Solve America's Fiscal Problems In One Simple Step

03/05/2013 02:33 pm ET | Updated May 05, 2013

Want to straighten out the nation's finances, eliminate poverty, and end the income tax?


Tax financial trades.

As it happens, a bill to do that was introduced last week in Congress by Tom Harkin, Sheldon Whitehouse and Bernie Sanders in the Senate, and Representative Peter DeFazio in the House.

Between them, S 410 and HR 880 recommend a tiny tax -- three basis points, or three cents per $100 -- that would bring in an estimated $353 billion over ten years.

Unsurprisingly, the financial industry thinks this is a bad idea, mainly because, it says, the result on the markets would be uncertain. The real reason is likely to be that a tax -- any tax -- would, however marginally, cut into its profits.

An upside? By taxing short-term traders, and rewarding long-term investors who trade much more rarely, the tax would minimize the short-term mentality that's helped cause market crashes.

You have to wonder what they're even complaining about. In the first place, most other business sectors in the United States pay taxes on their profits; what makes banks and hedge funds so special? And then, most other advanced countries have similar taxes, so it's not like a tiny tax like this would drive business offshore.

In any event, the amount of untaxed transactions is so vast that the cost of the proposed tax would be less than a rounding error. In 2011, New York's Depository Trust Company settled securities trades worth $1.669 quadrillion -- that's $1,669 million million to you and me. That included almost all the securities trades in the US. The amount for 2012 is unpublished, but it's unlikely to be lower.

The sponsors probably proposed the three basis point tax because it's tiny enough to possibly get passed, and because in years past -- the U.S. had just such a tax between 1914 and 1965 -- the same tax was in that range. That's prudent in this political environment.

But my question is: why so small? A similarly small tax -- say, twenty-five cents per $100 -- could solve the country's fiscal problems altogether, with room to spare. And it wouldn't really cut into financial trading, because business people do what they do because there's a profit to be made. Taxes are just the cost of doing business.

Unless I'm mistaken (and anyone reading this is welcome to correct me), a 0.25 percent sales tax on $1.669 quadrillion would produce $4.172 trillion a year (the finance business would call that twenty-five basis points -- each point being one penny per hundred dollars). Last year, the federal government spent $3.796 trillion, including debt service.

If a four-year sales tax on securities was set at 0.5 percent, it would bring in $8.345 trillion each year, which would retire the entire $16 trillion debt of the United States over that period, cover the entire budget of the United States, and create an annual surplus of $427 billion.

Some of that surplus could be distributed to the country's citizens in the form of a guaranteed income, eliminating the need for social programs like welfare. After the debt was paid down -- and the debt service minimized, so that it wouldn't absorb so much of our tax revenues -- the tax rate could be set at 0.25 percent -- less, actually, since service on the national debt is now about $900 billion.

Income taxes would disappear, along with most other taxes, and could be replaced with a guaranteed income for all citizens. This would be a good thing, because thanks to computers and robotics, we're approaching a work without work for large numbers of Americans. And no cuts in government programs would be necessary to do it; we could go to Mars and build all the aircraft carriers we wanted to.

This idea isn't new. Congressman DeFazio has proposed similar measures in years past. And as I say above, the U.S. had just such a sales tax on securities transactions between 1914 and 1965. And there's an excellent paper in circulation that goes into the idea in some depth.

That paper says a sales tax on securities transactions would bring in about $100 billion. But it's probably a little out of date on that score. It was written in 2001, when today's enormous derivatives market barely existed. Since then, it's mushroomed. In 2011 -- the last full year of statistics available -- global derivatives transactions totaled $23.276 trillion -- a very large portion of which had a U.S.-based party. In 2001, some derivatives routinely traded today didn't even exist.

As the financial industry says, the impact of doing this may be unknown. But the impact of doing nothing, or of the various austerity proposals now fashionable in some circles, is known.


Any questions?