I always wonder if bills like this one which radically alter the structure of our government are proposed in seriousness or merely as a distraction to please certain voters.
Obviously, adding a 1% tax on all financial transactions, as this bill proposes, would drastically change how our economy operates. Keeping the markets efficient and accurately priced becomes much more difficult when any trade comes with a 1% cost. Especially when the 1% is imposed whether it results in a profit or a loss. From what I see in this bill, even selling one stock to purchase another would incur a 1% fee on the first sale and a 1% fee on the purchase of the second stock.
1% may not sound like much, but as money continues to change hands the government's take grows significantly. Let $100 change hands 10 times, and you're left with $90.44 of the original money. Let $100 change hands 100 times and you're down to $36.60.
Of course this scheme would transfer money to the government to pay down our debt (in theory, if the money is used as the bill intends), but at what cost? This additional financial friction could seriously slow down the economy and disrupt efficient market pricing. Finding the proper balance of taxes, debt, and economy growth is a very, very difficult problem, and this solution is not well thought out at all. Furthermore, eliminating our national debt is not going to solve all of our problems, as many would like us to believe.
Throwing ridiculous bills like this in the mix only serves to muddy the waters. It distract us from the real problems and the potentially viable solutions. Let's make small, incremental changes within our current tax structure to fix our problems in a reasonable manner.
Forget about friction: how much money would this really bring in? Some time ago I read that Switzerland instituted a stock market transaction tax ... and their market quickly lost a very large fraction of its business. US based multi-nationals would e.g. follow all those oil services companies that have moved their headquarters outside of the country (curiously, to Switzerland (and note that this happened before the BP spill)).
Obviously there would be a mass exodus out of instruments that are taxed in this way. People and companies would game the system like mad, descend upon D.C. for exceptions for their "critical" industries, etc. etc.
And destroying or chasing out of the country a large fraction of the US financial sector---which all too many people unwisely desire---could easily result in a net loss to the government, especially when you count secondary effects like a decreased ability to raise capital and vastly less efficient capital markets.
My favorite not so quick fix is the government selling off a very large fraction of the land it owns. What's the compelling reason for it owning this much of these top ten states I just randomly found on the net:
"This is an idea originally floated in 2004 by a single member of Congress, Democratic Rep. Chaka Fattah of Pennsylvania. So far it has attracted little support and gone nowhere. The White House has not endorsed it."
I should hope that we're not all waiting with bated breath for the White House to endorse every bill that substantially alters the structure of government.
This would be like cutting out a cancer that, while killing you eventually, is presently keeping you alive.
Anyone who thinks that eliminating the national debt will fix our financial woes does not understand how our current debt-based economy, built around a central bank, works. If the national debt were retired in this way, our financial problems would become much worse than they already are.
This is Keynesian economics 101. I will not attempt to pass judgment on the wisdom of this system, but it is what it is.
In our current system, and that of almost every national economy in the world, debt = cash. That is is a vast simplification, but it boils down to this: The dollars which circulate in the economy (whether paper or electronic) are dollars which are created by various types of bank loans, treasury instruments, etc. When these obligations + interest are repaid, money is taken out of the economy that was previously in circulation. If the entire national debt were somehow repaid, then trillions of dollars will be removed from circulation. If all personal, corporate, and national debt were paid off, we would have no currency left. In fact, because principal on debt is created by said debt, but interest is not so created, it is not even possible to pay off all the debt. There is literally not enough cash in existence to do it.
This is why it is truly a crisis when the lines of credit get "clogged up", as in the present crisis. If the loans don't start flowing again, we are looking at deflation. One can argue whether deflation is good or bad, of course. As I said, it is what it is.
"In fact, because principal on debt is created by said debt, but interest is not so created, it is not even possible to pay off all the debt. There is literally not enough cash in existence to do it."
That's true in principle, but in practice inflation makes a difference. Let's say $100 in cash is added to the economy today, and $104 in debt is added at the same time. Next year, inflation will have done two things: it will have decreased the value of the $4 of debt, and it will have increased the rate that new cash/debt is added to the economy. So maybe next year $110 in cash and $114.40 in new debt will be added. The old debt gets paid off, but now we have $4.40 in new debt, but it's "worth" the same amount as last year's debt, so we're even.
Sort-of, anyway. In practice the system isn't so balanced, and the old debt isn't paid off, it just piles up.
One solution is to stop generating new cash this way. Instead, next year the treasury could generate $114 of debt-free cash instead of borrowing it from the fed. $104 of that could go towards paying last years debt, and the remaining $10 would be a permanent debt-free addition to the economy. Eventually all of the debt-based cash could be replaced, and the treasury/congress would be back in charge of our monetary system. There are drawbacks to that approach too (partly why the semi-independent fed was created) but it's constitutional and at least the responsible parties would be elected officials.
Bottom line... debt is idiotic. I think it should be retired as rapidly as possible. Would you choose lots of pain today, or tons more pain amortized over many generations to come?
If the loans don't start flowing again, we are looking at deflation.
But, if the dollar tanks in worth, couldn't that cause inflation? The cost of most of our goods and services in the U.S. are based on goods and services overseas which would go up if the dollar devalued by 20% as some say it might.
There are really two kinds of deflation. Servicing a debt and paying off a debt. Paying off a debt early causes LESS money to be sucked out of the economy in the form of interest, and increases the intrinsic value of one's financial assets. This increases the value of the dollar both by decreasing its supply, and increasing its perceived value internationally. In this scenario, bank loans are continuing to be made because the financial health of the nation, in general, is good.
However, deflation can also be caused servicing loans when no further loans are being made. Interest is sucking cash out of the economy, and loans are not being made to replace it. Because much of our productivity is based upon the ability to acquire easy credit, such deflation causes a halt to productivity, which leads to a further inability to service existing loans. Default follows, with the flotsam of toxic assets in its wake. Very bad news.
In a central bank system, both forms of deflation inevitably lead to inflation. The hope of central bankers is to control the currency supply such that just enough cash is added in the form of loans to keep the system solvent. However, central planning of an economy never works, and thus we come to the latter form of inflation, which is what we were experiencing just before the bundle of bailouts from the lest several years.
In the latter form of deflation, not only is the dollar perceived as worthless, but it is further devalued by the reactionary inflation which is invariably used to "solve" the crisis. So as you can see, inevitably it is inflation that causes the cost of overseas goods and services to increase.
You have to consider why exactly it is that the cost of goods and services overseas would normally be going up:
China is holding has bought vast sums of US Dollars in order to keep their currency low in relation to the dollar. By buying lots of dollars, China exchanges dollars for Yuan. Yuans flood the market, but China locks up the dollars in the bank. Yuans are inflated. The Dollar is deflated. The Dollars still exist - but they are not in circulation. If China were to liquidate their reserves of US Dollars, this would result in massive inflation. But China can only keep this up for so long. If we flood the market with dollars faster than China can buy them relative to its own currency, this strategy will fail, and eventually China will be forced to liquidate its dollar reserves. This will have the effect of driving the price of the Yuan up, and the Dollar further down.
The last part looks a little scary: "If we flood the market with dollars faster than China can buy them relative to its own currency, this strategy will fail, and eventually China will be forced to liquidate its dollar reserves. This will have the effect of driving the price of the Yuan up, and the Dollar further down."
The problem I see with this is that when the U.S. pumps more money into circulation by buying up U.S. treasury bonds, etc., it further devalues the dollar. The Chinese (and Russia, India, etc.) know this well, and are perfectly happy with this. They'll continue to watch us devalue the dollar. Later, if we try to pull anything, they'll use the money they've amassed to buy up an overwhelming military force. But obviously, they'd rather own us than fight us. Not that they are set on world domination, but when the idiot on the block keeps lowering the cost of his mansion, and you'd like to have that mansion, you'd be stupid not to let him lower the cost until you can buy it for 20% off (or more).
My understanding is that this is far more than just a sales tax: it is a 1% tax on ALL financial transactions. Other proposed sales taxes to replace the income tax, such as the fair tax, generally only apply to retail sales of new consumer goods. This would go way beyond that.
Write a check to your nephew for his birthday? 1% tax.
Buy something used on eBay and pay for it on paypal? 1% tax.
Support a project on Kickstarter? 1% tax.
Get paid by your employer? They pay a 1% tax.
Sell some shares of stock A in order to buy stock B? 1% tax on the sale and another 1% tax on the purchase. This one is HUGE: consider how many such transactions occur on Wall Street each day. Such a tax alone could quite likely destroy the high-speed trading industry. I'll let smarter people decide whether that's good or bad.
Also consider that all of these cascade. For example: you buy a table and pay a 1% transaction fee. The store paid a 1% transaction fee when they bought the table from the manufacturer, a 1% transaction fee on the shippers who brought it to the store, and a 1% transaction fee on their rent, utilities, and other overhead. The manufacturer paid a 1% transaction fee on their raw materials, 1% to have those materials shipped, etc. I would imagine that this would strongly encourage vertical consolidation in order to avoid these intermediate transaction fees. Again, I'll let the economists figure out how good/bad that is.
The bill isn't exactly clear on my reading. But it's certainly not proposing the equivalent to a 'sales' tax. It would be a 1% tax on all sales, investments, trades, possibly even payments on outstanding debts or even transfers from one account to another owned by the same person. Again, the full extent isn't quite clear to me, but it's definitely far more broad than a traditional 'sales' tax or VAT. And frankly, that's the only way you could gather those amounts.
The "no income tax" part doesn't kick in until 2017.
Note that the CRS summary says that the bill states that paying off the debt in 7 years is the bill's purpose. The CRS does not assert that it will work.
I suppose it might work, but I can point to one flaw right now: it cancels the income tax in 2017, not "when the debt is paid off".
Seven years is plenty of time for congress to alter that part, and keep both taxes in place. Their justification would probably be to fund the IOU's for all of the money that was borrowed from the "pay off the debt" fund during the first seven years.
- Politician A gets to pass broken legislation now and get credit for "Fixing the Status Quo".
- Years later, Politician B gets to fix the broken legislation and get credit for "Fixing the Status Quo". Of course, this fix is even more broken than the original.
- For extra credit, Politician A and B are the same person, but none of the voters remember that he's been responsible for the mess all along.
Obviously, adding a 1% tax on all financial transactions, as this bill proposes, would drastically change how our economy operates. Keeping the markets efficient and accurately priced becomes much more difficult when any trade comes with a 1% cost. Especially when the 1% is imposed whether it results in a profit or a loss. From what I see in this bill, even selling one stock to purchase another would incur a 1% fee on the first sale and a 1% fee on the purchase of the second stock.
1% may not sound like much, but as money continues to change hands the government's take grows significantly. Let $100 change hands 10 times, and you're left with $90.44 of the original money. Let $100 change hands 100 times and you're down to $36.60.
Of course this scheme would transfer money to the government to pay down our debt (in theory, if the money is used as the bill intends), but at what cost? This additional financial friction could seriously slow down the economy and disrupt efficient market pricing. Finding the proper balance of taxes, debt, and economy growth is a very, very difficult problem, and this solution is not well thought out at all. Furthermore, eliminating our national debt is not going to solve all of our problems, as many would like us to believe.
Throwing ridiculous bills like this in the mix only serves to muddy the waters. It distract us from the real problems and the potentially viable solutions. Let's make small, incremental changes within our current tax structure to fix our problems in a reasonable manner.