Taxing financial transactions is more strategic than taxing high wealth
from Dean Baker
Presidential candidate Joe Biden is considering to propose a financial transactions tax as part of his campaign for the Democratic nomination, according to a recent report from The Washington Post. This is big news for those of us who have long advocated such a tax.
Sen. Bernie Sanders has taken the lead on this issue among presidential candidates, including a financial transactions tax — also known as an FTT — as part of his plan for making college tuition free. Several other candidates also support a financial transactions tax, but if the Democratic Party’s leading centrist candidate endorses the tax, it would mark a new degree of acceptance within the mainstream of political debate.
Interestingly, Sen. Elizabeth Warren is not among those supporting a financial transactions tax. This is certainly not due to a reluctance to challenge the interests of the wealthy. Senator Warren has proposed an ambitious wealth tax that would tax wealth above $1 billion at the rate of 3 percent a year. While there are good reasons for wanting to tax the very rich, a financial transactions tax is almost certainly a better economic policy and would have much better political prospects.
We can see the economics of a financial transactions tax are superior when we consider the motivation for taxation by the federal government. The federal government doesn’t need taxes to spend money; it can just print it. It taxes to reduce consumption, in effect, to allow the economic space for spending.
To see this point, imagine that the federal government were to spend another $1 trillion next year on Green New Deal policies (a bit more than 20 percent of current federal spending), such as clean energy and mass transit subsidies. If there were no increase in taxes, we would expect to see a huge surge in demand in the economy, likely leading to inflation. (Assume that the Federal Reserve Board simply prints more money so that interest rates are little changed.)
Now suppose that the federal government handed another trillion dollars next year to Jeff Bezos, Bill Gates and other incredibly rich people. Again, let’s say there is no increase in taxes.
In this case, we almost certainly don’t have to worry about inflation. Jeff Bezos, Bill Gates and other multi-billionaires already have pretty much all the money they can possibly spend. This government handout will fatten stock portfolios but will have little effect on demand in the economy.
Now let’s flip this over and imagine that instead of handing money to our billionaires, we are taxing away their wealth at the rate of 3.0 percent annually. With Bezos, Gates and the rest still earning money on their assets, their wealth is likely to be little affected. The impact on the consumption of the very wealthy is likely to be minimal, meaning that we have created little room for additional government spending.
In fact, it’s possible the effect on demand goes the other way. Most billionaires like their money. The wealth tax gives them a strong incentive to hire accountants, lawyers and other people engaged in the tax avoidance/evasion industry. This is real spending that creates demand for goods and services, no matter how nefarious. It’s quite possible that a wealth tax will end up increasing demand in the economy.
By contrast, the way to avoid a financial transactions tax is to reduce trading. This means that we would see less demand for goods and services in the financial sector. Most estimates show that if we raise the cost of trading with a financial transactions tax, we will see a roughly proportionate decline in trading, meaning that the financial sector will bear pretty much the full cost of the tax. What people spend on the tax, they save on trading. This is what we want a tax to do: free up resources in the economy to allow the government to spend on other priorities.
The politics of any tax increase will always be difficult. The rich can be expected to use their political power to scare people into believing the world will end if they are forced to pay more taxes. But the wealth tax has a unique problem.The size of the narrow financial sector (securities and commodities trading) has exploded over the last four decades, going from roughly 0.5 percent of GDP to more than 2.0 percent of GDP. A financial transactions tax would partially reverse this rise. By my calculations, it could raise an amount roughly equal to 0.6 percent of GDP, which comes to $1.6 trillion over the next decade, with the money largely corresponding to a shrinkage of the financial sector.
Since the bulk of the money comes from a very small group of people, this small group of people has the option to announce that they will not pay the tax, by renouncing their citizenship. If that sounds strange to people, they have not been following the political behavior of the very rich in recent years. Can anyone say it’s worth $5 billion a year to Jeff Bezos to be a U.S. citizen?
Suppose 1,000 very rich people, representing $10 trillion in wealth, sent a letter to Congress proclaiming their plan to renounce their citizenship if lawmakers moved ahead with President Warren’s wealth tax? My guess is that Congress would not move forward (even if it otherwise were inclined to endorse such a measure). If Congress did move forward, and a substantial share of these billionaires carried through with their threat, the Warren administration would face a major embarrassment.
It’s great to see leading presidential contenders proposing measures to seriously address the rise in inequality over the last four decades. However, the implications of these policies have to be considered carefully. A financial transactions tax is likely to prove far more effective than a wealth tax.
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Real-World Economics Review Blog 
Or you could implement a 50% Discount to consumers at retail sale that is fully rebated back to the enterprise by the monetary authority thereby not only completely eliminating any possibility of inflation, but beneficially integrating price and asset deflation into profit making economic systems. Both dominating economically illegitimate finance capitalism and socialist re-distributive taxation are passe’.
A post accounting sovereignty tax on large corporations who continuously illegitimately pay no tax and yet remain in business of say 5% of 50% of their gross revenues (businesses that make no profit, go bankrupt and actually go out of business would be exempt from such tax) would be a legitimate form of taxation.
As inflation would no longer be a worry, directly funding government by the monetary authority in coordination with Congress, but which ideally would quickly become a fourth branch of government which would continuously distribute monies based on the financial needs of multiple looming crises that the US and the rest of humanity is facing.
“A post accounting sovereignty tax on large corporations who continuously illegitimately pay no tax and yet remain in business”
My version of that is a 15% revenue tax on any corporation that has a 200:1 highest paid to lowest paid ratio with inclusion of stock growth on 5 years of grants and lowest-paids of captive suppliers or subsidiaries. For 50:1 and 10:1, the thresholds would be 10% and 5%.
“As inflation would no longer be a worry,”
I can kind of see where you are going with this, but if you fix the problem of money pooling in the hands of the rich, there would be no downside to shrinking the monetary base from current inflated levels. And if you have one-time inflation, I fail to see a big problem with that. That said, if you are printing dollars for these purchases and not taxing to remove them from circulation, I am not sure why this would be considered less inflationary.
Interesting points. I disagree with the point on interest rates but it is a small partld of the argument. Returns on investment go up while investments are held constant, so interest rates would go up, but this is a good thing.
Capital flight is an important topic that needs to be discussed. “Free Trade Doesn’t Work” is required reading for anybody who thinks that the US would be the power it is today without Hamiltonian economics being the standard 200 years ago.
I think a good anchor for that topic is to rather than talking about punitive measures, to talk instead about critical resources that the rich need and tie the tax to these critical resources somehow. For a corporation, the critical resources are access to workers and consumers. The free traders are giving the cow away for free for our rich consumer base. This creates a massive supply and demand imbalance that has ultimately led to our huge trade deficits.
For the rich, the anchor is the corporation they want to be close to to run and the assets they want to own.
In theory there are two ways to use taxation to slow a trade deficit – tax the goods as they flow in and tax the asset dollars as they come back, and these in theory should have similar impacts on this imbalance.
All of the above suggests a third option for wealth taxes. Tax the assets themselves and not the people owning them. Then billionaires could not dodge taxes by revoking citizenship. They could dodge taxes by selling US assets, but then someone else would have to buy them and contribute. The taxes would have a direct Pigouvian effect on our Trade imbalance and could fund a progressive distribution like part of the freedom dividend or chipping in the first part of every worker’s payroll taxes.
The 50% Discount/Rebate policy at retail sale is a catch all/cancel all inflation one because it is at the terminal ending point of the entire economic/productive process. Normal garden variety inflation is never more than a smallish single digit percentage because high tech capital intensive financialized economic systems are very costly for all enterprise. Hence they cannot raise their prices much without fear of losing market share.
Also, money itself is at best a tertiary “cause” of “monetary” inflation. The real primary causes of inflation are individual income scarcity and hence a systemic scarcity of free and clear potential business revenue. Hence, commercial decision makers aware of this are tempted to commit the economic vice of inflate. The better and more profitable alternative is the paradigmatic monetary assist of the 50% Discount/Rebate policy.
I’m not actually that concerned about income inequality, although I suggest a sizable philanthropy tax instead of a philanthropy deduction in my book.
If you’re not a member of the US elite, you pay income tax, a wealth tax. Why would we excuse the elite from that tax? Other than we believe their power to escape income tax is greater than the power of the US government to assess and collect that tax from them. If the US has lost its sovereignty to such an extent, the only choice left for the nation is we shut down and allow the rich to take over. As a nation we’ve allowed the situation with income inequality to go on far too long. It’s going to a struggle (dare I say even a war) to convince the rich to give anything back to the nation. Just passing laws will not be enough for that task.
Dean Baker unfortunately sees this only in terms of America. It really is an issue which needs resolving in the United Nations, which neither passes laws nor imposes taxes. UNESCO needs to promote world wide the understanding that the use of money generates debt, but “owning” money in the bank, shares in the other people’s debt etc makes the owner not rich but responsible for paying back the debt he owns. Better for the powerful to interpret money honestly as giving credit where needed, which costs them nothing. Our debt to nature and our fellow men cannot be paid off by returning token money but only by renewing what we have consumed and making good the damage we have done to the real world in the process.
The significance of Edward Fullbrook’s new book on Market Value lies in his beginning to give us a handle on how to signify the aggregate real value of all we’ve got (his ‘1’ representing the whole of it) so that we can see the significance of trying to keep it whole and functional.
Dave, I agree problems related to income inequality extend beyond the US. But I also believe the US version of capitalism (cowboy, casino, etc.) provided the blueprint the first is destroying the US and then many other nations whose elites used that blueprint.
Dave, I look at the problems that face our species a bit differently. Everything that humans create and use for their societies is the result of relationships between humans and with other actors encountered by humans (e.g., animals, geology, geography, atmosphere). The problems facing our species have the same origin. From these relationships humans need certain results in order to survive and prosper. That’s the failure we face today. The results no longer support human survival, let alone prosperity. We must fix these relationships to fix our problems of survival and prosperity. Because of the endemic uncertainty in all of human society, it is not clear just how to go about fixing these problems. That’s the issue with which we must begin to engage, to stave off extinction. Sketching out the changes needed to our relationships to improve humans’ chances of survival is our first goal. Then we must find ways to reform our societies so they are consistent with these changes.
“Everything that humans create and use for their societies is the result of relationships between humans and with other actors encountered by humans”.
In a nutshell, my argument is that they are the result of our PERCEPTION OF those relationships. We need to change the perception, in particular of the nature of money.
Dave, you’ve got it. Perceiving is what humans do. Scientists expand perception by changing perspectives, including the use of all sorts of tools and repeated observations.
Correct Dave. Concepts are perception and the new concept for money is Gifting not Debt Only.
Yes, scientists (hopefully) change ientsie-tientsie data points or try to make partial theoretical conclusions. Paradigm perceivers take the truths, the most relevant datums, the most applicable aspects and the highest ethical considerations of scientists, and finding the integrative essence of that agglomeration discern the new paradigm concept in that body of knowledge/area of human endeavor that will transform and create an entire new pattern.
The difference between science and paradigm perception-wisdom is the difference between small and big, partial and full, depth and surface level, reform and permanent
progression.
Craig, study the blog on resources for recovering academic writers. I have a thing about people choosing words like women choose dresses, to make themselves stand out. With words, however, it frequently results in getting at cross purposes. Ken is talking about what I call ‘basic’ and academics ‘fundamental’ science, where you are talking about what Kuhn called ‘normal science’. The one changes perspectives, the other data points. Not the same thing at all, which is why Kuhn distinguished them. Kuhn’s paradigm was a different thing again: not basic science but a practical example which if you follow it requires you to adopt a perspective. A paradigm change such as the Copernican revolution therefore requires one to see the same reality from a a different perspective.
The programming language I worked with, Algol68, was designed as a scientific language, aiming to avoid cross purposes and make work comparable by standardising the logic language and making the logic perceptible through its method of defining applications. Compared with Algol60 this was a new paradigm, not restricting computing to numbers and letters but considering both as objects and making this variable so new types of object (e.g. pictures, tables and spread sheets, and methods of processing them) could be defined. This is what made general purpose computers possible and opened up the revolution we have seen in information technology.
Craig, your little comment on October 18th suggests we could easily agree that seeing money as giving credit involves a paradigm change where we see now it as repaying debt.
The paradigm example I sometimes use is the difference between being paid at the beginning or end of the week. In the one case one is given credit and we owe work, in the other our employer owes us credit for work already done.
I;m afraid you are right Ken, in the sense that greed in power knows no limits. In the immediate postwar decades, the gap between rich and poor seemed to be closing, in a sort of new deal consensus that brought a fairer distribution of the wealth. I thought at the time that the rich had learned the importance of this fairer distribution for a commonwealth of political and social peace. Then came Reagan and the end of the new deal consensus, to my amazement, because I had been so naive as to think rich people would understand the wisdom of fair distribution. Getting the super rich in a financialized world to give back any of the advantages a rigged system has given them, will be a hard slog, for they will claim what they have as rightfully theirs and hire pinkerton’s to protect it.
Try the historian’s method. Go back to 1944 when Princeton UP published Game theory, and read the reviews. Then year by year follow the evaluations of game theory in OR and other economic social science reviews. See its history over the past 75 years as methodology for understanding the real world. That gives you a good idea what to think of it.
Robert, I agree with you about the “historian’s approach.” It is the only approach I see that provides the content and context needed to reveal changes in human cultures that led to our current crises.
It’s my view that the great increase in economic inequality (even greater than that in 19th century Great Britain) is the result of first turning science into idolatry and second the invention of a “scientific economics” that pretends uncertainty does not exist and that a single theory (scenario) provides a complete description and explanation of all economic arrangements. These are autocratic assertions. They leave no space for science to grow, and thus no space for humans to change their knowledge or to deal with unexpected events, particularly events that endanger human survival. And since they are autocratic, they help foster autocracy in other areas – government, religion, conflict.