James Pethokoukis

Politics and policy from inside Washington

Dems/unions push new wave of investment taxes

Aug 31, 2009 18:42 UTC

American equity investors have suffered a lost decade of portfolio performance — the S&P 500 is about where it was back in 1998 — and trillions of dollars of lost net worth, so it may seem a terrible time to hit them with a $100 billion-a-year investment tax. And, of course, it is.

But good sense isn’t stopping the AFL-CIO from pushing just such an ill-advised plan. The nation’s largest labor organization is proposing a tenth of a percent tax on every stock transaction, to fund infrastructure projects that would, presumably, employ union members.

It would be a version of economist James Tobin’s proposal to levy a tax on currency trades as a way of reducing speculation and volatility.

Anti-globalization forces later latched onto the idea. More recently, so too have financial reform proponents such as Adair Turner, the chairman of Britain’s Financial Services Authority, who recently suggested Tobin taxes may be a way of containing the size of the financial sector.

Now organized labor is genetically hard-wired to figuring out new ways to clobber capital, forgetting that America’s investor class resides on Main Street as well as Wall Street. But you might figure its political allies could be a wee bit savvier.

Yet congressional Democrats are also toying with similar ideas. Earlier this year, a group of House members introduced a bill that would impose a quarter percent tax on all securities transactions, with the hope of raising at least $150 billion a year.

More recently, one of that bill’s sponsors, Representative Peter DeFazio, an Oregon Democrat, has proposed a 0.2 percent tax on crude oil futures contracts to tamp down on speculation and pay for national transportation spending.

With a stock transaction tax, investors would get hit directly through passed-along trading costs, just as a cap-and-trade emissions plan on business would quickly mean higher energy costs for consumers.

But there would also likely be some indirect, though severe, impacts.

To the extent that active traders are nudged aside, volume would thin and spreads widen. Some investment firms might choose to locate offshore or trade overseas.

And if that happens, these various transaction taxes would generate less revenue than expected — as well as cost domestic jobs — perhaps prompting tax proponents to advocate even higher levies to make up for the shortfall.

And don’t forget that the Obama administration is already proposing to raise capital gains tax by a third for wealthier Americans.

Maybe if the unions are really looking to fund more infrastructure spending through higher taxes, they could show some sacrifice by supporting taxes on members’ “gold-plated” healthcare plans, whose benefit costs may be 50 percent higher or more than the plan of the typical American worker.

So far unions have been vetoing efforts in Congress to use just such a tax to pay for healthcare reform. Then again, raising taxes of any kind during a period of economic weakness is a risky proposition.

COMMENT

They dont get it!! .. They will crush and cripple the market.. I pray for this country for the next few years..

Posted by Jeff Gold | Report as abusive

2012 Watch: Pawlenty the tax cutter

Aug 31, 2009 17:15 UTC

How much Tim Pawlenty pay Walter Mondale to say this:

He brings an almost Jack Kemp-like fervor to cutting marginal tax rates; an important predicate for any presidential run may be how Pawlenty handles a recommendation from a task force he appointed that the state replace some corporate and individual taxes with consumption levies. His emphasis on taxes rankles many Minnesota Democrats. “There is a long line of progressive Republican governors in Minnesota who are big supporters of education,” says Walter Mondale, the former vice president and U.S. senator. “He is much more interested in tax-cutting and has broken with that tradition.”

Do we need a Fiscal Fed for fiscal policy?

Aug 31, 2009 14:05 UTC

Long after the American economy returns to growth mode, the national debt will continue to soar. According to the Congressional Budget Office, the national debt — as low as 33 percent of GDP in 2001 — will reach 54 percent of GDP this year and grow to at least 68 percent by 2019. Beyond that, the increasing cost of mandatory social insurance spending will certainly push the U.S. debt-to-GDP ratio ever higher in the decades ahead.

So how will policymakers deal with the debt? Well, at some point they will raise taxes and cut spending. (No inflating away the debt, right? Promise?) Indeed, the inevitability of such actions seems an article of faith among bond investors who continue to lend cheaply to America. But uncertainties remain. Which taxes will be raised? Which programs will be cut? And by how much? And when?

For all the talk about the need for transparency in monetary policy, there is precious little in the area of fiscal policy. And this is most unfortunate. Eric Leeper, an economics professor at Indiana University, argues in a new paper that enhanced fiscal transparency “can help anchor expectations of fiscal policy and make fiscal actions more predictable and effective … Fiscal policy is too important to be left to the vagaries of the political process.”

Of course, the political process is tough to escape in a democracy. Any budgetary limits Congress imposes on itself eventually can and likely will be evaded. But imagine, if you will, an amped-up version of the Congressional Budget Office. Like the Federal Reserve, the chairman and members of this “fiscal council” would be nominated by the president. And they would explicitly be tasked with the authority to recommend, or even set, deficit and debt targets.

The head of the council would regularly testify before Congress, as does the Fed chairman, on the nation’s fiscal soundness and whether particular new policies would make things better or worse. Leeper notes that in 2007 Sweden established an eight-member Fiscal Policy Council that offers an independent, no-holds-barred analysis of whether the government’s fiscal policy objectives are being met and are sustainable over the long term.

A U.S. version, for instance, might testify as to whether Congress is ignoring pay-as-you-go budget rules. Or it might actually set a debt target that Congress would have to vote up or down on. The key here is to create an institution with as high a profile as the Fed’s that can highlight current fiscal policy and its real-world budgetary impacts, as well as solutions.

And if the budget situation continues to deteriorate, the council might even be given the power to set some broad budgetary parameters, such as federal spending increases being limited to population growth plus inflation.

And who would be the first chairman of the Fiscal Council? You could do a lot worse than master communicator, legendary tightwad and respected financier Warren Buffett.

COMMENT

I would like to clarify one important point. The term “Fiscal Fed,” though catchy and alliterative, appears nowhere in my paper and I find it to be counterproductive. Dedemocratizing fiscal policy is not my intent. And suggestions to do so bring to a screeching halt precisely the conversation I’d like to encourage.

The remainder of your column is constructive and does get to the heart of the issues I have tried to raise.

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