A New Paradigm Tax Solution

The Congressional Super Committee is listening to all sides and keeping their cards close to the vest when it comes to their proposal for budget reform. If they come up with nothing there will be $1.2 billion in automatic cuts. This week 100 congressmen signed a letter urging them to go after $4 billion in cuts. Of course the devil is in the details and I haven’t seen many new ideas. There is one, though.

               This beauty is called the Harkin-DeFazio Financial Transaction Tax Proposal. The proposal is a financial transaction tax (FTT) on trading of financial instruments like stocks, bonds futures and credit swaps. What a handsome line up of targets. This idea has the obvious romantic appeal of taxing those seen as culprits in the great meltdown. It also will tax the most able to pay by being tied to transactions. Those great automated trading programs that instantly jump in and out of positions will be taxed many more times than you will be taxed trading your own investment account.

               Whenever I see a government program I wonder how it will really play out regardless of the rhetoric it is delivered with. In most situations the “cure” has nothing to do with the cause and, in fact, usually creates more confusion while completely missing the target. Let’s think through this. They are proposing a .03% tax per transaction. If my 401k trades $10,000 in stock, the tax will be $3.00. Compare that to Hermann Cain’s national sales tax of 9% on everything. That tax would cost $900.

               It has been estimated that this proposal would generate between $30 and $40 billion dollars annually in our size economy. This alone will not resolve the budget crisis but it would be a good shot in the arm. What I like best about it is that it actually makes some sense without a great deal of pain and it generates a reasonable amount of revenue. The libertarian view would state that it is opening a new area for government to start taxing and once they get in the tax only goes up. I will give you that but I could pay $6 per transaction and still be OK with it so I don’t have to pay other places.

               The public debate has finally settled that the system is broken and the tax structure must be changed. That in itself has taken the better part of the last 40 years. This can be one part of the new paradigm. I like the target and the thinking. Hopefully it can make it out of Washington