How do we fix the economy???

PeterZ wrote:I lost the work I was doing on this response. Bother!

Long and the short of it is that with a world equities market totaling between 80tr-100tr in market cap and the amounts being traded annually approximates between 75%-150% of world GWP and approximately 35% of those equities reside in the US, charging 5% of the purchase price per transaction will net a good deal of tax revenue.

If we assume for this discussion that the US will $34 trillion traded in the year, that's 3.4 trillion in transaction tax. 5% paid by the buyer and 5% paid by the seller. Further assume that new issuances represent 10% and the same transaction tax is applied. This generates another $.17tr

US Bond market is approximately $40tr (as of 2014) and growing. Weighted average maturity is 5.6 years implying that $7tr mature every year. Further assume than 10% are traded annually. Applying a 5% transaction cost to that traded $4tr amounts to $400bn, again 5% to buyers and 5% to sellers. Applying that 5% to the new issuances generates $350bn.

Total retail sales is 5.2tr in 2014 and grew 28% in the last 5 years, but let's keep this number for this discussion.

Now in 2014 total income tax, payroll tax and sales tax revenue for Federal, States and localities. was $5.1tr out of a total tax revenues of $6.1tr. If we set the total sales tax at 20% for all jurisdictions, we get sales tax revenues of $1tr.

Back of the napkin math suggests that $1tr for sales tax, $5.1tr for equities transactions and $750bn for bonds transactions generates $5.32tr total tax revenues. That compares to the total $5.1tr generated by the income tax and sales tax for all levels of government.

As you can see there is wiggle room on the rates assessed.

Let's note some other things I see first...

These back of the envelope numbers are assuming:

1. NO exemptions for anyone. Which I think we've agreed would be required if you didn't want to drive all the poor towards ever increasing poverty.

2. No tax avoidance behavior.

3. No tax evasion.

Etc...

But if you apply the exemption a huge chunk of that revenue disappears. And to make it up you need to raise the rate on everyone else.

Then people and corporations immediately go to work finding every way they can to avoid the tax. Which takes another chunk out of the revenue. Which means you need an even higher rate.


And then there's just plain evasion. Once the rate has been bumped to factor in the need to make up the revenue from the exemption and the avoidance impacts it's getting a lot higher. Don't tell me you don't think there wouldn't be a sudden outbreak of ever increasing numbers of cash transactions occurring off the books all over the country. And now you're short on revenue again and up the rate goes...

The guiding principle is both morally superior and practically more consistent with the services government provides than an income tax.

I still don't even have a vague grasp on where you are getting any moral superiority angle from.

Taxes are assessed when someone engages in a voluntary action and the government gets paid for securing those transactions.

Last I checked the workforce of the US was not slave labor. Participating in the workforce is also a voluntary action. (And before you say "but people need to earn a living", what is entailed by earning a living is making an income that *you can spend*. If you have no need to buy anything you have no need to earn income. So it doesn't matter if we're talking income taxes or sales taxes for that.)

And the government gets paid for creating and maintaining the entire societal infrastructure which supports all the businesses that generate all those jobs by getting their cut.


So I still have no idea how any moral superiority argument can be made here.




(Parting note... generally when people talk sales tax proposals they are not talking about applying those to stock or bond transactions. So much as proposing even fractional percent taxes on such transactions has sent Wall St into fits of rage in the past. That you are casually throwing around numbers like 10% for those transactions here is fascinating, the full on Wall St riot at such a proposal would be amazing entertainment to watch.)

I use the logic as you. It is immoral to compel a woman to go through with a pregnancy. Since going through with a pregnancy is not immoral, that leaves compulsion as the variable that makes it immoral.

Taxes are necessary and so compelling people to support government through taxes mitigates the immoral aspect of compulsion. If there is an alternative that does not require compulsion, it would be morally superior.

Work is voluntary. Income in exchange for work is voluntary. There are people who donate their time afterall. Yet earning a living is not voluntary. Without an income one has no money with which to live. So one either earns an income, one supports oneself completely in the wild or one is given support. So taxing an income is taxing a necessary part of living.

Not all purchases are necessary to live. So taxing sales reduces the amount of compulsion used to generate tax revenue. Trading securities is entirely voluntary.

From that perspective taxing transactions is morally superior to taxing income.

It isn't possible to drop out of the economy altogether. Notice, however, that some people are choosing to reduce their reliance on the money economy that buys and sells: choosing DIY work of many sorts. The DIY (and also the volunteer) economy is much harder to tax. Whenever taxes in whatever form are raised, some people shift over the margin into more of these forms of work. If they were ever stupid enough to go to 100% tax, whether income or sales, only dumb people would work at anything taxable, and the black market would grow like Kudzu vine. However, the peasant and craft economy is much less productive per unit work than one using mass production, so the advantage comes from the poor man's version of tax evasion.

This shift involves recognizing the difference between needs and wants, and a focusing on needs, rather than wants.

BTW, it would be nice to cut government spending. An enforced requirement limiting the total size of laws and regulations would require the legislature to concentrate on picking the best ones. At present, they seem to think that the best ones are those that please those providing campaign funds


PS

gcomeau wrote:(Parting note... generally when people talk sales tax proposals they are not talking about applying those to stock or bond transactions. So much as proposing even fractional percent taxes on such transactions has sent Wall St into fits of rage in the past. That you are casually throwing around numbers like 10% for those transactions here is fascinating, the full on Wall St riot at such a proposal would be amazing entertainment to watch.)

Wall street and government both live off of the real economy. They don't directly produce it. Note the rising frequency of investing methods that bypass the Wall street establishment: DIY

Even a very small tax on transactions would reduce high frequency trading. This has been suggested as worth doing

DDHv wrote:BTW, it would be nice to cut government spending. An enforced requirement limiting the total size of laws and regulations would require the legislature to concentrate on picking the best ones. At present, they seem to think that the best ones are those that please those providing campaign funds

This is utter stupidity. Tell me, what is more important: A law banning the sale of child pornography, or a law requiring car makers to obey a set of safety standards?

Any proposal for a limited number of laws quickly runs into issues like that. There is just no way to accurately prioritize some laws and regulations over others (child pornography is a heinous crime, but also very low volume; car safety standards are perhaps onerous, but do have a very measurable effect on road safety, which is definitely in the public's interest).

Proposals like yours always sound fine when reduced to a snappy one-sentence description like that, but completely fall apart under the most superficial levels of scrutiny.

The only way to combat campaign funding and its impact on a candidates' decision making is to completely outlaw it. Give every candidate a uniform budget filled from a public fund, disallow any fundraising, and disallow any third-party interference. No more super-PACs, no more sponsored advertising, nothing of the sort.

DDHv wrote:It isn't possible to drop out of the economy altogether. Notice, however, that some people are choosing to reduce their reliance on the money economy that buys and sells: choosing DIY work of many sorts. The DIY (and also the volunteer) economy is much harder to tax.

That would be one of the tax avoidance behaviors in question yes...

BTW, it would be nice to cut government spending. An enforced requirement limiting the total size of laws and regulations would require the legislature to concentrate on picking the best ones. At present, they seem to think that the best ones are those that please those providing campaign funds

You seem to be suggesting a reduction in regulations correlates to a reduction in spending. I can almost guarantee this is not so. The government doesn't need any high level of regulations in place to spend money like water if it feels like it.

gcomeau wrote:(Parting note... generally when people talk sales tax proposals they are not talking about applying those to stock or bond transactions. So much as proposing even fractional percent taxes on such transactions has sent Wall St into fits of rage in the past. That you are casually throwing around numbers like 10% for those transactions here is fascinating, the full on Wall St riot at such a proposal would be amazing entertainment to watch.)

Wall street and government both live off of the real economy. They don't directly produce it. Note the rising frequency of investing methods that bypass the Wall street establishment: DIY

Even a very small tax on transactions would reduce high frequency trading. This has been suggested as worth doing

Yes, but 10% isn't only not in the general neighborhood of 'small' for those purposes, it isn't on the same continent as "small".

Those high frequency discouraging transaction taxes are generally proposed to be around 1 to 5 hundredths of one percent. And Wall St loses their shit even over that.

Setting it at 10%... 200 times higher than the usual proposals... wouldn't reduce high frequency trading, it would almost completely halt trading altogether. If you had to beat a 10% gain on every single transaction just to break even capital would flee the market like refugees fleeing Syria.

10% of transactions cost but no capital gains tax. Each participant pays 5% of a transactions total worth. The owner pays 5% of the initial value of his purchase and 5% of the end value of his sale. The sale value will likely be higher and so that 5% tax on the sale will be larger than the 5% paid at the purchase. The aggregate tax collected will not be 10% of the value of the sale. It will be lower. The more profit made on the transaction, the closer the total tax approaches 5% of the sale price. The downside is that taxes are paid whether money is made or lost on the transaction.

Compare that to the capital gains tax. Long term capital gains are taxed at 15%. Short term capital gains are taxed at the marginal income tax rate of the owner. This system advantages the buy-and-holder and penalizes the high volume trader.

High volume traders will trade abroad from foreign accounts in foreign exchanges. Buy-and-holders will move assets to the states and trade in US markets from domestic accounts. More and more long term investments in securities will be domiciled in the US. The impact will be to increase foreign direct investment of long term investments and reduce the amount of transactions. The amounts of the sales will be higher even if the number of sales will be lower.

Tax avoidance will profit long term owners to sell in the US to take advantage of the lower overall tax rate for large capital gains. I can see many traders with foreign accounts selling their mega profitable positions to account holders in the US. The US gets 10% of the amount of the sales with the buyer paying 5% and the seller paying 5%. The seller avoids foreign income tax and the US gets the benefit of the large transaction.

PeterZ wrote:10% of transactions cost but no capital gains tax. Each participant pays 5% of a transactions total worth. The owner pays 5% of the initial value of his purchase and 5% of the end value of his sale. The sale value will likely be higher and so that 5% tax on the sale will be larger than the 5% paid at the purchase. The aggregate tax collected will not be 10% of the value of the sale. It will be lower. The more profit made on the transaction, the closer the total tax approaches 5% of the sale price. The downside is that taxes are paid whether money is made or lost on the transaction.

Compare that to the capital gains tax. Long term capital gains are taxed at 15%.

Yes but you only pay capital gains on *profits*. It isn't a barrier to making profit in any way, it only impacts how *much* profit you can make.

I could put a 90% capital gains tax in place with no transaction fee and if that stock I bought goes up 1% or 2% or 5% I still make a profit.

If I put no capital gains in place but a 10% transaction fee on it that stock goes up 1% or 2% or 5% I've lost 9% or 8% or 5% of my investment.


You would absolutely kill trading. It would come to a grinding halt immediately.

gcomeau wrote:

PeterZ wrote:10% of transactions cost but no capital gains tax. Each participant pays 5% of a transactions total worth. The owner pays 5% of the initial value of his purchase and 5% of the end value of his sale. The sale value will likely be higher and so that 5% tax on the sale will be larger than the 5% paid at the purchase. The aggregate tax collected will not be 10% of the value of the sale. It will be lower. The more profit made on the transaction, the closer the total tax approaches 5% of the sale price. The downside is that taxes are paid whether money is made or lost on the transaction.

Compare that to the capital gains tax. Long term capital gains are taxed at 15%.

Yes but you only pay capital gains on *profits*. It isn't a barrier to making profit in any way, it only impacts how *much* profit you can make.

I could put a 90% capital gains tax in place with no transaction fee and if that stock I bought goes up 1% or 2% or 5% I still make a profit.

If I put no capital gains in place but a 10% transaction fee on it that stock goes up 1% or 2% or 5% I've lost 9% or 8% or 5% of my investment.


You would absolutely kill trading. It would come to a grinding halt immediately.

No it wouldn't. It would push high volume trading abroad and pull in high profit sellers from abroad. The incentive of the transaction tax would segregate traders and investors. Traders trade where the transactions costs are least. The more one trades the more one seeks that advantage.

All traders will have a mammoth gain upon occasion. Those sorts of gains will be sold in the US to avoid capital gains taxes foreign countries will assess. The transaction tax to the seller is only 5% compared to the capital gains taxes of those foreign countries. In all likelihood the seller saves money by selling in the US and the US still gets 10% of the transaction.

The net impact is that all the truly massive securities gains will be realized in the US while all the high volume trades will take place elsewhere. They can have the volume and their traders take the risk, if the US retains the bulk of the assets and those transactions netting the largest gains. Speculators will take their risks abroad and only bring their whales to the US for sale. That works very well for US tax payers.

PeterZ wrote:

gcomeau wrote:Yes but you only pay capital gains on *profits*. It isn't a barrier to making profit in any way, it only impacts how *much* profit you can make.

I could put a 90% capital gains tax in place with no transaction fee and if that stock I bought goes up 1% or 2% or 5% I still make a profit.

If I put no capital gains in place but a 10% transaction fee on it that stock goes up 1% or 2% or 5% I've lost 9% or 8% or 5% of my investment.


You would absolutely kill trading. It would come to a grinding halt immediately.

No it wouldn't. It would push high volume trading abroad and pull in high profit sellers from abroad.

Do you have any idea what percentage of the stock market transactions made are "high profit"... if we're going to define "high profit" as "sufficiently high that your 10% transaction fee doesn't wipe out said profit"?

The incentive of the transaction tax would segregate traders and investors.

Even investors consider a 5 or 6 or 8% return worthwhile you know.

Until you apply that 10% transaction fee and turn those into losses of course. Than all those stocks performing at those levels lose all their investors INSTANTLY because even though they're increasing in value buying them will LOSE you money. Leaving only the relatively rare investments that can *reliably* be counted on to outperform that by some worthwhile margin.

The S&P 500 generally only averages about a 10% annual return. That's *averages*. As in half the stocks on it are worse than that. A lot of them considerably worse. What happens to the economy and the market when all those companies have all their investors dry up overnight when this tax is applied and they cease being worth buying and all their stock prices fall off a cliff because nobody wants to buy a stock where if you stay in for 2 or 3 or 5 years and they're able to maintain their rate of growth that entire time then you might *break even*?


I repeat. You would wipe out the market. Forget all that rosy prediction of tax revenue from it, because that's gone. Your calculation of how much tax you would generate is based on trading volume *now* but that would absolutely crater the second you instituted your 10% transaction tax.

gcomeau wrote:
Do you have any idea what percentage of the stock market transactions made are "high profit"... if we're going to define "high profit" as "sufficiently high that your 10% transaction fee doesn't wipe out said profit"?

The percentage is not as important as the number. The more transactions taking place, the higher the absolute number of sufficiently profitable trades will happen. Let the foreign markets take all the trades with losses and low profit margins. Those positions that have appreciated sufficiently for the lower transactions tax will move to the states. The more trades the foreign markets see, the more large gains there will be for the US to capitalize on.

Even investors consider a 5 or 6 or 8% return worthwhile you know.

Until you apply that 10% transaction fee and turn those into losses of course. Than all those stocks performing at those levels lose all their investors INSTANTLY because even though they're increasing in value buying them will LOSE you money. Leaving only the relatively rare investments that can *reliably* be counted on to outperform that by some worthwhile margin.

The S&P 500 generally only averages about a 10% annual return. That's *averages*. As in half the stocks on it are worse than that. A lot of them considerably worse. What happens to the economy and the market when all those companies have all their investors dry up overnight when this tax is applied and they cease being worth buying and all their stock prices fall off a cliff because nobody wants to buy a stock where if you stay in for 2 or 3 or 5 years and they're able to maintain their rate of growth that entire time then you might *break even*?


I repeat. You would wipe out the market. Forget all that rosy prediction of tax revenue from it, because that's gone. Your calculation of how much tax you would generate is based on trading volume *now* but that would absolutely crater the second you instituted your 10% transaction tax.

You keep citing the 10% transaction tax as if that's what is being assess to each participant in each transaction. It is not. Upon the final sale the effective tax paid on the complete transaction by the owner is less than 10% for positions that have show a gain.

For each transaction each participant only bears a 5% cost. Repeating that 10% number as a hurdle every investor has to clear for each transaction is simply wrong.

So, let's assume the most tax avoidant participant, the hedge Fund manager, wishes to navigate this system. He opens his positon (buys) in London. The position is likely leveraged and so a small change in price generates a high return. Let's keep the leverage percentage moderate for this discussion; 25% equity. That means a 1% gain in price achieves a 4% return. He pays 28% on that gain or 1.01% of the amount sold.

If the position moves 3%, that generates a return of 12%. He will se a tax of 28% or 3% of the entire sale price.

If the prices moves 5% it will generate a 20% return. The 28% tax represents 4.67% of the sales price.

If the price moves 10%, that generates a 40% return. The 28% capital gains tax represents 11.2% of the sales price.

Putting this in context, since January 2016 there have been 4 moves in the DOW of 3% or more, 2 moves of 4% and 1 move of 14%. So, our hedge fund manager will buy and sell his positions in London in every case but one. That last one will sell in the US to save about half of the capital gains tax he would have paid in London.

If the Hedge Fund manager levers to 10% equity, he would have saved money on all 7 major moves of the DOW this year by selling in the US. He would have engaged in 7 sales transactions in the US and 7 purchase transactions in London. The US would have gotten 10% of the entire value of those appreciated positions and the Hedge Fund manager would have paid a 5% transaction tax on those sales. In comparison the 3% moves would have resulted in capital gains tax of 6.46% of the sales price.

Your assertions are simply wrong. The volume of trades will indeed go down as I have stated, but the dollar value of the trades sold in the US will go up as big investors will sell their big gains in the US to save on taxes. They will sell all their losses in London and all the smaller gains. The US will still benefit handsomely because those assets will not reside in the US as well as the Feds collecting the transaction tax.