4 Ways to Change the Fed
Cross-posted from The Traders Crucible
I've listed below possible legislative language to 1. place the Fed under Tsy control, 2. authorize Tsy to issue US Notes to fund spending and the Fed to issue debt obligations to control interest rates, 3. Use coin seigniorage to offset budgetary costs of net interest, trade deficit and an automatic payroll tax holiday system, and 4. an automatic payroll tax holiday system (naturally). Sen. Sanders would do well to allocate any budgetary savings to new spending lest it simply be saved up for future tax cuts by the next Republican president.
1. Putting Fed (both FRB and the regional Banks) under control of the Secretary of the Treasury
Current law (12 USC 246) reads:
"Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary."
Amend that with:
Section 246 of Title 12, United States Code, is amended by striking the words "agent appears to conflict with the powers of the Secretary of the Treasury" and replacing with the following: "banks is exercised".
2. Tsy and the Fed swap jobs, with Tsy creating the dollars it needs to spend and the Fed issuing the bonds it needs to control interest rates.
Section 5115 of Title 31, United States Code, is amended by striking subsection (b) and inserting, after subsection (a), the following: "(b) The Secretary of the Treasury may in his discretion deposit United States currency notes, in paper or electronic form, in the general fund of the Treasury as necessary to issue warrants for money drawn on the Treasury consistent with appropriations."
Section 248 of Title 12, United States Code, is amended by inserting, after subsection (r ), the following: "(s) Authority to issue obligations (1) The Board is authorized, with the approval of the Secretary of the Treasury (“Secretary”), to issue publicly and have outstanding obligations of such amount, having such maturities and bearing such rate or rates of interest as may be determined by the Board. Such obligations may be redeemable at the option of the Board before maturity in such manner as may be stipulated therein. So far as is feasible, the debt structure of the Board shall be commensurate with its asset structure. (2) The Board is also authorized to issue its obligations to the Secretary and the Secretary may in his discretion purchase or agree to purchase any such obligations. The Secretary may sell, upon such terms and conditions and at such price or prices as he shall determine, any of the obligations acquired by him under this subsection. (3) Obligations of the Board issued pursuant to this section shall be lawful investments, and may be accepted as security for all fiduciary, trust, and public funds, the investment or deposit of which shall be under the authority or control of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or possession of the United States, or any agency or instrumentality of any of the foregoing, or any officer or officers thereof."
If the Fed needs a revenue source to pay interest on its obligations (language above taken from Federal Financing Bank statute), the Fed already has the authority to levy and adjust its transaction fees.
Subsection (c) of Section 248a, Title 12, United States Code is amended by inserting, after clause (4), the following: "(5) schedule of fees may be adjusted, in whole or part, to pay interest on obligations issued by the Board."
According to the Tsy website, US Notes are exempt from the debt ceiling ("Total Public Debt Subject to Limit is defined as the Total Public Debt Outstanding less the Unamortized Discount on Treasury Bills and Zero-Coupon Treasury Bonds, old debt issued before 1917, and old currency called United States Notes as well as Debt held by the Federal Financing Bank…").
3. The return of the platinum coin (with an assist from the Tea Party)
There's a Tea Party-backed House bill (HR 2977) introduced recently that seeks to to replace dollar bills with dollar coins. The bill''s section (d) would put coin seigniorage profits on-budget, which is actually a wonderful idea. That could mean (to extend the principle) that a payroll tax holiday wouldn't add to the deficit so long as seigniorage proceeds equal to the "tax holiday transfer of funds" were deposited in TGA every year. Likewise, the demand leakage created by our chronic $600B trade deficit could be offset without increasing the budget deficit or imposing trade barriers. Where I take the Tea Party bill in an unexpected directions begins with "The total deposits".
The ninth proviso of section 5136 of title 31, United States Code, is amended by inserting, after ‘miscellaneous receipts’ the following: "and such amount shall be included as an estimated receipt of the Government and a receipt of the Government under paragraphs (6) and (7), respectively, of section 1105(a) in any budget submitted under such section. The total deposits of said miscellaneous receipts each year shall be no less than the annual sum of Secretary's estimates of Tax Holiday Transfer of Funds, Net Interest and Trade Deficit."
Between replacing debt service costs with US Notes and/or rebating back net interest with coinage, uncapping SS FICA (see below) and offsetting the cost of the trade deficit, there's more than enough revenue to fund Sen. Sanders's universal healthcare bill without raising taxes or increasing the deficit. Of course a tax increase combined with a tax holiday could actually be a net tax decrease (see "unearned income Medicare contribution" below). Note, including net interest isn't really necessary if Tsy and Fed actually did swap jobs; also, the trade deficit could be replaced by OMB's similarly sized (just shy of $600B), Total Investment Outlays for Major Physical Capital, Research and Development, and Education and Training (Table 9.1 in President's Budget).
4. Enable Tsy to automatically set a counter-cyclical fiscal policy with an adjustable payroll tax holiday (No reason not to uncap Social Security FICA at the same time). As Greg Mankiw has pointed out, "Keynes also favored the payroll tax as a countercyclical policy instrument"
Chapter 21 of title 26, United States Code is amended by inserting, after Section 3128, the following:
"3129. PAYROLL TAX HOLIDAY.
(a) Tax Holiday Transfer of Funds-
‘(1) IN GENERAL- There are hereby appropriated to the Social Security and Medicare trust funds, out of money in the Treasury not otherwise appropriated, an amount equal to the reduction in FICA taxes described by subsection (b).
?‘(2) ALLOCATION AMONG FUNDS- Amounts shall be appropriated to such funds under paragraph (1) in the same proportions as amounts would (but for this section excepting subsections (f) and (g)) be appropriated to such funds under the Social Security Act and the Railroad Retirement Act of 1974.
(b) Reduction in Payroll Taxes-
‘(1) IN GENERAL- The rate of each FICA tax for each quarter (determined without regard to this section except for subsections (f) and (g)) shall be reduced by the number of percentage points equal to--
‘(A) such rate, multiplied by
?‘(B) the tax holiday percentage determined by the Secretary of the Treasury for such quarter.
‘(2) TAX HOLIDAY PERCENTAGE- The tax holiday percentage shall be Secretary of the Treasury's estimate of U3 unemployment rate, reduced by 2.5 percentage points, the resulting percentage then multiplied by ten (10). The tax holiday percentage shall not exceed 100%.
FOR EXAMPLE, if U3 rate is estimated to be 10%, it is first reduced to 7.5%, then multiplied by 10 to derive 75% as the current quarter's payroll tax holiday percentage.
(c ) Upon enactment of this Act, the Secretary of the Treasury shall notify employers of tax holiday percentage for each quarter in any manner as the Secretary deems appropriate.
'(1) FICA TAX- The term ‘FICA tax’ means--
‘(A) the tax imposed by section 3101 of the Internal Revenue Code of 1986 (and so much of the tax imposed by section 3201 as is determined by reference to the tax imposed by section 3101),
?‘(B) the tax imposed by section 3111 of the Internal Revenue Code of 1986 (and so much of the tax imposed by section 3221 as is determined by reference to the tax imposed by section 3111, and
?‘(C) the tax imposed by section 1401 of the Internal Revenue Code of 1986 (and so much of the tax imposed by section 3211 as is determined by reference to the taxes imposed by sections 3101 and 3111).
'(D) the tax imposed by section 1441 of the Internal Revenue Code of 1986.
‘(2) SOCIAL SECURITY AND MEDICARE TRUST FUNDS- The term ‘Social Security and Medicare trust funds’ mean--
‘(A) the Federal Old-Age and Survivors Insurance Trust Fund established by section 202 of the Social Security Act,
?‘(B) the Social Security Equivalent Benefit Account established under section 15A of the Railroad Retirement Act of 1974. and
'(C ) the Federal Hospital Insurance Fund established by section 1817 of the Social Security Act.
(e) Determination under subsections (a) and (b) shall be made on the basis of estimates by the Secretary. Proper adjustments shall be made to the extent prior estimates were in excess of or less than more accurate amounts.
(f) Eliminating Social Security FICA Cap and high-wage Medicare surcharge-
(1) Subsection 3121(a) of the Internal Revenue Code of 1986 is amended by repealing Paragraph 1.
(2) Subsection 1402(b) of the Internal Revenue Code of 1986 is amended by repealing Paragraph 1.
(3) Subsection 3101(b) of the Internal Revenue Code of 1986 is amended by repealing Paragraph 2.
(4) Subsection 1401(b) of the Internal Revenue Code of 1986 is amended by repealing Paragraph 2.
(g) Conforming unearned income Medicare contribution rate to standard FICA rate-
'(1) Subsection 1441(a)(1) of the Internal Revenue Code of 1986 is amended by striking the words "3.8 Percent" and replacing with the following: "15.3 percent".
'(2) Subsection 1441(a)(2) of the Internal Revenue Code of 1986 is amended by striking the words "3.8 Percent" and replacing with the following: "15.3 percent".