In the department of bad ideas that won’t go away, Exhibit A is a global tax on financial transactions. British Prime Minister Gordon Brown mooted the tax last weekend before the G-20 finance ministers in St. Andrews, Scotland, where he was promptly rebuffed by Treasury Secretary Timothy Geithner. “That’s not something we’re prepared to support,” Mr. Geithner said.
But it’s easy to see why high-tax countries such as France and Germany relish the idea. Tax competition is a bête noire for the Western European countries whose governments eat up close to half of their economies. The U.K. is back in that club after the post-financial-panic recession lopped 6% off its GDP. Scrambling for revenue””and unwilling to hamstring London markets alone””Mr. Brown is suddenly promoting global tax coordination.
Read it all. I didnt like this editorial because the argument isn’t nearly strong enough. The two key points are not made
(1) it will actually NOT raise Government revenues net net so it doesnt do what its advocates say it will (Overall it will actually LOSE tax revenue).
(2) it will have Massive collateral damage that its proponents never talk about.
It is amazing to me that (2) is hardly ever discussed–KSH.
As governments become increasingly anxious about revenues, they will look for more and more ways to separate the pigeon citizens from their money. For this to be effective, eliminating competing tax policies and approaches will become a high priority for tax authorities. This is very much a time when creativity, innovation and tax strategies that encourage, rather than impede, economic growth must be favored. Through mechanisms like the G-groups and OECD, I fear that the instinct of the policy makers will be to discourage innovation. Of course, the temptation for Treasury Departments is to tax hard and tax high and to ignore the possibility that tax revenues might, in the medium and long term, be increased by relieving tax burdens on all elements of an economy, as opposed to increasing them.
[blockquote]the possibility that tax revenues might, in the medium and long term, be increased by relieving tax burdens on all elements of an economy, as opposed to increasing them.[/blockquote]
Ah the Laffer curve! It is interesting that Arther Laffer observed that [i]somewhere[/i] between 0% and 100% there is point which will produce the maximum revenue. Presumably a 100% tax would produce no revenue and certainly a 0% would not. But [i]but at some point[/i] between 0% and 100%, revenue would be maximal–that if government [i]raised[/i] taxes above that point, revenue would decrease; and if government [i]lowered[/i] taxes below that point, revenue would decrease–something never mentioned by the anti-tax crowd.
Of course, what the Laffer curve does [b]not[/b] tell us is where that point actually is. Curiously the way the curve is usually drawn–perfectly symmetrical–the actual “optimum point” is 50%. But there is no particular reason to suppose that it isn’t actually at some other point–or even that their might not be more than one such point.
Thus when the top marginal tax bracket was reduced from 90% to 38% there was an increase in revenue. But there is nothing in the Laffer curve to suggest that lowering it to 19% would increase revenue or raising it to 57% would decrease revenues. All that Laffer suggests is that lowering it to 0% will produce no revenue and raising it to 100% will produce no revenue.
I don’t think that the idea of a “financial transactions” tax is a particularly good idea, perhaps because I have no idea what “financial transactions” would be taxed. When I buy bread, there is a financial transaction. When the employer pays the employee, there is a financial transaction. When gramps sends Junior a birthday check, there is a financial transaction.
It’s commonly a tax on transactions such as securities transactions. A similar bill, humorously called the “Let Wall Street Pay for Wall Street’s Bailout” is still in committee in the House of Representatives. The same Oregon congressman keeps introducing it year after year under various names. He claims that the greedy Wall Street speculators need to be made to pay for the money the U.S. taxpayers have had to give them.
In reality, such schemes would seriously harm, if not kill off broad segments of Wall Street, including the very taxpayers it is supposed to help.
Here is a simple example. Let’s say you buy 100 shares of Apple Computer for $200. If you use a discount broker, you would pay a commission of let’s say $8. So far so good. Now taxing the value of this transaction at 2%, somebody has to fork over an additional $400 to the government (200 x 100 x .02). Hmmmm, so now you have to have Apple increase $4 per share just to break even. But wait; let’s say Apple increases to $210 per share and now you want to sell. Hey, you are $6 per share ahead even after the tax. Oops, no you’re not. When you sell you will owe tax of (210 x 100 x .02) or $420. So after taxes and commissions, you only made around $180 in profit, and you get to pay tax on that on your income tax return.
It gets even better if you have financial instruments in your IRA or 401k. The transaction tax applies there too, so now the return on your retirement assets is whacked.
Anybody besides me wonder how this is making Wall Street pay for Wall Street’s bailout?
I am not a big Tim Geithner fan, but I was very heartened to hear him speak against such a ill considered tax.