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A Proposal

January 28, 2011

Jonathan Schell at The Nation gets at something essential, something glaringly missing, from Obama’s State of the Union Speech on Tuesday:

It’s true that the United States educational system is measurably slipping. It’s also true that the country’s infrastructure has decayed badly. And yes, the United States would benefit from whatever technical innovation it can bring off, just as any country would. But none of those problems, needful of attention as they are in their own right, is the chief cause of the United States’s economic doldrums—its stubborn high unemployment, its persisting housing bust, its galloping economic inequality. These were the fruit of an economic crash brought on by a misguided, corrupt, incompetent, larcenous, unregulated financial establishment. The relevant remedies are not better technology or some contemporary equivalent of sending a man to the moon. (In any case, although Obama insisted “We do big things,” he didn’t offer one.) The remedies needed are a re-regulation and reconstruction of the financial system, plus a major, Keynesian style stimulus program to create jobs and purchasing power, and so to jar the economy out of its stupor. But none of that was in Obama’s speech. On the contrary, his proposal to freeze spending for five years threatened more economic stagnation.

(Emphases mine.)

The basic cause of the American economic predicament is that purchasing power (that is, the inflation-adjusted paychecks ordinary workers get) has not appreciably increased in over 30 years. People not making enough money to keep the economy growing means the economy can’t grow.

Actually, not quite true.

The economy can still grow, but since wages aren’t increasing (except for a few people at the top, who, precisely because there aren’t very many of them, can’t make up for the shortfall in consumer spending) the only recourse for consumers is buying things on credit cards – i.e., growth financed through debt. This is exactly what we’ve seen in the years since the median wage stopped growing:

             
The thing is, financing economic growth by increasing personal indebtedness is literally not sustainable, because eventually, the credit cards are maxed out, and then everyone needs to pay down their debts before they can begin spending again. While this is happening, the economy shrinks, since people are not spending on anything except essentials. This results in layoffs, which means some people can no longer keep up their debt payments, which results in bankruptcies, which results in the banks who are owed that money raising interest rates to cover the increased risk, which results in more bankruptcies, which means more trouble for banks, etc.

Eventually, confidence in the entire system begins to erode, which leads to a general panic and the entire financial system grinding to a halt.

See October 1929 and September 2008 for an idea of what that looks and feels like.

It’s an experience that it is best to avoid, if at all possible. In fact, I think it would be a good idea to come up with policies designed to prevent that situation from ever happening again.

Growth through debt leads eventually to systemic crisis – we know this.

Growth from rising incomes leads to sustainable and widely-shared prosperity – we know this.

If two things happen, the United States would be poised for its greatest economic upsurge in history.

Thing Number One: Debt needs to be paid down, and the acquisition of new debt needs to be discouraged.

I propose that there is a one-time, 20% federal tax on all financial assets over $2 million – assets in IRA’s and 401(k) plans would be exempt, provided the particular accounts were held on, say, September 15, 2008 (this would prevent using retirement accounts as an anticipatory shelter.) Yes, the stock and bond markets would take a hit; can’t be helped, and the stock market is way over-valued anyway, by historical standards. The stock market should be there to finance capital investment, not to enrich Wall Street greedheads.

Such a tax would generate revenues sufficient to pay off the entire national debt owed by the United States government – and also enough to both balance this year’s budget, and to send every taxpayer a check for $20,000. Tell them: “This is YOUR bailout.”

THAT should be sufficient to get things moving in a big way.

There should also be a new regulation making it a crime to offer credit to someone whose personal debt is more than, say, 20% if his or her annual income.

Thing Number Two: Going forward, the aim of economic policy should be to get the real median wage growing on a consistent basis.

How? Here are some basic, proven ideas.

1. Give workers a bigger voice in how profits are distributed. A great way to do that is by encouraging union membership. Let me put this bluntly: the government ought to do everything it can to encourage unionization across all economic sectors. A good start would be repealing the Taft-Hartley act, and passing the Employee Free Choice Act.

2. Use the tax system to discourage out-sized payouts for corporate executives and banksters. Restore the tax brackets (adjusted for inflation) to what they were in 1955. Top marginal tax rate: 91.5 percent.
This will discourage the obscene paychecks Our Reptilian Corporate Masters currently award themselves, and encourage them (through deductions) to do economically beneficial things with the money.

3. Re-regulate the financial sector. Restore and strengthen the Glass–Steagall Act. Break up the big banks to the point that the insolvency of one won’t threaten the economy. (While I’m at it: impose a retro-active tax of 100% on all non-salary compensation of every executive of every financial institution that received federal bailout money. It might not prevail in the ensuing litigation, but it would be fun to watch them squirm. I mean, screw these people.)

All this would, of course, cause keening howls of outrage and pain on Wall Street and the executive suites of America’s corporate headquarters, and confusion and alarm amongst the Wall Street Fetishists on CNBC. There isn’t a violin small enough.

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50 Comments
  1. sean permalink
    January 28, 2011 8:21 am

    Why are you encouraging Class Warfare?

    • January 28, 2011 1:32 pm

      I’m not “encouraging” it, I’m responding to the Class Warfare that has been waged for 30+ years by the rich against everyone else.

  2. Dan permalink
    January 28, 2011 10:19 am

    Growth from rising incomes leads to sustainable and widely-shared prosperity – we know this.

    That’s not entirely true. Raising wages doesn’t necessarily raise the standard of living, as the effects can be (and typically are) inflationary.

    Economics are a complex interplay between many different factors. Your proposed solution above is fraught with oversimplification. For example, you tax assets over $2M at 20% and you’d likely shut down half of the businesses in America overnight. You also haven’t measured the decrease in productivity, inflationary effect, and increase in overhead associated with unionization.

    I run a small business with 15 employees and if my employees decided to unionize, we’d shut our doors the next day. It’s not so simple.

    • January 28, 2011 1:36 pm

      As long as rising wages don’t outpace the growth in productivity, rising wages aren’t inflationary, other things being equal.

      How would taxing wealth shut down half the businesses, much less “overnight”?

      • Dan permalink
        January 28, 2011 1:51 pm

        Because you’re taxing assets, not surplus. Many businesses – even big, profitable ones – operate on a cash flow basis. A one-time financial haymaker like the one you’re proposing may put a company into receivership if they can’t pay their bills that month, even if they could afford it in the long run.

        Now, if you’re speaking only of personal assets, that becomes trickier. How do you define what a personal asset is? Most wealthy people’s assets are owned by holding companies, and may have shared ownership or even a portion for business use (if I live in a $2M house, but run my business out of my basement, is it a corporate or a personal asset?)

        It’s not that easy. Tax codes are complex for a reason.

      • Dan permalink
        January 28, 2011 1:58 pm

        To clarify a little more technically, you can usually measure a businesses best use of its assets by its debt-to-equity ratio. If I have too much equity, I’m not growing fast enough. If I have too much debt, I’m taking on too much risk. Long story short, if I have an asset that I could afford to have taxed at 20% and shrug it off, I’m not running my business correctly. A 20% tax on my company’s assets SHOULD kill me if I’m running my business efficiently.

        • January 28, 2011 2:38 pm

          The idea is to tax people’s holdings of stocks and bonds – that portion over $2 million. I’m not suggesting that, say, GM sell 20% of its factories or that Starbucks hand over 20% of the value of the buildings it owns (I have no idea if Starbucks actually owns any real estate, but you get my point, I trust.)

        • Dan permalink
          January 28, 2011 3:13 pm

          Ok, that helps clarify a little. A tax on stocks and bonds would be different than a tax on assets. It still gets cloudy (holding companies, etc..), but that’s more reasonable than taxing a company 20% of the value of the factory that it happens to own.

    • M.Z. permalink
      January 28, 2011 2:04 pm

      Almost all businesses with over $2 mil in real assets (e.g. not goodwill, etc) are in some way incorporated. Matt’s proposal was only on personal assets. That said, it would be an incredible burden on shareholders or partners.

      It is difficult to say what would happen. Generally one-time events cull the weakest. Take for example some stores closing due to a highway project or the significant number of businesses that don’t reopen after a catastrophic event like a big hurricane. A lot of smaller businesses with single investors would have to do a one-time dividend since a lot of owners aren’t sitting 20% in liquid assets.

      I’m not sure I would be supportive of such a plan, but I don’t believe it would be TEOWAWKI.

  3. Kurt permalink
    January 28, 2011 10:49 am

    if my employees decided to unionize, we’d shut our doors the next day

    That is both illegal under law and a sin under the teachings of the Catholic Church.

    • Dan permalink
      January 28, 2011 1:27 pm

      Please put in just a little more charitable thought before your respond. You really think I’d just kill a profitable business because my employees unionized? Get real.

      Not every business is a money making machine capable of paying their employees whatever they’d like. As a Catholic who believes in social responsibility, I wish I could give my employees union-style pay and benefits. But the reality is that I can barely keep the lights on as it is. Even a slight increase in pay or overhead would be enough to force us to shut our doors. An you’d be surprised to know that 99% of businesses out there operate the same way. If my employees unionized, they’d FORCE me to close my doors.

      • January 28, 2011 1:56 pm

        If my employees unionized, they’d FORCE me to close my doors.

        Dan,

        Don’t your employees want jobs? A union can’t force you to pay your workers more than you can afford, or force you to offer them benefits you can’t afford. It’s called collective bargaining. An agreement has to be reached. If you say, “This is my final offer, because it’s all I can afford,” that’s it. (I think you may be required to open your books to someone and prove you are telling the truth to demonstrate you are bargaining in good faith.) Management has the right to say no to a union. They do it all the time. In fact, businesses on the edge of going under get concessions from unions.

        • Dan permalink
          January 28, 2011 2:15 pm

          It’s more than just money. I didn’t want to denigrate this discussions into the pros/cons of unionism, so I chose the example that requires the least amount of debate.

          I am not anti-union. I used to work for a union (i.e. the union itself was my employer), and now I own a business, so I know both sides very, very well. You’ll have to trust me when I say the overhead of unionized employees would kill my business. And I know many other business owners in the same boat.

        • Kurt permalink
          January 29, 2011 3:33 pm

          Dan,

          I will say that except in the cases of some highly specialized craft, it is very unusual for employees of a 15 person shop to seek to form a union. Generally, in such a situation, workers don’t find a union does much for them.

          But for companies of whatever size, the bottom line is that a union can’t make a boss agree to anything. The balance of power is still with the boss.

          I have long said that 90% of what union do is not that they can force bosses to agree to anything, they can often just make the bosses do what they have said they will do.

        • R.C. permalink
          January 28, 2011 7:33 pm

          David Nickol says:

          Don’t your employees want jobs? A union can’t force you to pay your workers more than you can afford, or force you to offer them benefits you can’t afford. It’s called collective bargaining. An agreement has to be reached. If you say, “This is my final offer, because it’s all I can afford,” that’s it.

          That depends very much on the union and how far they decide to take the negotiations. In many circumstances that isn’t “it.”

          A business can be pushed right up to the edge of non-sustainability, say “this is all I can afford,” and have the union say, “Well, we disagree.” At that point a walkout or something similar will occur; and the business will be worse off than it was and even less able to afford to give better wages/benefits. But the union will look bad if the result of its action isn’t more concessions from the business. The outcome after that, if the union doesn’t back down, is easily foreseen!

          That’s assuming the union doesn’t indulge in strong-arm tactics. Some do. And there’s always the “pull” that unions have with local politicians and regulators. For small and medium-sized businesses, it isn’t generally matched by the “pull” the business can wield in the same circles. Whoever has the “pull” can change the regulatory environment and voila: Negotiations become one-sided rather quickly, when it’s illegal not to cave in to the other side.

          Unions exist to create a monopoly on labor in order to counteract, in overall negotiating power, the monopoly on jobs held by a particular employer. And of course it is entirely fair to pit one monopoly against another. In an old mill town (the classic example), the jobs monopoly is very real. But in many industries today a union serves to create a monopoly on the labor side of the table where none exists on the jobs side. Power corrupts; when particularly lopsided arrangements occur unions behave in a way that gives them an entirely deserved evil reputation. (Just as much as “the company” in some old mill towns had that kind of reputation!)

          Finally, I note that union behavior is union leadership behavior; and these persons are generally selected by vote. Do union leaders sometimes make short-sighted decisions which ultimately damage the business, injuring the long-term interests of the workers? Well, do other politicians, who obtain their jobs by vote, ever make short-sighted decisions?

          So, “as much as the business can afford” sadly isn’t always “it.”

          In the end, the business owner has to be convinced that keeping the business open is both worth the hassle from his own personal perspective and at least minimally profitable. And sometimes unionization is a distinctly threatening and unfriendly step (e.g. when taken against a business when the business lacks anything like a jobs monopoly).

          If, in response to such antagonism, the business owner decides that he can’t make a profit and can’t stand the misery of running a unionized business as it spirals slowly into the ground? Then it is not only not morally reprehensible for him to close his doors, but may sometimes be morally obligatory.

          That way he has an opportunity to use his time and talent for something better, and that way, the antagonists are not infantilized and shielded from the consequences of their actions.

    • David Cruz-Uribe, SFO permalink*
      January 28, 2011 3:09 pm

      Dan,

      I understand your point of view because this is how it often plays out, but unions are not necessarily only about wages and benefits, or at least not about increasing them at the expense of the business itself. When I was a grad student at Berkeley, we were engaged in a desperate battle to unionize. But none of our demands were about wages, and our requests for benefits were just tinkering around the edges. The vast majority of what we wanted were improved working conditions: faculty should not be able to exploit grad student labor and play one student off another to squeeze the most work for the least amount of money.

      If you were already a fair and reasonable employer, and I have no reason to believe otherwise, it might well be that if your employees unionized they would want to talk with you about work rules, seniority, and other things that impact on them in ways that you, as boss, might not see. And, if they came to you with wage demands, could you envision being able to explain to them why the company could not afford to pay them more without other things (liked increased business or productivity) happening?

      • Dan permalink
        January 28, 2011 3:31 pm

        David,

        My experience working at the union is that these arguments are very much theoretical. The practical reality of unionized environments is that it fosters an adversarial environment between the workers and management.

        Unions are tools to protect workers from greed and exploitation. Unions are also tools FOR greed and exploitation by the workers. If an employer is balanced, and the employees are balanced, a union should never be necessary. It is a useful prescription for an illness, but it should not be prescribed for those that aren’t sick. Otherwise, much like regular medication, it can make something that is otherwise healthy very sick.

        • David Cruz-Uribe, SFO permalink*
          January 28, 2011 3:45 pm

          Again, I see your point. I would just balance it by saying that I have seen unions work in situations where both sides were treating each other fairly–balanced in your words. (I come from a union family in an old mill town. Things changed in the 80’s when companies decided to start breaking their unions. But there was a long period where things seemed to work well with the union as the instrument through which the sides dealt with one another.)

        • Kurt permalink
          January 29, 2011 3:44 pm

          I would respectfully disagree. With my wide though not universal experience, I can say that I have never known a single instance where unions created an adversial environment. However, I have seen unions giving voice to workers previously silenced and working under adversial conditions. I can see how that might lead to a misimpression the union created what it only shined a light on.

          The illness you describe is called sin. And it is something all (except for our Blessed Mother) are subject to. The cure does not come before the end of our earthly lives.

          The balance you refer to is allowing both workers and bossess have a voice. There is no “balance” by supressing one side. That is, in fact, the very definition of imbalance.

        • Dan permalink
          January 31, 2011 10:25 am

          Your argument implies there is an imbalance to begin with. If there is no imbalance, creation of a union creates an imbalance, as R.C. pointed out above.

          As for your disagreement, I worked *for* a union. I know firsthand the adversarial nature of what happens there. As David pointed out, it may not be in all circumstances, but the majority of what I’ve seen is not conducive to productive employer/employee relations.

  4. January 28, 2011 11:18 am

    It’s probably no surprise what I think, but I would be really curious to hear MM’s thoughts on the idea of doing a one time 20% tax on all assets over $2M and reinstituting an (inflation adjusted) set of 1955 tax rates.

  5. January 28, 2011 2:57 pm

    If such a plan would cause the stock market and the bond market to take a hit, then exempting IRAs and 401ks would not be enough to protect retirees, since most money in IRAs and 401ks is invested in stocks and bonds. Anything that sends the stock market and bond market down also affects pension funds, university endowments, and heaven knows how many other things that invest.

    If I am interpreting what I read correctly, about 100 million Americans own stocks directly or through a pension fund.

    • January 28, 2011 3:00 pm

      Well, that would be more than made up for when the economy roars forward, goosed by giving $20,000 dollars to people who will spend it. I imagine that would give stocks a boost.

      • Dan permalink
        January 28, 2011 3:15 pm

        I think the point is that the economy would not roar forward – rather, it would utterly collapse.

        • January 28, 2011 3:23 pm

          Dan – we’ve tried giving dumptrucks full of money to bankers and Wall Street punters. It hasn’t worked. You give 20 grand to each taxpayer, and there would be a boom the likes of which the US hasn’t seen since the go-go years of the 1960s.

        • Dan permalink
          January 28, 2011 3:39 pm

          Agreed – if you could create money out of nothing. Unfortunately, this is Robin Hood economics, and it doesn’t work in the real world.

          I’m not criticizing your premise. My point is that you’re oversimpifying, and you’re not taking into account the complexity and finely-tuned balance of macro-economics.

          It’s like saying “We could save millions in the space program if we just take a big slingshot and launch people into space!”. It seems really simple until you realize the physics involved.

        • January 28, 2011 3:48 pm

          if you could create money out of nothing

          But I’m not “creating money out of nothing”. I’m taking real money that exists as a result of profits earned by publicly-traded companies, and then redistributing it downward. In principle, this is fundamentally sound.

        • Dan permalink
          January 28, 2011 3:52 pm

          in principle, this is fundamentally sound

          No it isn’t. It’s a big slingshot. Looks like a good idea, but would make a terrible mess.

        • David Cruz-Uribe, SFO permalink*
          January 28, 2011 3:47 pm

          Matt, I could see this proposal actually triggering a deflation, perhaps even a deflationary spiral. If the taxation caused the economy to slow, and began depressing markets, a lot of people might save the money or pay down debts rather than spending it. This would cause banks to be flush with cash, but no one would be using it—similar to the situation we are now in. If you are going to do stimulus, you need to make sure that it actually accomplishes what you want.

        • January 28, 2011 4:04 pm

          I could see this proposal actually triggering a deflation, perhaps even a deflationary spiral. If the taxation caused the economy to slow, and began depressing markets, a lot of people might save the money or pay down debts rather than spending it. This would cause bahttp://voxnova2.wordpress.com/wp-admin/edit-comments.php#comments-formnks to be flush with cash, but no one would be using it—similar to the situation we are now in. If you are going to do stimulus, you need to make sure that it actually accomplishes what you want.

          I actually think the hazard would be inflation rather than deflation: putting $2 Trillion of liquidity into the economy tends to have that effect.

        • Dan permalink
          January 28, 2011 5:01 pm

          I actually think the hazard would be inflation rather than deflation: putting $2 Trillion of liquidity into the economy tends to have that effect.

          Please understand that I mean this in the most sincere and charitable way possible: what you just said was complete nonsense, you’re discrediting yourself by continuing to post this stuff.

        • January 28, 2011 5:38 pm

          I appreciate your charity, Dan (I mean that sincerely).

          I’m not an economist – this apparently is obvious – but I have done a fair amount of (amateur-level) reading on the subject, and my purpose here is to come at the problem from outside the box; i.e., to shake things up a bit.

          My proposed solutions are radical (in the literal sense of “going for the roots”) — and I’m open to discussing counter-proposals. You would agree that my description of the problem is basically right, yes?

        • January 28, 2011 5:48 pm

          Actually, I would say that the 20% tax is the only truly radical/unprecedented item in my list. The rest have been tried to one degree or another.

        • Dan permalink
          January 28, 2011 5:53 pm

          Thank you Matt for your gentle response. I absolutely agree with your description of the problem. And your line of thinking regarding your proposal is solid. It’s just too extreme . Economics is like Jenga: You can make the right move, but if you make it too quickly, everything will come crashing down.

          There are germs of good ideas here – it simply needs to be refined and moderated.

        • January 28, 2011 6:51 pm

          You’re very welcome, Dan. I like having conversations in my comboxes, rather than pie fights. You make that easier.

          Given the fact that we agree on the issues facing the economy and society, could you sketch out what your solution might look like?

      • Dan permalink
        January 28, 2011 3:48 pm

        Think of it this way – there are men much smarter than you and I who have dedicated their whole lives to economics. If there was an easy prescription to make the economy “roar forward”, someone would have done it a long time ago.

        • January 28, 2011 3:51 pm

          There are very powerful interests that make sure this never even comes up for discussion. The rich love the current wealth distribution percentages, and they’ll buy as many congressmen as it takes to keep things as they are.

        • January 28, 2011 3:52 pm

          Adding: what I’ve proposed here amounts the Keynesianism on steroids – and Keynesianism has many adherents among professional economists.

        • Dan permalink
          January 28, 2011 4:04 pm

          I think it’s precisely the “steroids” that are the problem. Just because something is effective doesn’t mean that 10x of that same something is necessarily 10x as effective.

          Keynesianism can work because it is balanced. If you take it out of balance, it doesn’t work.

          If you would have proposed 20% over 20 years at 1% per year, that alone may fundamentally change my opinion toward your proposal.

  6. January 28, 2011 7:12 pm

    Adding, Dan, I don’t want to put you on the spot – If you haven’t put much thought into this, that’s fine.

    Also, I wanted to start a new sub-thread, since our comments were getting to be an inch wide.

    • Dan permalink
      January 31, 2011 10:41 am

      You’re not putting me on the spot at all.

      Unfortunately I don’t have a solution. I know enough about economics to know that I don’t know enough about economics. My opinion would be speculative, impractical, and genuinely worthless.

      The one thing I do know is that any solution is going to involve suffering. There are only two forces of change in the world: evolution, or revolution. One is long and painful, the other is much faster but much more painful. Pick your poison – do you want to screw your generation or the next few?

      • January 31, 2011 1:32 pm

        Thanks for the reply Dan (and, I don’t think you’re a troll at all.)

        The one thing I do know is that any solution is going to involve suffering.

        Whatever the solution is, my concern is that any “suffering” that takes place ought to be widely shared.

        When I read the solutions put forward by others – and especially those on the right – what I hear is that we, the little people, ought to want to suffer a little more in order to make sure that our reptilian corporate masters become incrementally wealthier, so that they can then build factories and office buildings and then we “parasites” can have jobs; when those factories succeed and prosper, no one but the owners can benefit, because They’re Supposed To Have All The Money (or something…I’m paraphrasing here, plus it’s been awhile since I’ve read Ayn Rand.)

        Think about this: Obama cutting most people’s taxes, and raises taxes only on the rich (and that higher tax paid by the rich is still lower than during the administration of that communist monster, Ronald Reagan) is described as “socialism.” That is glaring evidence to me that the whole game is rigged, by the people who have the means to so rig it.

        • Dan permalink
          January 31, 2011 2:49 pm

          The thing that really scares me is how the wheel is becoming unbalanced. The reason the USA has made social and economic progress is the perpetual oscillation from left to right throughout history. Once society becomes unbalanced, the people generally have voted the opposing party into power, whose social and fiscal policies restore balance. Now, it seems that everyone is leaning so far right that even the Democrats look like Republicans.

          The left hasn’t had enough time to bring society back into balance, and you’re about to vote in another right wing government. Unless something gives, I think it spells disaster – I believe we’re about to witness the beginning of the decline of the USA.

        • January 31, 2011 3:26 pm

          I think you’re right about decline, Dan.

          My fear is that this decline will be blamed on racial and ethnic scapegoats, who will then be persecuted, rather than on those who ought to take the blame.

          Of course, when things completely unravel, I imagine Our Reptilian Corporate Masters will just pull their yachts out into international waters and watch our cities burn – and then decamp for their next victims, who will then be hollowed out and bled dry.

          It is the dawn of Locust Capitalism.

        • Dan permalink
          January 31, 2011 2:57 pm

          And I do agree with you that the game appears to be rigged. Everyone knows the punch reeks of booze, but nobody calls out those who spiked it – they drink anyways because they enjoy the buzz. But morning will come, and the hangover will be painful. The only problem is, unlike previous generations, we’re only too happy to let future generations suffer our hangover while we drink to excess. I do believe future generations are going to look back on our society with disdain and repulsion. We are to blame.

          Meanwhile, people cheer their captors as the noose tightens around their neck.

    • Dan permalink
      January 31, 2011 10:43 am

      And yes, mea culpa for being an idea troll – I can point out the flaws in other people’s ideas, but I can’t come up with a better one myself. ;)

  7. January 28, 2011 9:09 pm

    Well, as I said, I think it would be very interesting to hear what Mornings Minion thinks of the 20% one-time-personal-financial-asset tax. He has a PhD in economics and works profesionally in the field, and I would imagine that Matt would agree that MM is not bought and owned by the “Reptilian Corporate Masters”.

    That said, and since I could use a little mental distraction after spending the day prepping for and then giving a presention to a bunch of my own executive management, let me try a couple thoughts on this because while I think it’s a bad idea from an ecnomic point of view it’s kind of fun to play with something so incredibly extreme.

    You propose:

    I propose that there is a one-time, 20% federal tax on all financial assets over $2 million – assets in IRA’s and 401(k) plans would be exempt, provided the particular accounts were held on, say, September 15, 2008 (this would prevent using retirement accounts as an anticipatory shelter.) Yes, the stock and bond markets would take a hit; can’t be helped, and the stock market is way over-valued anyway, by historical standards. The stock market should be there to finance capital investment, not to enrich Wall Street greedheads.

    Overall, I think one of the big problems here is that the “Reptilian Corporate Masters” are not, in fact, dragons who sit on top of piles of hoarded gold. So when you go to confiscate 20% of their wealth, you need to figure out where that money is now and how to get it from there.

    The first big question is what you consider a financial asset. For instance, is stock in a privately held company going to be exempt? If not, you have a big problem with medium sized businesses. Here’s an example: Ten years back, I worked for a family owned company that had 35 employees. The company provided roughly 600k in total income to it’s owners (father and son) each year. Their accounting was creative enough I’m sure they didn’t have to claim that much on their taxes, but what that means is that they probably wouldn’t have wanted to sell that company (which was an incorporation not a partnership) for less that 5-10 years worth of what they got out of it, thus $3-6M. Now, would that put their shares in the private company in the category you define? Let’s say it did. If so, they would have had to pay a 20% tax on perhaps $2M or $400k. They probably didn’t have that much money in cash, so they would have had to do something to free up cash fast. They could try to sell the company, take out a loan, lay off workers to increase profitability, raise prices, etc. But whatever it was, it probably would have had some nasty consequences for those of us who worked for them. That’s the kind of thing that could conceivably close a lot of businesses of the mid-size variety.

    If you exempt shares in privately held companies, expect to see a lot of companies go private or private holding companies be made in order to shelter assets.

    How about other stuff like gold or real estate, etc? If you don’t count those as financial assets, people will flock to them and both avoid your tax and also create a bunch of nasty asset bubbles that will pop over the next couple years. If you do tax them, then you’ll have a value crash since people would have to sell of their assets in order to get cash to pay the tax.

    Now let’s turn to publically traded stocks and bonds, which I assume is most of what you’re thinking of here. Let’s say that Mr. Reptilian C. Masters owns $20M worth of stocks. He now owes the government $4M. So what does he have to do? Well, he has to $4M of the stocks he owns. The problem is, everyone else is also trying to sell 20% of their assets. And this puts stock prices into a downward spiral. Suddenly lots more people are selling than buying and stocks are plummetting even on companies that are doing very well. The pension funds and mutual funds start dumping their stocks too, because the stock crash is making them lose money in the nation’s retirement funds. Plus, people who invested in mutual funds with a more than $2M are trying to sell mutual fund shares, and so the mutual funds need cash. People are selling bonds and money market funds too. Everything is falling, and the fast it fall the more people want to sell.

    At this point, the Warren Buffets of the world get to step in and buy a bunch of stocks while they’re cheap, since he has so much money he can afford to buy hundreds of billions of dollars of bargain stocks even while paying the 20% excise. Foreign billionaires step in an well and invest heavily in US companies, since they’re the hardest hit.

    Companies freak out because they can’t make money through selling stock or bonds because the market is awash in both (and they’re undervalued at that) so they take the precaution of laying off workers (whose retirement accounts have already been hit hard by the asset crash) and raising prices.

    At the end of the day, a lot of the moderately wealthy are in bad shape. Lots of companies are limping. Retirement accounts have dropped far more than they did in 2008. And the billionaires and hedge funds have made out like bandits because they were the ones who had money when everyone else was selling. Goldman Sachs makes the most money of all.

    Now, I’ll go ahead and say, my basic opposition to your plan here is not practical, it’s moral. I don’t think that “the rich” have robbed us, and I don’t think it’s right to rob them in return. But I’m taking it as an assumption that that is probably an unbridgeable gap, so I’m trying to focus on the senses in which I think your proposal here would cause far more chaos than benefit. And at the root of it, I think, is the basic misconception that funds currently tied up in stocks, bonds and other investment vehicle are somehow inert and can thus be confiscated without changing their value, and the value of all other like securities. In the more long term, I think you’d also have to ask to what extent it would permanently slow/damage the US economy for people to know when investing their money in US companies that at any moment the government might step in and decide to confiscate a portion of everyone’s wealth. This would be economically much more destructive than an income tax, in that with an income tax you at least know the government is only taking new money you have coming in. I think it would probably strong incent people to, in the future, focus more on inert and easily hidden assets. And, of course, putting their assets overseas.

    I don’t think your three proven ideas you close with would be very beneficial either, but those at least seem like familiar mistakes, whereas this “wealth tax” has the fascination of being fairly novel.

  8. Nate Wildermuth permalink
    January 29, 2011 9:53 am

    Tax solutions do not take into account that the majority of the money, and therefore the power, will remain in the same hands, and that the system is built to collapse before power ever changes hands. Band-aid solutions to the system will only make the beast angry. And real solutions will kill the beast entirely (and what would we do without our laptops and gasoline?).

    Either way, you are looking at two choices: a further descent into servitude (assuming the ruling classes can agree on how to do that), or (if their failure and greed continue unabated), massive unemployment, outrageous prices, and social disorder.

  9. January 29, 2011 1:05 pm

    Scott Adams has some more practical ideas on how to tax the rich: http://online.wsj.com/article/SB10001424052748703293204576106164123424314.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsForth

  10. smf permalink
    January 31, 2011 12:24 am

    Obama isn’t going to do anything that isn’t pre-approved by Wall St, etc. because Wall St. wisely invested in his campaign. They own his administration as much as anyone does.

    Keynesian solutions are likely not to be as workable as in the distant past, because what we are likely to do is spend a great deal of money, which we will borrow from some other country, and then the stuff we buy will all come from some other country, too. In the modern global economy, with the dollar as the world reserve currency, and the US as leading economic force in the world, and with the most open markets in world history, we don’t have the ability to stimulate our own economy very easily. Quite frankly a lot of other countries can take a self-serving policy approach, knowing we will pay for their recovery, too.

    For a Keynesian solution to have even a chance at working it would have to be followed by essentially all of the leading economies and industrial powers. That isn’t going to happen, so we need a better idea than that.

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