The Need to Tax the Wealthy
By Dean Baker
April 16, 2009, The Economist
The quest to increase taxes on the wealthy is not a
gratuitous attack on upper income households; it is driven by
the need to raise more revenue to run the government. While
many deficit hawks been irresponsible in raising fears of an
impending collapse of the American government, the projected
deficits for years following the recovery are in fact larger
than is desirable.
There are areas of American spending at the federal
government level that could be reasonably cut, but even after
we have zeroed out the "waste, fraud, and abuse" category of
federal spending we will still likely need additional revenue
of between 1-2%t of GDP to keep budget deficits in an
acceptable range. That leaves a choice between increasing
taxes on the wealthy or imposing more taxes on the middle class.
The vast majority of the income gains in the United States
over the last three decades have gone to the richest 5% of
the population, largely as a result of policies that were
explicitly designed to redistribute income upwards. Therefore
it is far more appropriate to tax the richest 5%t of families
who have prospered than the broad middle class who have suffered.
Of course taxes can be designed in a better or worse manner.
The best way to increase taxes on the wealthy, in addition to
allowing the Bush tax cuts to expire, would be to apply a
modest financial transactions tax (FTT).
There is a long history in both the
rest of the world with FTT. Until 1964, the
imposed a tax of 0.12% on new stock issues and 0.04% on stock
or purchase, raising five billion pounds a year. This would
be equivalent to roughly $30 billion a year in the American economy.
Robert Pollin and I calculated that a scaled set of FTT on
stock, futures, options and other financial instruments could
raise approximately $150 billion a year. This would go far
towards bringing the long-term budget deficit down to a manageable level.
A FTT would be hugely progressive. While many middle income
families own stock, their holdings are dwarfed by the
holdings of the wealthy. Furthermore, few middle income
families are active traders. Their intention is to hold their
stock to support their retirement or their kids' education,
not to shuffle it around on a daily or hourly basis. Some
mutual funds do engage in frequent trading. An FTT would
encourage investors to move their money to funds that are
less active traders, thereby allowing them to escape most of
the impact of the FTT.
Most of the burden of the FTT will fall on wealthy
individuals who are active traders and also on the financial
industry itself. Either way, the tax will be overwhelmingly
borne by the wealthy. By raising the cost of trading, the tax
will discourage the trading that provides the revenue for the
financial industry. A well-designed tax should also
discourage the creation of exotic assets that may serve
little useful purpose, since it could lead to the tax being
paid multiple times. For example, the holder of an option on
a stock would both pay the tax on the purchase and sale of
the option and also on the purchase and sale of the stock
itself, if the option was ever exercised.
While most taxes impose some economic cost in addition to the
revenue raised, a FTT may actually increase economic
efficiency. By discouraging financial transactions that are
entirely rent-seeking in nature, a FTT will reduce the
resources used up by the financial sector, without affecting
at all its ability to serve the productive economy. The
reduction in trading volume will of course reduce liquidity
to some extent, but American financial markets will still be
quite liquid. Even with a 0.25% tax on a stock sale or
purchase, transaction costs will still only be raised back to
their mid-80s levels. And, the
very liquid stock market in the 80s.
There also is a powerful element of justice in imposing a FTT
in the current situation. The main reason that the budget
situation has deteriorated so much in the last two years has
been the damage caused by the irresponsibility and greed of
the financial industry. In this way, a FTT can be seen as
sort of a user tax, where the industry is effectively forced
to pay for some of the damage caused by its practices, just
as we might like to tax the output of industries that pollute
our air or water.
In short, there is a very good argument for increasing taxes
on the wealthy given the current budget situation. The
alternative is taxing those who are not wealthy. And, there
is no better way to tax the wealthy than to tax their
gambling in financial markets. A financial transactions tax
will raise revenue at the same time that it makes the economy
more productive. This is a genuine win-win situation.
© 2009 The Economist
Dean Baker is the co-director of the Center for Economic and
Policy Research (CEPR). He is the author of The Conservative
and Get Richer (www.conservativenannystate.org) and the more
recently published Plunder and Blunder: The Rise and Fall of
The Bubble Economy. He also has a blog, "Beat the Press,"
where he discusses the media's coverage of economic issues.
You can find it at the American Prospect's web site.