[Biden’s investment plan addresses longstanding needs in the
country. We will likely have to reduce other spending in the economy
to make room for it. A financial transactions tax is a great place to
look for some of the offset.] [[link removed]]

FINANCIAL TRANSACTIONS TAXES: THE PERFECT WAY TO PAY FOR BIDEN’S
INFRASTRUCTURE PACKAGE  
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Dean Baker
May 5, 2021
CounterPunch
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_ Biden’s investment plan addresses longstanding needs in the
country. We will likely have to reduce other spending in the economy
to make room for it. A financial transactions tax is a great place to
look for some of the offset. _

, Photograph by Nathaniel St. Clair

 

There has been a lot of silliness around President Biden’s proposed
infrastructure packages and the extent to which they are affordable
for the country. First and foremost, there has been tremendous
confusion about the size of the package. This is because the media
have engaged in a feast of really big numbers, where they give us the
size of the package with no context whatsoever, leaving their audience
almost completely ignorant about the actual cost.

We have been told endlessly about Biden’s “massive” or
“huge” proposal to spend $4 trillion. At this point, many people
probably think that Biden actually proposed a “huge
infrastructure” package, with “huge” or “massive,” being
part of proposal’s title.

While it would be helpful if media outlets could leave these
adjectives to the opinion section, the bigger sin is using a very big
number, that means almost nothing to its audience, without providing
any context. In fact, much of the reporting doesn’t even bother to
tell people that this spending is projected to take place over eight
years, not one to two years, as was the case with Biden’s recovery
package.

Over an eight-year period, Biden’s proposed spending averages $500
billion annually. This is a period in which GDP is projected to be
more than $210 trillion, meaning that his package is projected to be
around 1.9 percent of GDP. While that is hardly trivial, military
spending to projected be around 3.3 percent of GDP over this period.
This means that Biden is proposing to increase infrastructure spending
by an amount that is roughly 60 percent of projected military
spending.

It is infuriating that most of the reporting on these proposals make
no effort to put the spending in any context that would make it
meaningful for people. Reporters all know
[[link removed]] that almost
no one
[[link removed]] has
any idea what $4 trillion over eight years means (especially if no one
tells them it is over eight years), yet they refuse to take the two
minutes that would be needed to add some context to make such really
big numbers meaningful. Therefore, we have a large segment of the
population that just thinks the program is massive or huge.

WHAT PAYING FOR SPENDING REALLY MEANS

As our MMT friends constantly remind us, a government that prints its
own money, like the United States, does not need tax revenue to pay
for its spending. This distinguishes the U.S. government from a
household or state and local governments. Households and state and
local governments actually need money in the bank to pay their bills.
For them, more spending requires more income or taxes and/or more
borrowing. The federal government does not have this constraint.

Nonetheless the federal government does face a limit on its spending:
the ability of the economy to produce goods and services. If the
federal government spends so much that it pushes the economy beyond
its ability to produce goods and services, we will see inflation. If
this excessive spending is sustained over a substantial period of time
then we could see the sort of inflationary spiral that we had in the
1970s.[1]
[[link removed]]

If the economy is already near its capacity when President Biden’s
infrastructure package starts to come on line in 2022 and 2023, an
increase in spending of a bit less than 2.0 percent of GDP could be
large enough to create problems with inflation. This is the reason
that we have to talk about “paying for” the infrastructure
package. We need not be concerned about getting the money in the bank,
we have to reduce demand in the economy by enough to make room for the
additional spending in Biden’s infrastructure agenda. This is where
a financial transactions tax comes in.

THE VIRTUE OF FINANCIAL TRANSACTIONS TAX AS A PAY FOR

The Biden tax proposals have focused on increasing the amount of money
that corporations and wealthy individuals pay in taxes. This makes
sense, since they have been the big gainers in the economy over the
last four decades.

His tax increases will just take back a fraction of the income that
has been redistributed upward
[[link removed]] through a variety of
government policies over this period. And, in the case of the
corporate income tax, his proposal will just be partially reversing a
tax cut that was put in place at the end of 2017 by Donald Trump and a
Republican Congress. While taxing the economy’s big gainers is
certainly fair, there is a problem with going this route to cover the
cost of Biden’s program: the rich don’t spend a large share of
their income.

This point is straightforward, if we give Jeff Bezos, Elon Musk, or
any of the other super-wealthy another $100 million this year, it
would likely not affect their consumption at all. They already have
more than enough money to buy anything they could conceivably want, so
even giving them a huge wad of money will not likely lead then to
increase their consumption to any noticeable extent. Many of us are
used to making this point when we argue that any stimulus payments in
a recession should be focused on the middle class and the poor.

But this story also works in reverse, if we take $100 million away
from the super-rich, it is not likely to reduce their spending to any
noticeable extent. This means that Biden’s tax increases are not
likely to have as much impact on reducing demand as tax increases that
hit the poor and middle class. This is not an argument for hitting the
people who have not fared well over the last four decades, it is just
noting the impact of taxing the super-rich.

Financial transactions taxes (FTT) are qualitatively different in this
respect. While the immediate impact of a financial transactions
is hugely progressive
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in the sense that the overwhelming majority of stock trading is done
by the rich and very rich, the impact on the economy makes FTTs look
even better.

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Most research
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volume of stock trading falls roughly in proportion to the increase in
the cost of trading. This means that if a FTT raises the cost of
trading by 40 percent, the volume of trading will fall by roughly 40
percent. For a typical investor, that implies that they (or their fund
manager) will be paying 40 percent more on each trade, but they will
be doing 40 percent fewer trades. In other words, the total amount
that they spend on trades with the tax in place will be roughly the
same as the amount that they spent on trades before the tax is in
place.

And investors will not be hurt by less trading. Every trade has a
winner and loser. If I’m lucky, and dump my hundred shares of Amazon
stock just before the price drops, it means that some unlucky sucker
bought the stock a day too soon. Every trade is like this. The reality
is that for the vast majority of investors, trades are a wash, half
the time they end up as winners and half the time they end up as
losers.

However, they do end up as losers by doing lots of trading, that’s
because they are paying fees and commissions to the people in the
financial industry carrying through the trades. This is why most
financial advisers recommend that people buy and hold index funds, so
that they don’t waste money on trading.

A FTT reduces the money going to the financial industry to carry
through trades by reducing the volume of trading. This very directly
frees up resources in the economy. The number of people employed
shuffling stocks, bonds, and various derivatives back and forth will
be sharply reduced.

This is comparable to a situation where we found hundreds of thousands
of people digging holes and filling them up again. A financial
transactions tax, coupled with Biden’s infrastructure proposals,
will be a way to redeploy these people to productive work elsewhere in
the economy.

There is also a substantial amount of money here. According to
the Congressional Budget Office
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cents on a hundred dollars) would raise almost $800 billion over the
course of a decade. I’ve calculated
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graduated tax, with different rates on different assets (0.2 percent
on stock transactions, lower on everything else) could raise an amount
of revenue equal to almost 0.6 percent of GDP over the course of a
decade, or $1.6 trillion. My friend, Bob Pollin has calculated
[[link removed]] that
a somewhat steeper tax, along the lines proposed by Senator Bernie
Sanders, could raise close to twice as much. In short, this is real
money.

That doesn’t mean that we should reject President Biden’s
proposals to increase corporate income taxes and taxes on the top one
or two percent. (My route
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taxing corporations _is _better than his.) Even if Elon Musk might
not change his consumption much as a result of paying another $100
million taxes, there are many moderately rich people, earning single
digit millions, who may have to forgo a third home or live-in cook, if
we raise their taxes as President Biden proposed.

The bottom line is that Biden’s investment plan addresses
longstanding needs in the country. We will likely have to reduce other
spending in the economy to make room for it. A financial transactions
tax is a great place to look for some of the offset.

NOTES.

[1]
[[link removed]] People
also often raise the issue of burdening our children with the debt.
This is mostly an expression of extreme ignorance, since the issue of
debt service is incredibly trivial compared with the quality of the
economy and society that we pass onto to our children. The debt
service is also dwarfed by the rents
[[link removed]] created by
government-granted patent and copyright monopolies, which are also a
form of government debt passed on to our children. The debt whiners
literally _never_ talk about this massive implicit debt burden,
which takes the form of higher prices on everything from drugs and
software to video games and computers. In the case of prescription
drugs alone the rents come to close $400 billion annually, nearly
twice the size of our debt service burden.

_This post first appeared on Dean Baker’s Patreon page
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_DEAN BAKER [[link removed]] is the senior
economist at the Center for Economic and Policy Research in
Washington, DC. _

_COUNTERPUNCH’S mission is to help readers make informed assessments
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