The Bernie Sanders tax plan to pay for his ambitious expansion of government social programs is riddled with flaws and risky assumptions.
If implemented, the Bernie Sanders tax plan would cause the annual federal budget deficits to balloon, dramatically increasing the already dangerously large $18.4 trillion national debt. And many of Bernie Sanders' tax proposals would have dangerous side effects.
To be fair, the Vermont senator and candidate for the Democratic presidential nomination has all the best intentions. It's plain that he sincerely wants to help people. But America can't afford what he's proposing.
Sanders' policies, rooted in his socialist philosophy, include free public college tuition, an expansion of Medicare to all, universal childcare, and the rebuilding of infrastructure.
This week, Reuters columnist Daniel Indiviglio added up how much that would cost over a 10-year period and came up with a total of $12 trillion.
But the Bernie Sanders tax proposals intended to pay for it all - including a tax on overseas corporate profits and higher taxes on the wealthiest Americans - only add up to about $4 trillion. That's a gaping $8 trillion hole.
And some parts of the Bernie Sanders tax plan would have a dramatic impact on the markets as well as the U.S. economy.
For example, Sanders would like to eliminate the deferral U.S. corporations use to avoid paying the 35% corporate tax on foreign earnings. U.S. companies hold about $2.1 trillion overseas.
But making companies pay the full 35% tax on that money - and forcing companies to pay taxes on foreign profits as they are earned - would take a hefty bite out of the earnings of big multinational corporations.
Stocks of many big multinational companies, such as Microsoft Corp. (Nasdaq: MSFT), General Electric Corp. (NYSE: GE), and Pfizer Inc. (NYSE: PFE), would suffer.
One also has to wonder what kind of new strategies they would devise to reduce what they owe. That would reduce the projected $600 billion in revenue Sanders expects and would use to help pay for $1 trillion in infrastructure spending.
But another part of the Bernie Sanders tax plan would have an even bigger impact on Wall Street...
One of Sanders' biggest revenue generators is a financial transaction tax (FTT), or a tax on securities trading.
Specifically, Sanders wants to impose a fee of 0.5% on stock trades, a 0.1% fee on bonds, and a 0.005% fee on derivatives. This would raise $1.5 trillion over 10 years, according to Indiviglio's calculations. Sanders says the FTT would generate between $50 billion and $300 billion a year.
An FTT would also discourage such dubious practices as high-frequency trading, which would be a good thing.
But an FTT would have loads of unintended consequences. Volume would drop, affecting liquidity and increasing volatility.
An FTT would also sting the U.S. economy. The European Commission studied the impact of an FTT of just 0.1% and concluded it would shave 1.76% from the gross domestic product (GDP) of the Eurozone.
The FTT in the Bernie Sanders tax plan is five times the size of the one in the European Commission study. That would chop some 5% to 9% off the U.S. GDP - a nightmare scenario that would trigger a recession. Stocks would crash and, ironically, tax revenue losses would more than offset the gains from the FTT.
The FTT is intended to pay for both the free public college tuition and part of Sanders' plan to expand Medicare. But even setting the tax revenue losses aside, the FTT would fall far short of covering the costs of those programs.
The progressive website The Daily Kos estimated the real cost of free college tuition at $146 billion annually. A 2013 Congressional Budget Office estimate figured an FTT would bring in just $60 billion a year at best - not enough to pay for half the college tuition, much less cover any of the Medicare expansion.
Other parts of the Bernie Sanders tax plan are equally problematic.
He wants additional payroll taxes to help pay for his Medicare expansion; employers get slapped with a 6.7% tax on each employee's compensation. Both will add to labor costs, not exactly a great way to encourage job creation.
Some proposals seek to soak the rich.
Sanders wants to generate more revenue from the estate tax by closing loopholes and lowering the threshold for individuals to $3.5 million and couples to $7 million. He'd like to double capital gains taxes for the wealthiest 2%. He wants a "billionaire surtax" of 10% on 530 billionaires.
The trouble with plans to squeeze money out the wealthiest Americans is that they have the resources to evade such taxes. They can hire expert tax attorneys and accountants to work every angle. And if necessary, they can simply leave the United States for a more tax-friendly country.
So little of the Bernie Sanders tax plan will generate the revenue he's counting on.
And his socialist proposals almost certainly will end up costing far more than projected. Government programs nearly always do.
Bernie Sanders' tax plan, for all its good intentions, just can't work.
Follow me on Twitter @DavidGZeiler.
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