Tom Sgouros: Transactions Tax Would Benefit All

Wednesday, November 30, 2011

Tom Sgouros, GoLocalProv MINDSETTER™

 

For the most part, our nation's focus on its deficit has been a tragic waste of time. A waste because most of our economic ills have to do with the weakness of people's demand for goods. In a direct sense, those ills have little or nothing to with the nation's debt. And it's tragic because unemployment is not just a number; it represents an enormous collection of torpedoed dreams, thwarted ambition, and, well, misery.

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There is not much in the way of bright side to this waste of time, but if there is one, it's that it offers a small opening to discuss taxes again. Our state, like our nation, has suffered from taxes cut to please rich people. Bringing state and federal tax rates back to the bad old days of say, 1999, would go a long way to restoring fiscal sanity.

Unfortunately, taxes have been down so long that there is an enormous backlog of deferred maintenance, a long list of valuable investments we haven't made, and, of course, that overhang of debt. In other words, restoring the rates to 1999 probably won't be enough, either at the state or federal level.

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One of the most promising possibilities out there is the talk I've seen about a financial transactions tax. This would take a tiny bite (.03%) out of every purchase of stock, bond futures, credit default swaps, and all the rest. The volume of transactions is so large that a properly configured tax like this could raise somewhere more than $350 billion over a decade. Even better, it would have the effect of throwing some sand in the roulette wheel of the financial industry.

Big banks in New York are now the prime customers for the world's fastest computers because they've discovered money to be made by making high volumes of trades milliseconds quicker than everyone else. This is insanity with no conceivable economic justification behind it. After all, the trades they're making are trades you can't make: one more way in which that roulette wheel is tilted in favor of the big boys. This tax is too small to matter for a lot of things, but it's enough to put the brakes on a lot of this kind of high-frequency thrashing.

Taxing to raise no money

At the state level, there's a similar proposal that's been around for a few years, and it's high time to talk about it again even though it would raise pretty much no money at all.

This is a progressive tax on real estate gains. Vermont has a tax like this, and it scales both with the size of the gains and the time you own the house. If you own the house more than six years, there's no tax at all. But if you own it a short time you pay a fairly substantial tax on the profits, and the less time you own it, the higher the tax. People who own a house for five years only owe 5% of the gains, 4 years, 10%, and so on.  People who only hold the house for a few months and sell for big profits pay rates of 80% or more on the profits they make on their house.

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What profits, you say? The profits people will earn in a few years when the real estate market bounces back. The market is terrible now, but a big part of the reason it's terrible is because of the speculative bubble that drove prices up between 2000 and 2006.

Demand for anything with a roof was so huge that purchase prices far outstripped the rents landlords could get. With no possibility of renting for income even at increased rents, rental properties disappeared from the market, and housing prices soared, both for rentals and for purchase. The result: it became normal to pay well more than a third of your income for housing. The other results: a big wave of homeless people, and a further stratification of our society into the layer who can afford to live in nice neighborhoods (and rich towns) and the layer who can't.

The other important result was the crash. Now, thousands of people are trapped in their houses, bleeding equity, maybe underwater. Some people made a lot of money in real estate, but how widespread was that, really? For the most part, the real estate crash has been an economic disaster for our state -- as was the crash after the 1986-1989 bubble.

The tax in Vermont has been around since the 1970s so there's a record to learn from. One thing you learn about the tax is that it brings in very little money, just a few million dollars on a real estate market about the size of ours. The other thing you learn is that Vermont's real estate market is about the size of ours, despite being a bigger place. And then you learn about the foreclosure crisis in Vermont. What, you haven't heard about that? Of course not, they don't have one, and a big part is that this tax provides some sand in the roulette wheel of their real estate market, slowing things down and making sure that the market is filled with people who need a warm and dry place to sleep, instead of people just looking for a quick buck.

A tax like this will not prevent people from making money on houses, but it will slow things down, and maybe prevent the next bubble. Remember the bubble may seem lots of fun, but the aftermath is not. Over the last 25 years, I've lived through two bubbles here -- and their aftermath -- and can't say I had much fun either time. What do you say we try to prevent another?

Tom Sgouros is the editor of the Rhode Island Policy Reporter, at whatcheer.net and the author of "Ten Things You Don't Know About Rhode Island." Contact him at [email protected].
 

 

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