and reinsuring U.S. risks. The coalition pointed out that the current system puts them at an intolerable disadvantage that is destroying the U.S. based companies. "For example, White Mountains Group, EverestRe Group, Arch Capital and PXRe Group LTD moved their domiciles offshore into a no-tax jurisdiction and continue to cover US-based risks. Other US companies and lines of business have simply been acquired by foreign insurance companies domiciled in low-tax or no-tax jurisdictions."

A similar experiment in the shipping industry had comparable results. A recent letter from the Federal Policy Group, a tax lobbying organization, that was printed in Tax Notes, Sept. 10, 2007, p. 997, summarizes the effects of ending deferral on shipping income in 1986 and restoring it in 2004:

"The results of the 1986 act 'experiment' were dramatic. Much of the decline was attributable to the acquisition of U.S.-based shipping companies by foreign competitors not subject to tax on their shipping income. For example, Signapore-based Neptune Orient Lines in 1997 acquired U.S.-based American President Lines, then the largest U.S. shipper. In 1999 Denmark-based A.P. Moller Group acquired the  international liner business of Sea-Land Services, Inc., a subsidiary of CSX Corp. and previously the largest U.S. shipper of containers. By becoming foreign-owned, these shipping businesses were able to shed themselves of crippling subpart F taxation and compete again in the global markets. Of course, the movement of these businesses overseas meant the loss of headquarter jobs and related employment in the United States.

"Fewer U.S.-based shipping companies also meant fewer potential investors in the U.S.-flag "Jones Act" domestic trade, which is limited to U.S.-owned enterprises. Thus, one should not have been surprised that the number of U.S.-flag ships also declined following the 1986 act change. Over the 1985-2004 period, the U.S.-flag fleet declined from 737 to 412 vessels, causing U.S.-flag shipping capacity, measured in deadweight tonnage, to drop by more than 50 percent... A 2002 Massachusetts Institute of Technology study expressed concern that the [Effective US Control] fleet, eviscerated following the 1986 act changes, was not large enough to satisfy U.S. strategic needs.

"The 2002 MIT study pointed directly at the loss of deferral as the culprit.

"The combination of U.S. tax laws passed in 1975 and 1986 resulted in a business environment where EUSC shipowners could no longer avoid paying tax on current income. This change put them at a major disadvantage to their foreign competitors who often paid little or no income tax... Consequently, EUSC shipowners have greatly reduced their investment in EUSC ships since the Tax Reform Act of 1986... The impact of the deferral's restoration on OSG, the leader in urging the 2004 legislation, was nearly immediate. In 2005 OSG posted exceptional financial results, earning $465 million in net income, a company record attributed in large part to the 2004 legislation. OSG had gained the confidence needed to take investment risks and again become a growing enterprise.
In January 2005, just three months after enactment of the 2004 legislation, OSG acquired Stelmar Shipping, an Athens-based international shipper of crude and petroleum products, thereby reversing the trend of foreign takeovers of U.S. shipping companies. The acquisition of Stelmar increased the size of OSG's foreign-flag fleet by 80 percent, from 50 to 90 vessels.

OSG also began committing itself to a major expansion of its U.S.-flag fleet. Before enactment of the 2004 act, OSG's U.S. fleet had been declining in size. In 1996 OSG's U.S.-flag fleet consisted of just 16 operating vessels, and by 2004, the fleet had shrunk to just 10 operating vessels. In June 2005 OSG ordered 10 new Jones Act tankers to be built at the Aker Philadelphia shipyard, today an employer of approximately 1,300. And in February and March 2007, OSG announced plans to commission six new U.S.-flag vessels to be built at the Aker Philadelphia shipyard and Alabama's Bender shipyard."

A Better Solution

The threat to U.S. corporations from repeal of deferral is not just a bogeyman. Experience shows that it is real, and that makes sense. Corporate tax makes a huge difference in the value of a corporation. If we suddenly inflict a huge value drop on our U.S. corporations that can be undone simply by having them acquired by foreigners, they will be acquired. That is life in the real world in the 21st century.

Fortunately, we have a better option. The Shared Economic Growth proposal gets rid of the incentive to export U.S. operations in a manner that actually gives U.S. corporations a competitive advantage. We can easily afford it, and our economy needs it.

Wouldn't that be a better idea?