by Karen Telleen-Lawton, Noozhawk Columnist (read the original in Noozhawk by clicking here)
Clap your hands if you enjoy paying taxes.
Crickets.
You can imagine that the Wall Street Tax Act, recently introduced to tax the sale of stocks, bonds and derivatives, also did not get a lot of applause or even mentions except in financial circles.
Which had me wondering, how should we evaluate proposed taxes?
My first lesson in taxes came from my dad, as I approached my first voting opportunity. His voting guide was simple: If the measure raises taxes, vote “no.” He made an exception for local school taxes.
As I matured, I found that guideline didn’t work for me. Global and environmental problems like climate change require solutions not fundable on a local level. Income inequality has risen steadily since I was a young voter.
According to Larry Summers, former Treasury secretary and former director of the National Economic Council, “If the United States had the same income distribution it had in 1979, the bottom 80 percent of the population would have $1 trillion — or $11,000 per family — more annually.
“The top 1 percent would have $1 trillion — or $750,000 — less.”
Personal tax guidancee requires understanding why we have taxes. Sousan Urroz-Korori, co-founder and past director of the Economics Institute at University of Colorado Boulder, writes that a system of taxation “allows delivery of public goods to everyone and provides funding for capitalization.”
Urroz-Korori believes the most important traits in a tax system are that it be progressive, simple and neutral.
I absolutely agree that taxes should be progressive — higher incomes paying at a higher rate. Wealthy and upper middle-income earners can afford higher tax rates without impinging on their ability to provide the necessities for their families.
Economists generally agree that a simple tax system, where the average citizen can understand it and comply with it, results in greater compliance. Tax avoidance and tax evasion are much lower with a simple system.
However, I don’t agree with neutrality as a third goal for a tax system. I believe it is appropriate to use laws and taxation as carrots or sticks to affect production and consumption that causes financial harm or benefits to society.
Helmet laws for cyclists reduce costs in publicly-funded emergency rooms, for instance. “Sin” taxes, such as on the sale of cigarettes and alcohol, provide funds (perhaps indirectly) for the societal costs they may cause.
If implemented, the Wall Street Tax Act would assess 10 cents per $100 of transactions, potentially reduce “unproductive and speculative trading” and raise $777 billion over a decade. Sponsors say their bill “addresses economic inequality and reduces high risk and volatility” in the market.
Marcus Stanley, policy director with Americans for Financial Reform, is confident the bill would transition investors toward longer-term investments which contribute to the real economy.
Other countries in Western Europe, as well as South Korea, have already implemented similar taxes.
Nevertheless, Ken Bentsen, a securities industry executive, claims, “major economies that have adopted such taxes have had overwhelmingly negative results, including reduced asset prices, trading moving to other venues, market dislocation and decreased liquidity. Past experience also suggests that it would raise less revenue than supporters often claim.”
Of course, no one knows for sure how a new rule will pan out until it’s enacted. People adjust to avoid what they don’t like.
Ideally, laws would be based on game theory. Statistical analysis could predict actions and reactions; the rules tweaked to achieve the highest likelihood of the desired outcome. Instead, they are designed by politicians, whose job in a democracy depends more on compromise than efficiency.
Surely, the tax sponsors and legislative signers would prefer to keep all of their hard-earned money as much as the rest of us. It takes a good public servant to vote in the interests of all the people rather than the well-represented privileged.
One of their biggest supporters is Joseph Stiglitz, a Nobel Memorial Prize-winning economist and former chief economist for the World Bank. He labels it an example of a good tax, which “can simultaneously raise revenues while promoting growth and equity.”
Works for me: love your taxes!
Karen Telleen-Lawton, Noozhawk Columnist
Karen Telleen-Lawton is an eco-writer, sharing information and insights about economics and ecology, finances and the environment. Having recently retired from financial planning and advising, she spends more time exploring the outdoors — and reading and writing about it. The opinions expressed are her own.