A Different Approach to Balancing the Federal Budget?

Recently, various Democratic politicians have been pushing a range of tax options.  From what I can determine, and from what many experts are saying, most of them would cause more harm than good.  I’m not saying that we don’t need more federal revenue.  I’m saying that everyone is looking in the wrong places.

Let’s go back to basics.  First, you can’t tax people who have no income.  Second, despite the political rhetoric, it’s highly unlikely that a “wealth tax” is constitutional.  Third, a wealth tax would destroy a lot of entrepreneurs while only marginally inconveniencing financial types.  That’s because the wealth of the entrepreneurs is usually tied up in stock and having to sell large blocks of it to pay taxes could destroy the company or at least damage it.  The same thing could happen to family held companies without large cash reserves.  Fourth, extremely high marginal tax rates would cause either creative tax evasion or tax flight, both of which would leave the upper middle class shouldering the burden, not the wealthy.

BUT… there is another source of untapped revenue that has several advantages.  First, it targets the financial community, and that’s where most of the money is.  Second, it’s about time that Wall Street starting paying the bill.  And third, it’s not really that onerous a tax when you think about it.  And fourth, some states already use it.

I’m talking about a transfer tax on every share of stock sold on every stock exchange in the U.S.  The tax would be levied on the seller, since the seller gets the money. With computers, keeping track shouldn’t be that hard.

I did some back of the envelope calculations, which astounded me. The other day, which wasn’t extraordinary, the top 100 stocks on the NASDAQ-100 had a daily volume of over 400 million shares traded.  Only one of those stocks sold for less than $6 a share and the rest looked to average a hundred dollars a share.  The yearly sales value of just those 100 stocks look to exceed $10 trillion annually.  A one percent transfer tax on the sales of the shares of just those one hundred companies would yield about $100 billion annually… and there are over 4000 publicly traded companies on U.S.

Now I know that there are also some public start-up companies whose shares are valued in cents, and some sort of sliding scale would be necessary for them, but given how much Wall Street has benefitted, is a one percent a share, or even half of that, too much to ask of the large established firms… and the algorithm-driven trading computers used by market profiteers?

6 thoughts on “A Different Approach to Balancing the Federal Budget?”

  1. JakeB says:

    Isn’t it also the case that the vast majority of that trading now is a kind of competitive arbitrage among large financial firms anyways? (That is, taxing it has at worst no social cost at all and at best would be a positive good.)

    As I recall, isn’t this kind of tax one of the mechanisms used on Paolo’s home planet in _One Eyed Man_ to help increase societal stability?

  2. Daze says:

    This or a Tobin tax on currency trading have been criticised on the basis that they’d make most speculative trading unprofitable – which to me would be another benefit. However, it is necessary to take the potential for a drastic reduction in the number and hence value of trades into account when looking at possible yields from trading taxes.

  3. Hanneke says:

    I think it’s a good idea, and agree with the advantages you mentioned, but will create less income than your quick calculation guesses.

    From what I’ve read, as a not-very-interested layperson, an enormous amount of the algorithm-driven trading has very low returns – the enormous volume of low returns trades makes it worthwhile. If you tax each trade, a lot of these big volume & tiny returns trades will likely become unprofitable.
    From the explanation I saw, all these financial firms settle as close to the stock exchange as possible, so (for one reason, and crudely put) they can see a buy order coming before the exchange does, and quickly buy up the wanted stock, then sell it on to the original buy order at a fraction higher than they bought it for. That means they buy and sell a 100 dollar stock while making no more than a cent in profit. If you then tax the trade at one percent of the stock worth, i.e. a dollar, they’d make a 99 cents loss on the trade.

    So taxing the stock exchange trades will help stabilize the stock exchange, and neutralize a bit of the advantage that big rich traders get from being able to get the costliest real-estate closest to the stock exchanges.

    Also, the fear of rich people leaving if they get taxed at a higher rate tends to be overblown compared to what happens in reality (for instance, tax increases on the rich in some Scandinavian countries did not cause their millionaires to relocate; and when US taxes were more progressive a few decades ago, millionaires still lived there and grew rich there as well, even with top rates above 70%).
    Many billionaires like their present way of life and will live it no less pleasantly when their tax goes up, so the pressure to relocate is not that strong.
    On the other hand, it might provide some incentive to do something more productive about tax havens than Brexit.

  4. R. Hamilton says:

    First, spend considerably less, and hurt everyone when you cut. No exceptions, neither for bribes from the rich nor sympathetic impulses (or posturing) on behalf of the poor.

    Privatize more, too – let people pay the provider rather than the government for more services; presumably the provider will have to remain solvent. At the very least, increase fees and require more activities to operate from those fees rather than taxes. That will also make those activities immune to government “shutdowns”.

    Then, and only then, tax more. At first glance, this doesn’t sound as bad as some taxes; but that doesn’t mean I like it.

    I own NO stocks, at least not directly, both because of the paperwork that would have generated (with special reporting requirements that apply to some of us), potential conflicts of interest etc, and even retired, because I wouldn’t want to be involved in something I’d be likely to get so obsessive about (and probably not all that effectively so). So it wouldn’t hurt me directly; but since everyone taxed (except individuals, esp. those without advisors) tends to pass that cost on to someone else if they can, I have my doubts that _any_ tax wouldn’t have unexpected consequences, even on my wallet, and therefore, probably on most people’s. At the very least, I’d expect it to bring the markets down at least a bit, reduce investments (even if it stabilized them), and reduce $$ available for other purposes (R&D, hiring, etc).

    The least necessary government is a necessary evil; any more, is merely evil. That premise should be considered even if reasonable people disagree what constitutes “least necessary”.

  5. geoff soper says:

    I’m no expert. Quite otherwise. Two matters.

    Is there anyway this transfer-tax might be avoided by e.g. conducting transfers outside US conduits.

    In the light of previous modesitt blog value – e.g. the one on Pelosi. – I have taken the liberty of calling your blog to the attention to AlterNet, theHill, theDailyBeast, Business Insider, & the New Yorker — these being my preferred breaking-news providers — and Ocasio Cortez’s interns. Pelosi’s at this point being beyond me.

    If I’ve transgressed somehow, in manners unforseen, please forgive me.

  6. Wine Guy says:

    Taxing tranfers would do at least 3 good things:
    1. It would reduce speculation, which would keep the lows from being so low from massive sell-offs. It would also keep the highs from being so high.
    2. It would encourage more buy-and-hold.
    3. It takes its money from the financial centers that have been siphoning off money with minimal return to the economy.

    What the financial markets would really do is just increase their trading fees, managment fees, etc. to make up the difference.

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