James has a post on the difficulty of raising tax revenue over at Outside the Beltway. Rather than comment on the discussion specifically, I think I’ll go off on a tangent and fantasize about how I’d rectify our fiscal ship if I didn’t have pesky things like politics and the Congress to worry about.
Spending
I would means test Medicare and Social Security. I would raise the Social Security retirement age slightly. I would raise the Medicare eligibility age slightly.
I would limit federal highway and infrastructure spending to actual interstate spending. Bridges across the Mississippi between Iowa and Illinois, yes. Bridges to nowhere, no. Highway spending would be restricted as a matter of principle and policy to the area five miles on each side of a state border. The Erie Canal, arguably the most significant item of travel infrastructure ever built in the United States, was built without federal money. Hawaii and Montana can build their own roads.
I would abolish defined benefit pension plans for federal employees. I would abolish pension plans other than Social Security for elected officials outright.
I would establish an objective of cutting our military spending in half and reduce our military commitments commensurately. As long as we’re fighting two wars that’s impractical but it should be a matter of policy and principle.
I would abolish agricultural subsidies or, at the very least, means test them.
I would abolish subsidies to the arts except as they apply to decorating federal buildings.
Revenue
I would raise FICA max to whatever the president’s salary is as a matter of principle and policy and require all federal employees including elected officials to participate.
I would limit all personal federal income tax deductions including the mortgage interest deduction except, possibly, the healthcare deduction.
I would tax employer-paid benefits including healthcare benefits as income.
I would impose a minimum income tax rate that everybody was subject to. When I made $1,400 a year I paid taxes on it. And it’s patently unfair for the ultra-rich to pay accountants and lawyers to diddle the system.
I would raise the gasoline tax and, ideally, impose a carbon tax, for geopolitical reasons among others.
I would impose a transaction tax on the sale of equities and similar financial instruments. While I think that the sale of stock by companies is a benefit to the society, I’ve never heard a convincing argument that high velocity sales had any social value.
Other odds and ends
While I’m fantasizing, here are a few more.
We should adopt a policy of strict reciprocity in foreign policy. For example, if another country eliminates its tariffs and quotas on our goods and doesn’t subsidize exports, we should be willing to do the same with their goods. We should restrict the ownership of real property by foreign citizens in the United States to whatever the restrictions on the ownership of real property by Americans in their home countries might be.
I would reduce the term of copyrights to 25 years or the natural life of the author, whichever is less. I’d prefer 15 years but I’m willing to compromise. Copyrights would lapse if the work goes out of print or distribution.
I would think about instituting a “loser pays” policy on federal lawsuits.
That should be enough to prevent me from ever getting elected to anything.
Okay, I’m on board. Can I produce your campaign ads? (I actually do have a Pollie award, oddly enough.)
I think 25 years on copyright is a reasonable compromise. I should be safely dead in 25 years and my kids can go write their own damn books.
To be honest, michael, I’m surprised I’ve lived this long. I thought my wife would have killed me by now.
A good list, I might comment on my disagreements later, but I agree with most of it.
One thing I would add which is a personal issue that fits in the general gist of these proposals is federal flood insurance reform. We’re subsidizing development in environmentally sensitive areas, often for the benefit of the wealthiest citizens, and we’re starting to pay tens of billions of dollars per year to rebuild structures that we’ve paid to rebuild before and we’re going to pay to rebuild again, particularly if you believe in global warming. I would phase out federally subsidized flood insurance one mile from the coast. I don’t care if people build there, I don’t want to pay for it.
You know, after all the acrimony on this topic I’m surprised by this.
I still like the Levine-Boldrin suggestions better, but at least this would reverse the trends we’ve been seeing.
In line with this I’d also suggest simplifying the tax code. We spend quite a bit of money on figuring out taxes. And the value of the hours spent doing is not really known with any certainty. All that is lost and we are worse off for it. If we could raise just as much money with a simpler system then we’d obviously be better off. It would also be harder for people to “diddle” with the such a system.
Why? This sounds suspiciously like a Tobin tax and frankly the biggest problem there is that it is pretty much not going to do much. I suggest you look at this post by Aswath Damodaran.
Financial transactions are not really stuck in any given location. Put a Tobin tax on finnancial transations in New York and they move to San Francisco. Make the tax nation wide and they move to London, Tokyo, etc. And considering that people can make transactions in ether space vs. meat space you’ll be stuck policing finance like online poker. You going to arrest a London financial company executive who comes to New York because he isn’t taxing the Americans using his services, but doing so via the internet? Really?
And you seem to be making the speculator argument. Speculation, like just about every damn thing in the world, can be good and bad. If speculators are buying low and selling high they are helping the market to allocate resources. If they are buying high and selling low then they are not helping. And what exactly is too short of a period to hold a stock? Suppose I buy stock in XYZ Inc. with the intention to hold it for awhile, but then they release a statement saying they’ve come up with a new gizmo, or have bought out a company that will greatly enhance their business, or any other thing and their price gets a nice bump and I sell pretty that same day (maybe even sooner). Speculation? Good? Bad? Why tax the transaction?
And there is the regulatory aspect of all of this. Right now many financial transactions are centralized. This makes it easier to watch them and thus regulate them. Put a tax on it and you might collect revenues for awhile, but what happens when the Cayman Islands sets up a competitve system with no taxes? Then Dubai sets up another system (after all, the benefits to any country that can entice such a relocation are substantial). And then others follow suit and now financial transactions are distributed among several locations making it much, much harder to regulate them. What is the SEC going to do to somebody engage in shennanigans in the Caymen Islands? Nothing.
Finally, if your goal is to stop speculation, then it shouldn’t be in your revenue column. Doing so suggests that you trying to do a bait and switch. Which is it, do you want revenue or do you want to prevent speculation? Tobin himself notes that the point of such a tax is to eliminate speculation not create a revenue center. That it will generate revenue is a secondary benefit, but could lead to problems down the road.
I like the way Damodaran puts it regarding such taxes,
I once ran for public office and told the truth. It didn’t work out. I ran for school board in a rural area where I lived at the time in Texas. The woman I ran against was something of an eccentric with a well-earned reputation for being difficult to work with. I won handily during the absentee voting period. However, after the absentee period ended, the local paper published a story about my candidacy in which I advocated year-round school and a state income tax dedicated to education. She overwhelmed me 60-40 on election day. The superintendent told me that I was about 20 years too early with my ideas, but thanks for trying. Within a month of being elected, she called for the cafeteria workers to begin an inventory of the flatware on a daily basis; she alleged that her grandchildren were being made to eat with plastic utensils. So much for being truthful…..
The specific type of trading that I think is being talked about is the type that requires large amounts of data to be transferred to your computers microseconds before everyone else gets it. If you want to be able to look at bids on the NYSE and make thousands of trades before anyone else can actually see the bids, being located in London isn’t going to help you at all because your data must share the tubes with everyone’s porn searches. This type of trading adds no value and should be taxed, if not declared unfair and illegal, and because they need to be physically next to the exchange with dedicated tubes, will be easily taxed.
Steve:
I think I’ve always said (but maybe not in the heat of argument) I was open to compromise on copyright duration. 25 years is plenty to incentivize me and other “creatives.” Shakespeare’s descendants aren’t collecting royalties, I don’t see why mine need to.
I’d add this as a further compromise: 15 years of copyright if it were followed by an automatic 10% royalty for an additional period. Some guy 15 years from now wants to make a movie of one of my books, that’s fine by me, but I want to wet my beak. For me it’s less about some notion of controlling my work and keeping it boxed inside some rigid vision, and much more about the money.
FYI I have never objected to non-commercial or minimally-commercial uses of my work. The Yale drama club wrote and performed a play based on a book series of ours and we were completely cool with it. Flattered, actually. As we are with fan fiction.
But if Sony or Newscorp or Disney or Bertelsmann want to use our product they need to cut us in on the gross.
Not buying it Sam. That kind of trading already shares the tubes with everyone’s porn searches and WoW addiction.
And the amount of the current transactions that are high frequency–i.e. not your “invest and hold” types of purchases? Probably a shockingly high number.
As for the value some of these techniques may or may not have one is iceberging. That is where a program executes a large buy of a stock by breaking it up into seemingly random smaller buys. Thus making it harder for other market participants to spot the large buy and jump on the band wagon. This can actually reduce volatility. Is that good? I can see how it could be.
And lets turn it around. Why is it bad? Simply saying, “I don’t see the value”, isn’t sufficient. I don’t see the value quite a few things where other people do, I don’t advocate taxing those things out of existence. Such a view is simply self-serving in the end.
I support this, but it would definitely have a rather drastic change on American security policy. My guess is that you’d have to gut the Army, drastically shrinking its personnel and pulling back from nearly all commitments abroad. That alone would save you a ton of money, but if you wanted to go further, you could re-orient the US military around 1)trade route/coastal/continental airspace protection, and 2)nuclear deterrent. Having a defense policy built around a strong nuclear deterrent would be pretty damned cheap.
For most of agriculture, definitely. That said, I think you can make an argument that it is good for a nation to be able to at least feed itself on national security grounds, so perhaps a limited form of grain and corn subsidies could continue.
I like this idea generally, although I do have some concern that the second part (on reciprocal property rights) might have a negative impact on foreign investment in the US.
I’m for this.
YES. If you live in one of these areas, and your home gets wiped out, you should get humanitarian assistance, not money to rebuild your house in the same damned area where it will get destroyed for the fiftieth time.
Of course, quite a few real estate developers might be unhappy to see this come about.
Um, too many taxes, me thinks. It seems you are merely “better” financing the mess we are in. Bringing in the federal employees into social security will not alter the mathematically unsustainable nature of our spending. Cut spending. Not raise taxes. Cut federal programs and agencies, not fund them “better” or “more fairly.” Cut laws against drilling, don’t raise taxes to encourage it. Cut the number of agencies so we don’t need to have new federal office buildings on which to put art.
Far better with social security and health care to require a savings account for every American to do with as they wish — our money, after all. Why should we funnel taxes into the ponzi schemes? Increasing the payment into ponzi schemes makes them no less ponzi. Just puts off the day of reckoning.
I hate to say it, but you are falling into the “level headed” argument. We need more “level headed” taxes to pay for the wonders of government, which each and every time become a corrupt boondoggle, so that next go round we’ll need to be even more “level headed” and tax some more to pay for the new and improved government. And on and on we’ll play the game of taxing to pay for what we have, at an ever increasing “level headed” rate, until finally, the government will tax 100% and supply 100% and they’ll give us sausages on Tuesday.
No, leave the taxes as they are for a decade as we so slash the bureaucracy that the savings can go to pay down the debt. Once the feds are off steroidal taxes and the debt paid down, we can bring down taxes to the two things that the feds are best at:
national defense, and running a court system.
But more taxes, redefined taxes, recommitted taxes, reformulated taxes, repositioned, or whatever you call it — more taxes is the result. And that cannot be good.
Well, yes, Its all fantasy. But what the heck…….
Spending
I would means test Medicare and Social Security. (Great, that will reduce political support. I’m all for it.)
I would raise the Social Security retirement age slightly. I would raise the Medicare eligibility age slightly. (By 5 years.)
I would limit federal highway and infrastructure spending to actual interstate spending. Bridges across the Mississippi between Iowa and Illinois, yes. Bridges to nowhere, no. Highway spending would be restricted as a matter of principle and policy to the area five miles on each side of a state border. The Erie Canal, arguably the most significant item of travel infrastructure ever built in the United States, was built without federal money. Hawaii and Montana can build their own roads. (Agreed.)
I would abolish defined benefit pension plans for federal employees. I would abolish pension plans other than Social Security for elected officials outright. (Absolutely.)
I would establish an objective of cutting our military spending in half and reduce our military commitments commensurately. As long as we’re fighting two wars that’s impractical but it should be a matter of policy and principle. (I don’t know what the “right” amount of military spending is. But I do have to observe it is the only spending category that declines as a percent of GDP over time – scale economy. And nobody feels unsafe. The same can’t be said about our pension, infrastructure and anti-poverty schemes. I don’t know why would focus on the military.)
I would abolish agricultural subsidies or, at the very least, means test them. (Tomorrow, if possible. Wait. You are King. Tomorrow it is.)
I would abolish subsidies to the arts except as they apply to decorating federal buildings. (Absolutely.)
Revenue
I would raise FICA max to whatever the president’s salary is as a matter of principle (Seems a bit arbitarry, but catchy.) and policy and require all federal employees including elected officials to participate. (You bet.)
I would limit all personal federal income tax deductions including the mortgage interest deduction except, possibly, the healthcare deduction. (Yep.)
I would tax employer-paid benefits including healthcare benefits as income. (Yep. We need for one form of comp to be taxed the same as another.)
I would impose a minimum income tax rate that everybody was subject to. When I made $1,400 a year I paid taxes on it. And it’s patently unfair for the ultra-rich to pay accountants and lawyers to diddle the system. (It is of course unfair to “diddle” the system, but I’d suggest this is truly a rare situation. But to the extent…..)
I would raise the gasoline tax and, ideally, impose a carbon tax, for geopolitical reasons among others. (Awful.)
I would impose a transaction tax on the sale of equities and similar financial instruments. While I think that the sale of stock by companies is a benefit to the society, I’ve never heard a convincing argument that high velocity sales had any social value.
(I found this one particularly odd. It smacks of “I’ll tax something I don’t like, just because I don’t like it,” and its a populist way to create taxation. That’s the MO of Nancy Pelosi crowd. Why?)
Other odds and ends
While I’m fantasizing, here are a few more.
I would think about instituting a “loser pays†policy on federal lawsuits. (Please, please, please.)
That should be enough to prevent me from ever getting elected to anything. (Indeed. me too.)
PS –
Based on the numbers and sources I’m looking at, the notion expressed over at OTB that the tax system is not progressive, even adjusting for regressive sales, property etc taxes, is just flat damned wrong.
My disagreements:
1. Federal highway and infrastructure spending. I am too much of a Lincolnphile to not believe that internal improvements are not an exalted purpose of government. I will say though that to the extent federal money is used for an internal improvement it should reflect federal priorities, not defer to the host state. For example, Obama is currently throwing money at high speed rail projects being proposed by states while the GAO is pointing out we don’t have a national plan to see that the pieces fit together or advance national interest.
2. Cutting military expenditures in half. I’m skeptical that even if we drew down from the wars, that we wouldn’t find it necessary to increase the size of our navy and foreign intelligence operations, or even spend more in direct assistance to foreign countries. In my view, the way you pick your foreign policy tells us where the costs are going to be paid.
3. Minimum taxes for the poor. I think taxes are taxes and the poor pay their share. If Dave’s going to invoke the Eerie Canal as the gold standard, I can point out that historically the poor and even middle class didn’t pay income taxes until IIRC FDR?
4. Foreign policy strict reciprocity. I generally favor ad hoc foreign policy, and I’d be concerned that stable property arrangements in the United States would be disturbed if our policies sought to mirror what other countries were doing.
5. Loser pays federal lawsuits. It might actually be that fee-shifting provisions are the norm, but it depends upon the federal statute. I think there are a number of federal laws, like in civil rights, that wouldn’t be filed if the plaintiff was at risk for paying government lawyers based upon complicated factual and legal matters.
Still, I agree with Dave far more than I disagree, and far more than probably any political candidate.
Yeah, that’s why I asked Alex to substantiate his claim.
The reason I’m skeptical about highway spending is twofold. First, I think it subsidizes sprawl, inefficiency, and fuel consumption. Second, I think it’s like subsidizing buggy whips or corset stays. We should be putting our money into future systems which to me means energy, data, and (gasp!) rail rather than car and truck transport.
BTW, the context of my mentioning a transaction tax on the sale of financial instruments is the quote mentioning a VAT in James’s post. IMO a VAT is an absolutely horrible idea. Politically it makes all the sense in the world but economically it’s a nightmare. It reduces accountability and penalizes efficiency. Adding a VAT to our income tax (which is what would happen in practice) would give us the worst of all possible worlds.
It’s not a closely-held belief of mine. It’s just an example of one of dozens of possibilities that would be better than a VAT.
@Steve. I’m talking about high frequency trading, and yes they need to be physically located near the exchange or they lose the time advantage. Being closer means they are only subject to a limited amount of interfering traffic – routed through a local switch instead of several to get to say London. Each switch means more delay. Entering and immediately canceling thousands of bids/asks to see how high or low other investors are willing to go before anyone even realizes it has happened so you can reap the difference sounds like unfair manipulation because it is. They account for up to half of all trades according to the Time’s article – yes shockingly high, but so what? In any case, a well designed tax would not make it worth packing it all up to move next to some podunk exchange instead.
Even so, moving trading from New York to the Caymens means you move the computers doing the trading to the Caymens too. I see nothing here that is magical about New York. And there are algo traders in London right now.
Ahhh yes, the spiffy variant of the “just the right man” argument. And I’d curious to see this “well designed” tax because most proposals are for a tax in the range of $0.01/trade.
See the tax would likely have to be world wide for it to really work. Suppose the Caymen Islands decides to build a high tech financial trading infrastructure after Dave’s tax goes into effect. Do you think many of these HFT firms might move? What are you going to do, tax them to death before they leave? Jail their employees?
Still waiting for the explanation of why this is bad…..
Steve V, would your view of the tax be different if it wasn’t proposed as a pigovian tax or simple revenue raiser, but was used as a fee to fund regulatory oversight and insurance for our financial system?
BTW, I bet most people here “are HFT” and don’t know it. Your 401k, IRA, or even if you are an individual online trader you probably derive some benefit form HFT. You want to buy a stock cause the price looks good, the HFT set up will pretty much ensure you buy the stock pretty much as soon as you click the button. Of course you don’t have some of the advanced strategies that other HFT outfits use, but still there is a benefit to the little guy. Your 401k wants to buy 10,000 shares of Google, they might utilize an HFT that will iceberg it for them.
@Steve: Yes I can see it now, the New York Stock Exchange (of Guatemala, we moved because they have the best high Frequency trading infrastructure!). Gimme a break.
No. Here is how I see it. Dave has lamented that our way out of the current recession will not be lead by the financial services sector. He’s probably right. But do we really want to f*ck it right into the ground? So we tax it and they all move to London…well the businesses do, the jobs just get lost here for the most part.
I’d be much more impressed if somebody could tell my why it is inherently bad. Frankly, I’ve never ever seen the value in acorn squash. Vile nasty a$$ $hit if you ask me. I say we put a $500 tax/squash on the stuff. Sound reasonable? No? That has been the best argument so far in this thread. “I don’t like it so get rid of it.”
Why not? We’ve seen lots of tech stuff move over to India. Where exactly were you on the off shoring debate again…?
We’ve seen the automobile industry and other manufacturing industries bug out too.
Maybe it wont be Guatamala, maybe it will be to London. Or Paris. Or some other advanced city in a country that decides, “Hey, having that industry here would be good.”
Oh, and I bet the telegraph and the telephone did pretty much the same thing. Gave an edge to those investors who had it vs. those who didn’t.
This is really a bizzare set of beliefs here, it is pro-off shoring, anti-technology, and rather muddled on the actual justifications.
@Steve. If I steal 8,000 bucks from one person I’d go to jail, but if I stole 1 cent from 80,000 people a thousand times a day, I’m a high frequency trader and not doing anything wrong? The HFT system does not get you a good price because it’s not used for buy and hold. It buys and sells immediately for the benefit of relatively few, and meaning everyone else pays an extra penny or two on their stock trade. It amounts to a private company levying a transaction tax on everyone else whose computer is slower and further away than theirs.
So…profits equal theft. What is property? Murder? C’mon, if a guy gets in there before you and makes money that sucks, but it isn’t theft.
Now, there maybe some areas of HFT trading that need better oversight and regulation, but if HFT depends on micro differences in security prices then even a micro tax can kill it.
What is magical about buy and hold? Here is the deal, you want to buy a stock and when you see the price go up enough you sell. You have say…$5,000 bucks and you are doing it as a side line to your regular gig.
But if you had $500 million and could devote full time to it and could automate things so you could take advantage of small scall price differentials and toss in some other spiffy algorithms that can spot various micro inefficiencies…you can cut down the price differential you need to turn a good profit. That is the gist of HFT. At the same time this puts in place the infrastructure so that when you want to buy a stock and push the button on your computer at home, you buy the stock at that precise moment (or 0.03 seconds later). There is also the possibility that it adds to the liquidity of the market.
Is it new and possible prone to abuse? Yeah, but so is a car. I can get in my car and rampage down the streets, or come to work with a frying pan and start bashing people over the head. The idea then isn’t to get rid of frying pans or cars, but try to keep people from abusing them.
I think the financial services sector is much more mobile than you think. Sure it might take a few years, but then it will largely depart in its entirety save for the buy and hold crowd. So you still have the problems you fear, but now they are in another country (and impacting the securities you still want to buy and sell) and we’ve lost the jobs here.
Only when they sell at a penny higher which is not gauranteed. And even if it were, why is it wrong for a company to make you pay a higher price with a computer vs. with a person?
Here’s what would happen – NYSE would move to Iceland for their HFT and lack of transaction tax. I’d open an exchange here that BANS HFT and the prices will be cheaper since they aren’t being artificially bid up – even more now because some other jackass can open an HFT in Greenland before I can get to it – and everyone here will be better off and the NYSEi would move back to New York because they’ll realize they need the suckers for the HFT to work otherwise they are just trading with themselves. But it’s too late! I’ve taken all the suckers!
@Steve, it’s pumping and dumping at a microscopic level, pure and simple.
@Steve: And talking inefficiency – If I grab a penny from a transaction, and provide no benefit whatsoever to the buyer or seller, I’m discouraging them both and introducing inefficiencies, right? Dead-weight loss, hmm?
Dave and Drew –
As I mentioned at OTB, when you take into account all local, state, and federal taxes, pretty much everyone in the United States has a tax rate of about 28 – 31%. That’s neither progressive nor regressive. We basically live in a flat tax country.
Steve goes to buy World of Warcraft from his buddy, his buddy says he wants $10 for it. Someone comes over and shoves himself in between them and says, no, he wants eleven. “He just said 10??”, only he can’t see his friend anymore because this strange new person keeps waving his arms and shouting “LALALALALA”. So Steve gives the person 11. The person pulls down Steve’s pants, and while Steve is distracted, gives his friend 10, gives Steve the game, and walks away. After finally being able to converse directly with his friend to find out what happened, Steve shouts after him, “Good for you, you’ve found a way to make a profit!”
In short, yes its called arbitrage and it is probably not quite as old as prostitution. If my reserve price is $15 and he buys it first and sells it to me for $11 then yes, its a legitimate transaction.
Your spoof above, however, is not how HFT take place. The HFT transaction would go like this. I want to buy the item for $10, but I’d also be willing to pay $11. So the HFT program executes the buy order before I do then turns around and offers me a sell order for $11. Now they have made $1 profit. The actual algorithms are much, much more sophisticated however. Some rely on statistical arbitraging between markets. They don’t have to make money on every transaction, just on enough of them to turn a profit. Do it on a large enough number of transactions and even a small amount of profit/transaction can add up.
Of course, if they are front running trades then that is illegal and needs to be stopped. But just because it can be abused in some situations does not mean all HFT should be stopped.
So in the end you are still stuck with your anti-technology, pro-offshoring, muddled reasons for not liking it.
And your example with Iceland is totally unconvincing. There is nothing from preventing that from happening now. An exchange can be set up that bans HFT. Further, if a company is listed on your exchange and the Iceland exchange then you’d still have the HFT effects on the price of the company’s stocks.
@Steve: If you invented a little machine that just sucks a little blood out of your toe for no good reason I’d think it was stupid and useless even if you used the best and latest technology. That’s not exactly anti-technology.
I find it hilarious btw that if a private company forces you to pay this money and does nothing useful with it, you aren’t mad, but if they were to force you to pay it and then inefficiently fund education with it you would be.
Sam,
As I’ve already pointed out some of the HFT techniques may actually reduce volatility. HFT may also add liquidity to the market. And there is the benefit of the infrastructure that HFT required–i.e. at some level we are all HFTers. As such you claims that is provides no benefity are suspect. Just admit it you don’t like it, have no evidence and thus want it banned.
I didn’t say I wouldn’t be mad, but that I see it as a valid form of business. If I see something is being sold at $5 and I know that at a price of $10 I’d still sell the entire supply available and I have enough to buy the entire supply available…I’d be stupid not to do it. And it is beneficial because at the $5 price enough of the product might not be made. So by arbitraging (speculating if you want) the price signals “Hey, come make more of this, there are profits to be made.” The original manufacturer might see this and raise his price too. And over time the price could come back down and there would be more available than at the $5 price making lots more people better off.