Power of Story
Send a Tweet        
- Advertisement -

Share on Google Plus Share on Twitter Share on Facebook 1 Share on LinkedIn Share on PInterest Share on Fark! Share on Reddit Share on StumbleUpon Tell A Friend 1 (2 Shares)  

Printer Friendly Page Save As Favorite View Favorites (# of views)   3 comments
Exclusive to OpEdNews:
OpEdNews Op Eds

Abrogating Responsibility To Make the Economy Work Is Inexcusable

By       Message Seymour Patterson     Permalink
      (Page 1 of 2 pages)
Related Topic(s): ; ; ; ; ; ; ; , Add Tags Add to My Group(s)

Must Read 1   Supported 1   Valuable 1  
View Ratings | Rate It

opednews.com

- Advertisement -

One tenet of economic analysis is that incentives matter. Price (including wages and interest rates) is an especially important incentive, since high prices discourage consumption, while low prices attract buyers. Except in cases of conspicuous consumption, consumers tend to comparison-shop all the time for goods and services that are offered at the best price. This is why they try to take advantage of tax holidays, sales, discounts, and volume purchases that lower unit price. What consumers always seek is the biggest bang for their bucks.

In a free market, price as an incentive is upfront, straightforward, and known to everyone--whether it's listed on the menu in restaurants, on stickers placed on automobiles in dealership lots, or on merchandise in department stores. The price is always there, except for components like tips at restaurants or the sales tax that is added to your bill at the grocery store.

Often the bid and ask price of a good is the same. An exception, however, is found in share prices in the stock markets. Standard & Poor (NY), Dow (NY), CAC (France), FTSE (UK), DAX (Germany), and Nikkei (Japan), for instance, all have a spread between the bid and the ask price.

Even so, buying a financial instrument is no more complicated than buying a cup of coffee at Starbucks, especially if you go online to execute the purchase through Ameritrade, E*Trade, Scottrade, Fidelity, etc. If you go to Starbucks for a coffee, you pay the price of the coffee plus a sales tax--6 percent, if you happen to live in Jacksonville, Florida. Then you can locate a seat, take out your laptop, cocoon yourself in your book or newspaper, and sip your latte.

- Advertisement -

If you want to buy Starbucks stock, you should know that Starbucks (sbux) is traded on the Nasdaq (acronym for National Association of Securities Dealers Automated Quotation) and that at the close of that particular date (for example, August 9, 2013) the bid price was $72.41 and the ask price was $74.98. There are no sales or excise taxes for purchasing shares, but, if you trade online, there is an extra charge per transaction of between $7 and $10.

If, in these circumstances, you were to buy 10 shares of Starbucks stock at $74.98 per share, you'd run an out-of-pocket expense of $749.80. But here's the important point for the purposes of this article: Uncle Sam would take zilch, nada--because there is no sales tax on the financial trade of stocks or bonds.

Try and wrap your head around this: If my bill at Starbucks was $75, I would actually have to pay $79.48, because of the sales tax. Or, if I dined (with friends) at a Darden restaurant (Oliver Gardens or Red Lobster), not only would I have to pay $79.48; I'd   also be expected to tip the waitress/waiter about 15 percent of the bill, or $11.25--making the out-of-pocket expense $90.73. A meal priced the same as a share of stock might cost you only $15.75 more--which makes it too bad we can't eat stocks. You might think to yourself that you don't have to buy the stock. True. But you don't have to buy a latte either. You do have to eat, however, and the sales tax on food is both confiscatory and regressive. Economists like to say the burden of the sales tax is shared between the seller (the restaurant) and the buyer (you). However, from the consumer's vantage point, he or she is physically out the amount of the tax as soon as it is paid up front.

- Advertisement -

Some members of Congress, among them Ted Cruz and Marco Rubio, have made good on threats to shut down the government once more as they wrangle over funding the Affordable Care Act (a.k.a. Obamacare), even as the fragile economy attempts to achieve a steeper growth trajectory. (Ms. Bachmann noted that Republicans are about the happiest they've been in a while during the shutdown.)

On August 5, 2011, we had a sovereign credit rating downgrade, because Congress and the White House could not compromise on taxes and spending cuts; now we have sequester and all its pain-inducing disruptions--I know a furloughed victim of sequester who later lost his job because of the government shutdown. So, this (sequester or shutdown) is not just an abstraction. It affects real people in their pocketbook. And here we are bickering again about funding the government, although, ironically, the deficit is falling. Should we be bemused by the blather of Mr. Cruz and Mr. Rubio (who is clearly a smart man) threatening to shut down the government because the President wants to fund a law that Congress passed and SCOTUS declared constitutional? In another venue this would be nothing short of insanity.

Then there's the deficit. If Congress were really serious about the deficit, it could fix it in the blink of an eye. In compliance with the Constitution, Congress could instruct the U.S. Mint to produce a $1 trillion platinum coin (or reduce the debt with quarter dollars, according to S. Baker). This coin could then be delivered to the U.S. Treasury as revenue to offset the deficit. Problem solved! And it would not increase the money supply or have any effect on inflation. But given the dysfunctional state of the Congress, everyone knows this will never happen. Why? It's too simple. Besides, it would take the leverage away from some members of Congress to use the deficit as a cudgel to force their ultimate goals: repeal of the Affordable Care Act and privatization of Social Security and Medicare--all in the guise of fiscal discipline through spending cuts.

Why Not a Tax on Wall Street?

A more palatable solution to the "deficit crisis" is a tax on Wall Street. By way of example, here's how it could be done:

First, Wall Street expects 252 trading days in 2013 if nothing untoward happens, such as another Hurricane Sandy. The dollar volume of trade on Wall Street averaged about $53.4 billion from August 2-August 8, 2013. (See NASDAQ DmX) Assuming that these trading patterns will hold going forward, the 252 days times $53.4 billion gives us $13.5 trillion in financial trades that does not get taxed. The estimate of the U.S. deficit for 2013 is $973 billion, down from $1.1 trillion in 2012. (Data compiled by Chantrill.) Now assume that a 7.2 percent excise tax (the name of a sales tax levied by the federal government) is imposed on all stock purchases. That tax rate would bring in revenues equal to $973 billion, which of course would wipe out the deficit in the U.S. Treasury. But this, too, ain't going to happen either--mainly for twisted political objections and obstructions.

- Advertisement -

When you buy a caffe latte at Starbucks, you add $4.30 to the country's GDP, because something real got produced--a cup of coffee--and real things were used to produce it, like imported coffee from Ethiopia and persons earning the minimum wage. But when you buy a share of Starbucks stock for $74.98, nothing new was produced and you now have a share of stock that someone else had before. Nothing is added to GDP. This is like buying a used computer or a used car. The car just changed hands. That's all. Your buying it did not lead to the production of a new car (or computer), although you might have had to pay a sales tax to the state government. The purchase and sale of pure financial assets add nothing to the GDP of the U.S.

It would seem that if the federal government were to impose an excise tax on Wall Street, it would not hurt the economy. This does not mean the financial sector does not play an important role in the economy. It does! When stock prices are rising, people who own stocks, pension funds, 401Ks, etc. are richer and more inclined to spend for goods and services on Main Street. They might even buy more lattes! But this does not detract from the point that financial transactions do not add anything to GDP. Yet, a Congress beholden to Wall Street would be loath to act to reduce the deficit it decries loudly and for which it seems quite willing to harm the U.S. economy.

Congress has no incentive to harness a source of revenue (from Wall Street) that could fix the deficit, because of the money that flows to Congress from Wall Street. Just as there is no real incentive to make the Postal Service profitable. (The latter could be done by mandating the removal for ten years of the set-aside sum of $5 billion a year to finance future retirements. This was a poison pill embedded in legislation to insure the failure of the U.S. Postal Service, in order to justify selling it off to private investors.) Congress also has no real interest in the solvency of Medicare and Social Security (for which the rational solution is to simply remove the $113,700 taxable income cap). Congress's only solution to an economy mired in very significant problems is privatization, deregulation, and tax cuts.

Next Page  1  |  2

 

- Advertisement -

Must Read 1   Supported 1   Valuable 1  
View Ratings | Rate It

Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)
 

Share on Google Plus Submit to Twitter Add this Page to Facebook! Share on LinkedIn Pin It! Add this Page to Fark! Submit to Reddit Submit to Stumble Upon



Go To Commenting
The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of this website or its editors.

Writers Guidelines

Contact AuthorContact Author Contact EditorContact Editor Author PageView Authors' Articles
- Advertisement -

Most Popular Articles by this Author:     (View All Most Popular Articles by this Author)

The Burden of Education on Students Grows but It Shouldn't

Fiscal-Policy Obstruction to Economic Recovery

Is Growing Ethnic Diversity a bad thing?

Minimum Wage, Unemployment Benefits, and Income Inequality Connection

Startups and small business create most new jobs

On Income Inequality and Economic Growth