{"id":236751,"date":"2023-06-05T12:00:51","date_gmt":"2023-06-05T11:00:51","guid":{"rendered":"https:\/\/www.transcend.org\/tms\/?p=236751"},"modified":"2023-06-03T04:31:48","modified_gmt":"2023-06-03T03:31:48","slug":"another-look-at-the-u-s-financial-transactions-tax-that-could-eliminate-need-for-all-others","status":"publish","type":"post","link":"https:\/\/www.transcend.org\/tms\/2023\/06\/another-look-at-the-u-s-financial-transactions-tax-that-could-eliminate-need-for-all-others\/","title":{"rendered":"Another Look at the U.S. Financial Transactions Tax That Could Eliminate Need for All Others"},"content":{"rendered":"

A small financial transactions tax could correct a number of maladies in the US economic system, from the federal debt crisis to the widening wealth divide to the rampant financialization of the economy, while eliminating taxes on income and sales.<\/em><\/p><\/blockquote>\n

2 Jun 2023 –<\/em> The debt ceiling crisis has again brought into focus the perennial gap between what the government spends and what it accumulates in taxes, and the virtual impossibility of closing that gap by increasing taxes or negotiating cuts in the budget.<\/p>\n

In a 2023 book titled\u00a0A Tale of Two Economies<\/a>: A New Financial Operating System for the American Economy, Wall Street veteran Scott Smith shows that we would need to tax everyone at a rate of 40%, without deductions, to balance the budgets of our federal and local governments \u2013 an obvious nonstarter. The problem, he argues, is that we are taxing the wrong things \u2013 income and physical sales. In fact, we have two economies \u2013 the material economy in which goods and services are bought and sold, and the monetary economy involving the trading of financial assets (stocks, bonds, currencies, etc.) \u2013 basically \u201cmoney making money\u201d without producing new goods or services.<\/p>\n

Drawing on data from the Bank for International Settlements and the Federal Reserve, Smith shows that the monetary economy is hundreds of times larger than the physical economy. The budget gap could be closed by imposing a tax of a mere 0.1% on financial transactions, while eliminating not just income taxes but every other tax we pay today. For a financial transactions tax (FTT) of 0.25%, we could fund benefits we cannot afford today that would stimulate growth in the real economy, including not just infrastructure and development but free college, a universal basic income, and free healthcare for all. Smith contends we could even pay off the national debt in ten years or less with a 0.25% FTT.<\/p>\n

A radical change in the tax structure may seem unlikely any time soon, due to the inertia of Congress and the overweening power of the financial industry. But as economist\u00a0Michael Hudson and other commentators observe<\/a>, the U.S. has reached its limits to growth without some sort of debt write down. Federal interest expense as a percent of tax revenues\u00a0spiked to 32.9%<\/a>\u00a0in the first quarter of 2023, and it will spike further as old securities at lower interest rates mature and are replaced with new ones at much higher interest. A financial reset is not only necessary but may be imminent. Promising proposals like Smith\u2019s can lead the way to a much-needed shift from serving \u201ccapital\u201d to serving productivity and the broader public interest.<\/p>\n

A Look at the Numbers<\/strong><\/p>\n

The material economy is roughly measured by the annual Gross Domestic Product (GDP), which for the U.S. had reached $25.6 trillion by the third quarter of 2022. (Michael Hudson observes that even GDP, as currently measured, is largely composed of non-productive financial services.) GDP is defined by spending, which depends on income. Collectively, Americans earned $21 trillion in 2021.\u00a0The monetary economy is defined as the total amount of money that changes hands each year. Smith draws his figures from data that the Federal Reserve publishes annually in the Bank for International Settlements\u2019 Red Book. The Red Book is not all-inclusive; it leaves out such payments as commodity trading, various options, crypto currency trades, and exchange-traded funds. But even its partial accounting shows $7.6 quadrillion\u00a0in payments \u2013 more than 350 times our national collective income. Smith includes this chart[i]<\/a>:<\/p>\n

\"\"<\/a><\/figure>\n

He comments:<\/p>\n

Most of these payments have little to do with what we regard as the real economy\u2014 the purchase of goods and services and the supply chain. Our GDP represents less than 0.33% of the payments in our economy. Once we see the big picture, the solution is obvious. We should tax payments instead of our income.<\/p><\/blockquote>\n

Smith calculates that U.S. spending by federal, state and local governments will total around $8.5 trillion in 2023. Dividing $7,625 trillion in payments by $8.5 trillion in government spending comes to a little more than 0.001, or a tenth of a percent (0.1%). Taxing payments at 0.1% could thus eliminate every tax we pay today, including social security (FICA) taxes, sales taxes, property taxes, capital gains taxes, estate taxes, gift taxes, excise taxes and customs taxes. With a 0.25% FTT, \u201cIf you have a net worth of $20 million or less, you would come out ahead. And if you make $500 million per year, you will finally be paying your fair share of taxes \u2013 $1.25 million!\u201d<\/p>\n

Bridging the Wealth Gap<\/strong><\/p>\n

The financial transaction tax is not a new concept. The oldest tax still in existence was a stamp duty at the London Stock Exchange initiated in 1694. The tax was payable by the buyer of shares for the official stamp on the legal document needed to formalize the purchase. Many other countries have imposed FTTs, including the U.S. \u2014 some successfully and some not.\u00a0In January 2021, U.S. Rep. Peter DeFazio reintroduced\u00a0The Wall Street Tax Act<\/a>, which was accompanied in March 2021 by a Senate bill introduced by Sen. Brian Schatz. According to\u00a0a press release<\/a>\u00a0on the Schatz bill, the tax \u201cwould create a 0.1% tax on each sale of stocks, bonds, and derivatives, which will discourage unproductive trading and redirect investment toward more productive areas of the economy. The new tax would apply to the fair market value of equities and bonds, and the payment flows under derivatives contracts. Initial public offerings and short-term debt would be exempted.\u201d Schatz stated:<\/p>\n

During the pandemic, Wall Street has cashed in on high-risk trades that add no real value to our economy and leave working families behind. We need to curb this dangerous trading to reduce volatility in the markets and encourage investment that can actually help our economy grow. By raising the price of financial transactions, we can make our financial system work better while bringing in billions in new revenue that we can reinvest in our workers and our communities.<\/p><\/blockquote>\n

Scott Smith concurs, noting that millions of people were forced into poverty during the first two years of the pandemic. In the same two years, the 10 richest men in the world doubled their fortunes and a new billionaire was minted every 26 hours. Much of this disparity was fueled by fiscal and monetary policy aimed at relieving the effects of the pandemic and of the 2008-09 banking crisis. Smith writes:<\/p>\n

Our burgeoning monetary economy has fueled the rise of securitization, private equity, hedge funds, the foreign exchange market, commodity trading, cryptocurrency, digital assets, and investments in China. Quantitative easing further fanned these flames, driving up the price of financial assets. All such assets are monetary equivalents, and, thus, inflating the price of such assets balloons the money supply.<\/p>\n

What many lauded as a robust economy was really monetary inflation. This makes it more difficult for the next generation to start life. Monetary inflation moves a select few out of the middle class, making them newly rich, while relegating many more to being poorer.<\/p>\n

\u2026 The trading of financial assets in the monetary economy represents the majority of the payments in the economy, eclipsing payments related to wages or the purchase of goods or services. Thus, it would be wealthy individuals and institutions, such as hedge funds, that would shoulder most of the burden of a payment tax.<\/p><\/blockquote>\n

Predictably, the Wall Street Tax Act has gotten pushback and has not gotten far. But Smith says his proposal is different. It is\u00a0not adding a tax but is replacing existing taxes\u00a0\u2013 with something that is actually better for most taxpayers. He has asked a number of hedge fund managers, day traders, private equity fund managers, and venture capital managers if a quarter-point tax would impact their businesses. They have shrugged it off as not significant, and have said that\u00a0they would certainly prefer a payments tax to income taxes.<\/p>\n

Responding to the Critics: The Sweden Debacle<\/strong><\/p>\n

Among failed FTT attempts, one often cited by critics was undertaken in Sweden in the 1980s. As reported by the\u00a0Securities Industry and Financial Markets Association<\/a>\u00a0(SIFMA):<\/p>\n

There were negative capital markets impacts seen in the great migration of trading volumes across multiple products to London, equity index returns fell, volatility increased and the interest rate options markets essentially disappeared.<\/p><\/blockquote>\n

But as argued by James Li in a podcast titled \u201cThe Truth About a Financial Transaction Tax<\/a>\u201c:<\/p>\n

Sweden\u2019s tax policy \u2026 had an obvious, massive loophole, which is that Swedish traders could migrate to the London Stock Exchange to avoid the tax \u2014 which they did, until it was eventually abolished. On the other hand, the UK\u2019s financial transaction tax has been much more successful. In 1694, King William III levied a stamp duty on all paper transactions, and a version of that levy still exists today, taxing many stock trades at 0.5 percent. Unlike the defunct Swedish tax, it applies to trades of shares of any UK company, regardless of where traders are based.<\/p><\/blockquote>\n

Again, Smith argues that the challenges met by other transaction tax proposals have arisen because they were being proposed as an\u00a0additional\u00a0tax. A payment tax\u00a0in lieu of\u00a0personal and corporate income taxes takes on a whole different character. He argues that big firms, rather than moving offshore to avoid a payments tax, would move to the U.S., since the tax rate in other nations would be much higher. Without a corporate or income tax, the U.S. would be the most favored tax haven in the world.<\/p>\n

He adds that an exit tax could be a good idea: any money leaving the U.S. could be taxed at a 5% rate. That would discourage people from wiring money to an offshore exchange. But incoming money would not be taxed, encouraging foreign money to come to the U.S. to stay long-term, where it would be taxed less than elsewhere.<\/p>\n

The Alleged Threat to Retirees<\/strong><\/p>\n

James Li\u2019s favorite myth about a financial transactions tax is that it would be devastating for Main Street investors. He cites a report from the Modern Markets Initiative on the effects of the tax on savings and retirement security.\u00a0A Business Wire headline<\/a>\u00a0on the report warns, \u201cLatest Data from Modern Markets Initiative Shows the Financial Transaction Tax Would Threaten the Retirement Savings of Millions of Americans.\u201d Among other claims is that a financial transactions tax would cost \u201c$45,000 to $65,000 in FTT over the lifetime of a 401(k) account, or the equivalent of delaying the average individual\u2019s retirement by approximately two years.\u201d How that calculation was made is not included in the article, which refers the reader to the report. Li looked it up, and says on his podcast that it was highly misleading:<\/p>\n

[T]he study stated that under this type of tax, for every $100,000 of assets in a 401(k) plan, the saver would owe $281 dollars in FTT taxes in a given year; and then over a 40-year time horizon paying in at $281 a year at 7% annual growth \u2013 the average for pension funds \u2013 that this would yield a total value of $64,232 after 40 years.<\/p>\n

\u2026 [What they were] actually saying is, \u201cIf you put $100,000 a year into your 401(k), you would be paying approximately $281 in taxes for that $100,000; and if you had instead invested that money every year in a fund with 7% interest, that amount would add up to about $64,000 after 40 years.\u201d<\/p>\n

\u2026 I don\u2019t know about you, but I can\u2019t put $100,000 in my 401(k) plan every year. Very few people can. A more accurate estimate on how this would actually impact the average retirement savings is to look at the median income, which is around $52,000 a year, with an estimated $5,000 contribution into a 401(k) annually, which is around 10% of your gross pay based on commonly accepted financial planning advice. So the average person would only pay about $13 in FTT taxes in a given year.<\/p>\n

These people are extremely tricky and their logic is also extremely flawed, because we pay taxes all the time. It\u2019s like saying, \u201cOh, if I didn\u2019t have to pay an income tax, I would be able to put all that money away and be up like a million bucks when I retire.\u201d<\/p><\/blockquote>\n

Similar arguments are made concerning potential losses from FTTs to pension funds and the stock market. SIFMA contends, \u201cWhat\u2019s bad for the capital markets is bad for the economy,\u201d stating \u201cThe capital markets fund 65% of economic activity in the U.S.\u201d Perhaps, but the money paid for shares of stock traded in the stock market does not go to the corporations issuing the stock. It goes to the previous shareholders.\u00a0Only the sale of IPOs<\/a>\u00a0\u2013 initial public offerings \u2013 generates money for the corporation, and this money is typically exempted from FTTs. Trades after that are simply gambling, hoping to sell at a higher price to the \u201cgreater fool<\/a>.\u201d<\/p>\n

Killing the Parasite That Is Killing the Host<\/strong><\/p>\n

In the 2015 book\u00a0Killing the Host \u2013 How Financial Parasites and Debt Destroy the Global Economy<\/a>, Michael Hudson calls \u201cfinance capitalism\u201d a parasite that is consuming the fruits of \u201cindustrial capitalism\u201d \u2013 the goods and services traded in what Smith calls the material economy. Pam Martens writes in\u00a0a review<\/a>\u00a0of Hudson\u2019s book that this \u201cblood-sucking financial leech [is] affixed to your body, your retirement plan, and your economic future.\u201d<\/p>\n

But it is not actually the pension funds that are doing most of the financialized trades or that would get taxed on those trades. It is their asset managers \u2013 including BlackRock and Vanguard, both of which lost money overall in 2022. If the asset managers can\u2019t make money in the financialized economy, perhaps it would be better for the pension funds to move to more productive investments \u2013 from \u201cfinance capitalism\u201d to \u201cindustrial capitalism.\u201d<\/p>\n

Publicly-owned banks mandated to serve the public interest would be good options if we had them. As the economy falters, the public banking movement is\u00a0picking up steam<\/a>, part of a much-needed shift towards an economy that puts the public interest above private profits.<\/p>\n

NOTE:<\/strong><\/p>\n

[i]<\/a> Bank for International Settlements,\u00a0https:\/\/stats.bis.org\/statx\/toc\/CPMI.html<\/a>\u00a0(Data on cashless payments, payment systems, service providers, counterparties, clearing houses, and central security depositories. Click on the United States,\u00a0https:\/\/www.bis.org\/statistics\/rpfx22.htm?m=2617<\/a>\u00a0(Data on OTC FX and IR derivative),\u00a0https:\/\/stats.bis.org\/statx\/srs\/table\/d1<\/a>\u00a0(Data on XT futures and options),\u00a0https:\/\/stats.bis.org\/statx\/srs\/table\/d11.2<\/a>. (Data on OTC FX Instruments), Federal Reserve Bank of New York,\u00a0https:\/\/www.newyorkfed.org\/medialibrary\/Microsites\/fxc\/files\/2022\/aprfxsurvey2022.pdf<\/a>\u00a0(Data on XT Derivatives), Cboe Global Markets,\u00a0https:\/\/www.cboe.com\/us\/equities\/market_statistics\/historical_market_volume\/<\/a>\u00a0(Data on stock market volumes). All data is the latest available. Most categories are for 2020, some categories are for 2021 and 2022.<\/p>\n

________________________________________<\/i><\/p>\n

\"\"<\/a>Ellen Brown is a member of the <\/em>TRANSCEND Network for Peace Development Environment<\/a><\/span>, an attorney, founder\/chairperson of the\u00a0<\/em>Public Banking Institute<\/a><\/span>, and author of thirteen books including\u00a0<\/em>Web of Debt<\/a><\/span>,\u00a0The Public Bank Solution<\/a><\/span>, and\u00a0<\/em>Banking on the People: Democratizing Money in the Digital Age<\/a><\/span>.\u00a0Her 300+ blog articles are at\u00a0<\/em>ellenbrown.com<\/i><\/a><\/span><\/p>\n

 <\/p>\n

Go to Original \u2013 ellenbrown.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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