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Last week Money Morning Contributing Editor Martin Hutchinson presented an open letter to U.S. President Barack Obama and members of Congress regarding passage of a Tobin tax.
The simple solution of a Tobin tax handles three of the U.S. government's biggest challenges: It resolves the controversy over expiring Bush tax cuts, helps reduce the federal budget deficit, and offers more regulation over controversial Wall Street profits.
Hutchinson said a Tobin tax – a tax on financial transactions – is the one tax increase that would not damage the already fragile U.S. economy.
"[It] is one tax increase that would generate substantial revenue, help knock down the deficit, and even produce major improvements in the operation of the capital markets in both the United States and abroad," wrote Hutchinson. "It wouldn't increase taxes to U.S. households or most U.S. businesses, meaning it also wouldn't harm the U.S. recovery."
The key to making sure the Tobin tax does not harm economic recovery is keeping it low, around 0.01% – 0.02%. This would have little effect on the average consumer and taxpayer, but hit Wall Street's profits hard – and bolster the financial state of the country in the process.
Reader support for Hutchinson's proposal was overwhelming, with readers writing in from all over the country to say they forwarded the letter to their elected representatives in Congress.
While most readers supported the idea, some were skeptical about another government tax and whether or not lawmakers would keep the low rate if given the power to enforce a Tobin tax.
The following concerns and comments were sent in to the Money Morning Mailbag, questioning the true effect of a Tobin tax and if there could be a better alternative.
I read with great interest the proposal to institute a Tobin Tax to help relieve the out-of-control U.S. deficit. This tax has been used in other countries to increase tax receipts but not control government spending.
I am a U.S. expatriate living in socialist Brazil where the country's internal deficit and debt seems to grow uncontrolled. Brazil imposes a Tobin Tax called "Imposto sobre Operacoes Financeiras," Tax over Financial Operations or IOF as it is called here, on all money transactions. The very low rate of 0.01% – 0.02% may not initially cause any pain to the taxpayer. But it would give the politician another avenue/source of funds to tap into. Pretty soon, that rate could rise to 1.0% – 2.0% or higher – and sky's the limit. Hence, a definite no-no.
Similarly, a Value Added tax is another no-no. Socialist governments love "hidden" taxes where the citizen does not see it paid in front of him. It is imbedded in the product or service.
We must first hold the government to fiscal restraint. We must first see deep cuts implemented in government programs across the board, eliminate programs that have accumulated over decades, many that serve no purpose except to propagate bloated government bureaucracy. And this belt tightening must be demonstrated for at least three to five years.
– Avi B.; Brazil
The temptation to raise the Tobin tax rate in the future may be as addictive as the urge to borrow and spend now is by both political parties. Perhaps we could blend it with the Fair tax (HR25) and get this country back to work. But, I doubt that we could elect enough 'saints' to Congress to get a quorum in either house.
Limiting military spending and other bulging budgets then fixing the infrastructure, going green and drafting reasonable laws may be way too sensible for the kids in D.C.
– Chas D.
In response, Money Morning's Hutchinson said the following:
"I think the Tobin tax as I stated just hits Wall Street and so would be popular as well as productive. I don't see too much risk of lawmakers raising it too high because it would do far more damage to the economy than it would raise in revenue. The Law of Diminishing Marginal Returns is very applicable to a transactions tax, because people would find ways of evading it if it was too high, and economic activity would fall.
"A Fair tax is also a good idea, but a separate question — it pushes tax onto consumption, but is rather regressive. The Fair tax and the Tobin tax are not really connected – or at least don't have to be, either way."
For those who do support the Tobin tax, and want to see change brought to Wall Street, please
click here
and scroll down for a form letter to forward to your elected representative.
(**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Web site. Please include your name and hometown with your email.
News and Related Story Links:
- Money Morning:
The Tobin Tax: The Deficit-Busting Levy Wall Street Hates
- Money Morning:
Money Morning Mailbag: Tobin Tax the Only Solution to Problems Posed by High Frequency Trading
- Money Morning:
The Tobin Tax: The Deficit-Busting Levy Wall Street Hates
- Money Morning Archives:
Money Morning Mailbag Feature
Better idea is switch to Fair Tax system and quit taxing income. http//:www.fairtax.org
A tax is a tax! If you take money out of the private sector and put it into the public sector it will be used to buy votes. 0.01% – 0.02% is insignificant, but it's going to be doubled and doubled again until it is significant!
I've got a better idea, figure out how much this tax would bring in and cut government spending by that amount. As the Obummer would say, "It's a win win solution"!
We need a new tax? What planet are you from?
Don
To Don:
Sorry about the delay. I've been busy. I'm from the US. "New tax…" no, not really. 45 states already have a sales tax. Sales taxes have been around. Actually, the Fair Tax is a replacement for the income tax. It ends payroll witholding, provides a prebate so that no one pays taxes up to poverty level (family of four- @ $8,400/yr. paid in monthly installments), etc.
While I am not a proponent of any new taxes, I think the Tobin tax would be the best solution to fix the rising deficit if it is used properly. If passed into law, this tax should only be earmarked for payment on the existing deficit, not as a new tax for Washington to spend on any "pork barrel" program that takes their fancy. Every time Congress enacts a new tax or raises tax rates the cost of government goes up because Congress thinks new money needs to be spent on new programs which offer little benefit to the average taxpayer and only increase government waste.
I think the recent elections have sent a clear message to Congress (both Republicans and Democrats) that "business as usual" is no longer the standard that is acceptable to the American people and that if they cannot reign in their out of control spending (Republicans and Democrats both) they may find themselves on the "outside looking in" as some have already done this election. Even though the voters were unhappy with the actions of all Congress, the party that has the majority is the one that usually suffers. Take heed, Congress, and especially Republicans, there is another election in two years and the public is watching!!!
Wayne:
" …If passed into law, this tax should only be earmarked for payment on the existing deficit, not as a new tax for Washington to spend on any "pork barrel" program that takes their fancy…"
How long do you think, honestly, that would last? The income tax is like a hungry man trying to eat his own arm. Even if he succeeds, he will diminish his ability to feed himself.
Over 90% of the lobbyists in Wasington are there because of the income tax. The code is ripe for it and adding just another teeny, little tax will lead to more lobbying, more exemptions, tax breaks, etc. which will lead to more taxes… and the code is further complicated and even more taxes are hidden.
Better idea is to quit taxing income altogether. People making money is a sign of a good economy and the income tax feeds off the same money, canabilizing the economy in essence hindering or destroying it. The more money made, more taxes are taken out. It hinders everyone's movement 'upward' especially, the poor who have to deal with 23% or more of their check disappear each week. Stop taxing income and the poor have the best opportunity in there lifetime to get out of poverty. Before you judge it too hastily, check it out: http://www.fairtax.org
I'd love more money in my paychecks, wouldn't you?
OF COURSE the tax is "popular" with the folk.
"Don't tax you and don't tax me, tax that man behind that tree."
A tax is a "good" tax if someone else (ostensibly) pays it.
If you think Wall Street won't pass that tax on to its clients, you are mistaken.
This country has a SPENDING PROBLEM, not a revenue problem. We had better do something about the REAL problem.
always,
tony
Some people support themselves with a modest income from day trading. If the Tobin tax applied to them then even a .01% tax could be devastating.
I fail so see why another tax will do nothing more than cost the American consumer more money.
I favor a compromise, change the "Bush" tax cuts threshold to one million, rather than the present family number of 1/4 of a million.
I am not a tea bagging conservative.
Have you read HR4646, which proposes a 1% transaction tax on all financial transactions. You really should read it, as your .01% has already been usurped. This House legislation is currently in four committees. There has been no comparable Senate legislation introduced, although one Senate bill does have a similar provision for a Fiscal Responsibility Task Force.
Regards,
Kent Edwards
Why do you not provide a Form Letter for the support of the Fair Tax plan also?? WE the PEOPLE want less taxes, NOT MORE!!!
A Tobin tax will never happen under an Obama administration. Most CEO's on Wall Street are progressive liberals and have supported Obama's campaign, because they knew they could profit off big bloated government.