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Posted by on Feb 19, 2013 in Business, Economy, Featured, Politics | 4 comments

A Painless Tax to Cut the Budget Deficit

No tax can be completely painless, but there is one thatcomes pretty close. Income taxes, estate taxes, sales taxes all have a direct impact on citizens. However, if a tax does not obviously affect you from a financial standpoint, it may have an indirect impact that costs you money. As an example, if you do not drive, you don’t pay the gasoline tax. However, the vehicles that bring the goods to the stores where you shop have to pay these taxes, raising the cost of transporting the products that you buy. And when transportation costs go up, purveyors will be charged more by trucking companies and the purveyors will charge you more for what you purchase.

A tax that will be relatively painless for the vast majority of citizens would be a small stock transaction tax that could raise considerable sums for the government to cut the budget deficit. This would have to be structured in such a way that traders could not move to other markets to make their trades, or enacted in coordination with other nations to make the tax universal or near universal.

The amount of the levy that has been discussed is three basis points on every trade, or three cents for every hundred dollars traded. The Joint Committee on Taxation has estimated that this tax would bring $352 billion into government coffers over ten years. This would also be an easy tax to collect from the intermediate companies that buy or sell the stocks. Initial public offerings and bond sales would be exempted from this tax so as not to interfere with the raising of capital. Withdrawals from IRAs and education funds would also not be subjected to this tax.

Companies that trade millions of shares of stock back and forth daily, the high-frequency traders that try to make small amounts on each share, would be affected the most by this tax. High-frequency trading currently accounts for about half of all trades daily on American stock markets and is responsible for much of its volatility. These companies have algorithms that allow them to trade hundreds of thousands or millions of shares in milliseconds in order to make money buying or selling. But these companies provide nothing of social value with their trading, though it has been asserted they provide liquidity to the markets. These companies have also been responsible for flash crashes in the markets and it is claimed that they manipulate the markets at times. In addition, in August of 2012, the Knight Capital Group, a high frequency trader, lost $460 million when a computer glitch caused runaway trading. They were subsequently bailed out by another high-frequency trading firm.

Opponents of a transaction tax claim that high-frequency trading would be reduced if this tax were enacted and that the amount generated for the government would be lower than estimated. Given the possible dangers of high-frequency trading, it would not be an adverse outcome if that ccurred.

The derivatives market dwarfs the world’s total GDPs with a notional value of over one thousand trillion dollars. These are potentially destructive instruments for the financial system, need to be better regulated, and need to be subjected to transaction taxes as well. Perhaps some of the funds generated from these taxes could be used to regulate the derivatives markets, to make certain they do not bring down the entire financial system at some point in the future.

A transaction tax would cause minimal pain for American citizens, raise significant revenue, and poses no danger to the financial system. In fact, it could reduce stock market volatility and lessen possible disruptions to the market. Seems like a no-brainer even for our Congress.

Resurrecting Democracy

A VietNam vet and a Columbia history major who became a medical doctor, Bob Levine has watched the evolution of American politics over the past 40 years with increasing alarm. He knows he’s not alone. Partisan grid-lock, massive cash contributions and even more massive expenditures on lobbyists have undermined real democracy, and there is more than just a whiff of corruption emanating from Washington. If the nation is to overcome lockstep partisanship, restore growth to the economy and bring its debt under control, Levine argues that it will require a strong centrist third party to bring about the necessary reforms. Levine’s previous book, Shock Therapy For the American Health Care System took a realist approach to health care from a physician’s informed point of view; Resurrecting Democracy takes a similar pragmatic approach, putting aside ideology and taking a hard look at facts on the ground. In his latest book, Levine shines a light that cuts through the miasma of party propaganda and reactionary thinking, and reveals a new path for American politics. This post is cross posted from his blog.

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