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OpEdNews Op Eds    H3'ed 10/15/19

The Economics and Politics of Financial Transactions Taxes and Wealth Taxes

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From Common Dreams

Imagine that instead of handing money to our billionaires, we are taxing away their wealth at the rate of 3.0 percent annually.

Demonstrators hold signs in support of a financial transactions tax (FTT), also known as a Robin Hood tax.
Demonstrators hold signs in support of a financial transactions tax (FTT), also known as a Robin Hood tax.
(Image by (Photo: Elvert Barnes/flickr/cc))
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This piece first appeared on Patreon.

Last month, the Washington Post reported that Joe Biden is considering including a financial transactions tax (FTT) as part of his campaign for the Democratic nomination. For those of us who have long advocated such a tax, this is very good news.

On this issue, Bernie Sanders has taken the lead among presidential candidates, including an FTT as part of his plan for free college tuition. Several other candidates also support an FTT, 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.

It may be somewhat surprising, but Senator Warren is not among those supporting an FTT. This is certainly not due to a reluctance to challenge the interests of the wealthy. Warren has proposed a wide variety of measures that would directly challenge the interests of the rich and powerful.

The most ambitious item on this agenda is a wealth tax. Her tax would tax wealth above $50 million at the rate of 2.0 percent a year and wealth above $1 billion at the rate of 3.0 percent a year. (Sanders has an even larger wealth tax.) While there are good reasons for wanting to tax the very rich, an FTT is almost certainly a better economic policy and would have much better political prospects.

We can see the economics of an FTT are superior when we consider the motivation for taxation by the federal government. As the proponents of Modern Monetary Theory remind us, the federal government doesn't need revenue to spend, it prints money. The purpose of taxation by the federal government is to reduce consumption, so as to create the economic space for spending. The argument is that if the government spent a large amount of money, and didn't have any taxes, it is likely to create too much demand in the economy, thereby generating inflation.

To see this point, imagine that the federal government was 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 we had another big Republican-style tax cut where we handed $1 trillion annually to the very richest people in the country. Also assume that we have no offsetting reduction in spending or increase in other 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 their stock portfolios but will have little effect on demand in the economy. And for that reason it is not likely to lead to inflation.

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. To take the simple arithmetic, if Jeff Bezos can find a way to hide $1 billion for 20 years, he will effectively be making $600 million. (I am ignoring interest.) That means that if he spends $500 million on clever accountants and tax lawyers, he is coming out ahead on the deal.

Bezos' spending on accountants and tax lawyers is real spending that creates demand for goods and services, no matter how nefarious. For this reason, it is entirely possible that a wealth tax will end up increasing demand in the economy rather than reducing it.

By contrast, the way to avoid an FTT 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 an FTT, we will see a roughly proportionate decline in trading. For example, if an FTT raises the cost of trading a share of stock or an option by 40 percent, then the volume of trading will decline by roughly 40 percent.

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Dr. Dean Baker is a macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. (more...)
 
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