Kamala Harris tells us that her so-called “Medicare for all” plan will be paid for by taxing Wall Street — on the grounds that Bernie Sanders’ idea taxes the middle classes too much. There are only two problems with this.
We’ll skim over the specifics of the ideas for healthcare reform, for I think we all agree reform is needed, perhaps just not this reform. It’s the economics of that taxation that matter here. Our first problem is that it’s the middle classes who pay such financial market taxes; the second is that net and overall, they don’t increase tax revenue, they lose it. Having less money in the Treasury isn’t a great way of paying for new government programs. This also, obviously, applies to Sanders’ idea of spending the same lack of money on free college.
We have extensive experience elsewhere of these transactions taxes. There’s long been one in my native Britain, for example, on the purchase and sale of stocks. Entirely respectable nonpartisan studies tell us that the people who actually pay are pensioners. Nope, not banks nor bankers, but you and me in our 401(k)s. The reason is exactly why people seem to like these financial transactions taxes, all that back and forth and unproductive fluff of high-frequency trading. High-frequency trading is just money washing around, right? But it’s also more trading. What happens with more trading is that the difference between the buy and sell price narrows. Not that many decades back, we could sell a stock of MegaCorp at $9.80, then buy it at $10.20. That 40 cents was the amount we left on Wall Street for the privilege of being able to stick an investment in our pension. Forward a decade or two and that price difference had declined to perhaps 5 cents overall. More people trading more stock meant finer prices on both sides. Today, we can and do buy or sell, either way, at $10.00. There just isn’t, in this retail market, a spread on stocks any more. The reason being is that all those high-frequency trade people are trying to trade off fractions-of-a-penny price differences.
The people who have lost out here are the “market makers,” the Wall Street types who we bought from and sold to. Actually, Goldman Sachs paid $8 billion for an equity market maker and then had to close it down a few years later, simply because that spread had disappeared: There was no money in the business any more.
That is, all this froth benefits us and kills the Wall Street middlemen. Why would we want to reverse that? Because that’s what a tax would do. Raise the costs of the high-frequency trading, it disappears, the spreads come back, we all have to pay Wall Street again. Note that this is nothing at all to do with anyone doing anything to try and make it happen. We also can’t stop it. Taxing stuff means less of it happens; taxing financial markets makes them more expensive to use. It’s our pensions (you know, us middle-class types) who pay the Wall Street tax.
This is why Sir James Mirrlees, who got his Nobel for studying tax systems, says we shouldn’t ever have transactions taxes. The World Bank thinks it’s a bad idea too — as do the IMF, OECD, and the rest of the alphabet soup. It’s just a bad idea.
However, this is politics on the stump, so of course it’s worse than that. The European Union thought about doing a financial transactions tax. They also found it would lose, not raise, money. The problem here is that the more we tax stock transactions, the lower stock prices will be. This makes capital more expensive for companies, and therefore, we’ll get less investment in and by companies. This is not one of those things that is arguable, you know, maybe it’s some European foible. It’s just a fact about the way the world works.
Less investment means a smaller economy. Government does take a decent portion of GDP in taxation: There are taxes on all sorts of things as we know. A smaller economy produces less revenue from all of these other taxes.
We can see the revenue coming in from the financial transaction tax, and we don’t see that not coming in from the income tax, corporate taxes, sales taxes, and so on, from that now-smaller economy. The net effect of a Wall Street tax is less revenue overall, this not being a great way to fund new government programs: having less money.
Kamala Harris tells us that she’d fund her “Medicare for all” with a financial transactions tax so that the middle classes aren’t hit with the tax load. The result being that it’ll be the middle class pensions paying the tax and also that we’ll have less money in the Treasury.
This might not qualify as the best tax proposal ever.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at the Continental Telegraph.
