The Implementation of the 537 Accountability PACT

Sample Implementation of the Five Thirty Seven Accountability PACT:

The need for the 537 Accountability PACT has been explained; the goals and general principles have been outlined. Below is a specific proposal for the implementation of the Five Thirty Seven PACT. This implementation assumes that, in addition to the elected Five Thirty Seven, some Senior Executive Branch employees are also subject to the PACT. Note that penalties add to the base and marginal tax rates, and the resulting rates can exceed 100%.

CONGRESSIONAL MEMBERS

Base Taxation of Members: Congressional members will be subject to a simplified tax code. They will pay 80% of all household income at a base rate equal to Federal spending and unfunded mandates as a percent of GDP. The rest of their income will be taxed based on the highest marginal tax rate any citizen is subject to. This marginal tax rate is based on Federal programs only, and the calculation of this maximum rate includes income based phaseout of housing, food, child support, and other federal benefits. Newer members pay a percentage of this highest marginal rate, while more senior members pay the full amount. Note that this rate may be in excess of 100% of income. Table 1 below details this foundational tax scheme. 

Table 1-Base Taxation Provisions for Congressional Members

	Applies to:	Rate
Base Rate	80% of all income (passive and active) earned by Member and spouse	(Federal Spending + Unfunded mandates)/GDP
Marginal Rate for first year members (returning Members have previous service counted)	20% of all income (passive and active) earned by Member and spouse	The higher of: -the Member’s Base tax rate or -80% of the highest marginal tax rate paid by any citizen through any combination of Federal taxes and benefit phaseouts.
Marginal Rate for second year members (returning Members have previous service counted)	20% of all income (passive and active) earned by Member and spouse	The higher of: -the Member’s Base tax rate or -90% of the highest marginal tax rate paid by any citizen through any combination of Federal taxes and benefit phaseouts.
Marginal Rate for third year and longer serving members (returning Members have previous service counted)	20% of all income (passive and active) earned by Member and spouse	The higher of: -the Member’s Base tax rate or -the highest marginal tax rate paid by any citizen through any combination of Federal taxes and benefit phaseouts.

Tax surcharges for Members: Congressional members may be subject to tax surcharges, depending on when budgets, deficit ceilings, and tax increase are passed, and how much the budget is in deficit. Surcharges for missed timelines increase in magnitude and frequency as deadlines near. Votes for deficit spending (either debt ceiling increase or budgets in deficit) will result in tax surcharges applying as long as an individual is an active Member.

Table 2 outlines the tax surcharges for Members.

Table 2-Tax Surcharge Provisions for Congressional Members

Reason for Penalty	Amount of Penalty	Comments
Fiscal Mismanagement Event (FME)	Majority Members: up to 8% for each chamber if budget not passed by Oct 1, and daily penalties thereafter. Minority members: up to 5.9% for each chamber if budget not passed by October 1, and daily penalties thereafter.	See Table 5 below for details. Note that penalties can continue into following calendar year.
Current Budget Deficit	Equals (deficit + unfunded mandates)/(2*GDP)	Note that a surplus reduces taxes owed.
Vote for current Budget Deficit or Debt Ceiling increase	Equals (deficit + unfunded mandates)/(2*GDP)	Applies to Member who votes for deficit spending in Fiscal Year under consideration or for debt ceiling increase that funds deficit spending in Fiscal Year under consideration.
Voting for Previous Budget Deficit or Debt ceiling increases	Equals sum of previous penalties for voting for budgets in deficit or for debt ceiling increases

Table 3-Annual Compensation Provisions for Congressional Members

Compensation	Rate	Comments
Base Compensation	Multiplier of per capita GDP	Rank & File: 5X per capita GDP Senate and House Leadership: 6X per capita GDP Speaker: 7X per capita GDP
Surplus Bonus for every year the Federal debt does not increase	Equal to (Base compensation plus previous year’s surplus bonus) *15%	Bonuses compound as long as there is a surplus
Chamber Process bonus	Equal to (Base compensation plus previous year’s Chamber Process bonus) *3%	Bonuses compound as long as Chamber completes its process in a timely manner (passing budget, debt ceiling increase and tax rates changes in a timely manner). Chambers earn this bonus independently of each other.
FME Avoidance Bonus	Equal to (Base compensation plus previous year’s Chamber Process bonus) *5%	Awarded if budget, debt ceiling increase, and tax rates for following year enacted by Sep. 30. (so either Senate, House, and Executive earn this bonus, or no one does.)  Compounds.
Chamber Process bonus	Equal to (Base compensation plus previous year’s Chamber Process bonus) *3%	1. Bonuses compound as long as Chamber completes its process in a timely manner (passing budget, debt ceiling increase and tax rates changes) 2. If a first year President or VP had a Chamber Process bonus from last term of Congressional service, bonus will continue to accrue.

Table 4-Pension Provisions for Congressional Members

Congressmembers start with a base pension that they have earned and/or contributed to. This base pension is adjusted as follows:

Provision	Effect
If Member has served twelve or more years and deficit has not increased during Member’s entire term of service, then effect to left applies. Otherwise, Pension Reduction and Tax Surcharges below apply	Member’s pension is equal to the base pay rate for the position from which the Member retired
Pension Reduction	2% reduction for each year the budget was in deficit during a Member’s service
Tax Surcharge	Members tax surcharge = total increase in deficit during term of service * 2 * weighted average of Fed Funds rate for previous year divided by current GDP.

Table 5-Congressional Budget Timeline and Penalties

If event occurs after:	Event	Majority Member Penalty	Minority Member Penalty
15-Apr	Budget Resolutions due from each Chamber (Requirement A)	2.00%	2.00%
13-May	FME penalty trigger (for failing to meet requirement A)	0.25%	.05%
10-Jun	FME penalty trigger (for failing to meet requirement A)	0.25%	.05%
8-Jul	FME penalty trigger (for failing to meet requirement A)	0.25%	.05%
22-Jul	FME penalty trigger (for failing to meet requirement A)	0.25%	.05%
5-Aug	FME penalty trigger (for failing to meet requirement A)	0.25%	.05%
19-Aug	FME penalty trigger (for failing to meet requirement A)	0.25%	.05%
2-Sep	FME penalty trigger (for each failure to meet requirement A)	0.25%	.05%
9-Sep	FME penalty trigger (for each failure to meet requirement A)	0.25%	.05%
16-Sep	FME penalty trigger (for each failure to meet requirement A)	0.50%	.25%
23-Sep	FME penalty trigger (for each failure to meet requirement A)	0.50%	.25%
30-Sep	Enacted budget appropriations and corresponding debt ceiling increase due; tax rates for following calendar year set (Requirement B)	3.00%	3.00%
1-Oct	Daily Penalty: For failing to enact any of the items of Requirement B (budget appropriations, corresponding debt ceiling increase, tax rates for following year)-applies to all Members	0.10%	0.05%

Notes:

1.    The maximum penalty a Majority Member can face for failing to enact a budget by September 30th is 8%. A Minority Member may face a penalty of up to 5.9% for the same time period. 2.    The penalties for prior to Oct 1 apply to each Chamber separately. For FY 2013, the House passed the Ryan budget on March 29th, and so would have not have had any FME penalties apply prior to October 1st . Conversely, the Senate did not pass a budget, and so Senate Members would have faced the full penalties. 3.     If the three required elements (budget, tax rates set, and debt ceiling limit adjusted) are not enacted by December 31st, the daily penalties will continue into the next year. Members will be responsible to pay these penalties on income from the same calendar year as the fiscal year. 4.    If the a new term begins, and the budget has not passed, then Members who did not serve in the previous term have a thirty day grace period from being seated before FME penalties begin to apply.

EXECUTIVE MEMBERS

In this implementation, there are two classes of Executive Members subject to the PACT.

The first class consists the President and Vice President (the Elected Executive Members). These two members are subject to the same range of penalties as the Legislative Branch Members.

The second class consists of the most Senior political appointees, such as Cabinet Secretaries, “Czars,” etc. These appointees have their penalties from previous any Membership in Congress applied to them.

Table 6-Base Taxation Provisions for Executive Members

Description	Elected Members	Appointed Members	Rate
Base Rate	80% of all income (passive and active) earned by Member and spouse	All Income earned by Member and Spouse	(Federal Spending + Unfunded mandates)/GDP
Marginal	20% of all income (passive and active) earned by Member and spouse	N/A	The higher of: -the Member’s Base tax rate or The highest marginal tax rate paid by any citizen through any combination of Federal taxes and benefit phaseouts.

Table 7-Tax Surcharge Provisions for Executive Members (applies to Elected Members only except where noted.)

Reason for Penalty	Amount of Penalty	Comments
Fiscal Mismanagement Event (FME)	Up to 10%	See Table 10 below for details. Note that penalties can continue into following calendar year.
Current Budget Deficit	Equals (deficit + unfunded mandates)/(GDP)	Note that a surplus reduces taxes owed.
Voting for Previous Budget Deficit or Debt ceiling increases	Equals sum of previous penalties for voting for budgets in deficit	From any time served in Congress Note: this penalty applies to Cabinet level Appointed Members as well.
Scheduled, mandated reports (such as Unified Agenda of Regulatory and Deregulatory Actions)	Equals 0.10% on first day late and 0.1% for every week thereafter	Applies to both Elected members (President and Vice President) plus the Appointed Member whose department is responsible for submitting the  report

Note: Other than penalties for votes as a previous Member, Appointed Members do not face FME penalties.

Table 8A-Annual Compensation Provisions for Elected Executive Members

Compensation	Rate	Comments
Base Compensation	Multiplier of per capita GDP	President: 10X per capita GDP Vice President: 7X per capita GDP
Surplus Bonus for every year the Federal debt does not increase	Equal to (Base compensation plus previous year’s surplus bonus) *15%	1. Bonuses compound as long as there is a surplus 2. If a first year President or VP had a surplus bonus from last term of Congressional service, bonus will continue to accrue.
Executive Process bonus	Equal to (Base compensation plus previous year’s Executive Process Bonus bonus) *10%	1. Bonuses compound as long as Executive completes its legally mandated duties in a timely manner (submitting budget, complying with other mandated dates) 2. This bonus can accrue from one President to the next.

Table 8B-Annual Compensation Provisions for Appointed Executive Members

Compensation	Rate	Comments
Base Compensation	As defined by formula
Surplus Bonus for every year the Federal debt does not increase	Equal to (Base compensation plus previous year’s surplus bonus) *5%	1. Bonuses compound as long as there is a surplus 2. If a first year Appointed Member had a surplus bonus from last term of Congressional service, bonus will continue to accrue.

Table 9-Pension Provisions for Executive Members

Executive Members start with a base pension that they have earned and/or contributed to. This base pension is adjusted as follows:

Provision	Effect
If Member has served twelve or more years and deficit has not increased during Member’s entire term of service. Otherwise, Pension Reduction and Tax Surcharges Below apply	Member’s pension is equal to the base pay rate for the position from which the Member retired.
Pension Reduction	2% reduction for each year the budget was in deficit during a Member’s service
Tax Surcharge	Members tax surcharge = total increase in deficit during term of service * 2 * weighted average of Fed Funds rate for previous year divided by current GDP.

Table 10-Executive Budget Timeline and Penalties (for Elected Members only)

If event occurs after:	Event	Penalty
First  Monday in February	President Submits Budget Request	1.00%
Every Monday  thereafter until  30-Sep	FME penalty trigger event	0.25%
30-Sep	Enacted budget appropriations and corresponding debt ceiling increase due; tax rates for following calendar year set	3.00%
1-Oct	Daily Penalty: For failing to enact a budget, debt ceiling increase, and tax rates for following year	0.10%

Note: under this scenario, the maximum penalty for not having an enacted budget by Sep 30^th is 12.50%, including 34 weekly penalties.

 ADDITIONAL DETAILS

Below are more details to clarify the implementation of the Five Thirty Seven Accountability PACT:

-The PACT only affects Members during the time that they are in a position that is subject to the PACT. A New Member does not pay any surcharges for previous deficits, for example, nor does she receive any of the surplus or FME bonuses for year prior to her service. Similarly, a returning Member does not pay any surcharges for actions taken while he was not serving.

-Timing of Penalties: Members’  taxes are base on calendar year income, and the Federal Government’s Fiscal Year runs from October 1^st to September 30^th. A member’s PACT calculations for year “N” are based on:

Annual Compensation-Per capita GDP for Calendar Year N-2

Base tax rate and deficit penalty-spending, Federal revenue, and GDP for Fiscal Year N

FME Penalties: budget process for FY N+1

Marginal Tax Rate: Taxation and benefit policies for FY N+1

-If a penalty of the PACT applies to individual Members and is triggered, but it cannot be determined which Members the penalty should apply to, the penalty shall apply to all Members. For example, imagine that a debt ceiling increase is passed by a voice vote, so it cannot be determined who specifically voted for it. Thus, every member, present or not, is taxed as if she voted for it.

-Unfunded mandates, in general, count as spending for Active Members. For inactive members, unfunded mandates are not included when calculating whether a budget was in deficit or surplus when calculating 537 PACT pension adjustments.

-Penalties add to the base and incremental tax rates.

-Marginal or overall tax rates can exceed 100%, and the Member is expected to pay all taxes due by the initial tax filing deadline (April 15^th). Failure to pay all taxes due by this date will result in automatic expulsion from their seat, and forfeiture of all unearned pensions (Member contributions are returned as a lump sum and must be rolled into a retirement vehicle or taxed with penalties as any other premature withdrawal of retirement funds.)

-Federal loans by the government to any entity, public or private, are counted as expenditures when incurred, and revenue when repaid.

-If Independents caucus with a Party, then they face the same penalties as Members of the Party in that Chamber. If they do not caucus with a Party, then they receive no party related penalties.

-Departure of Members: if a member vacates his seat mid-term, he is penalized for any actions that he took prior to his departure.

-In case there is a question of whether the 537 PACT applies in a given instance, the presumption should be that it does. The burden would be on the Membership of the Five Thirty Seven to prove that their actions do not violate the letter or spirit of the 537 PACT.

SUMMARY

This implementation of the 537 Accountability PACT gives a lot of motivation for our elected 537 leaders to govern better. The compounding of the rewards helps to ensure that once a culture of competence starts to take root, it can be maintained. The system of penalties will ultimately drive free spenders out-simply put, they cannot afford to serve very long before the tax rates they face become onerous. The following post will show how this implementation would have applied to the FY2012 budget and FY 2013 budget process.