Lizzie Warren's Latest Bad Idea

Lizzie Warren’s Latest Bad Idea

Writing in Forbes, Tim Worstall dissects Elizabeth Warren’s recent call for a tax on financial transactions and discovers that it’s not only cancerous but DOA.

He first restates Warren’s announced purpose for the tax.

Among specific legislative steps Warren wants to see, she said Congress should impose a tax on every financial transaction, a policy embraced in Europe and by some fellow Democrats. She argued such a step would kill high-frequency traders who rely on “gimmicks that add no value to the economy” to turn a profit.

That’s a favorite Warren meme: banks and financial markets are rife with “gimmicks,” “tricks,” and “traps” that only Native American law professors with the intellectual heft of Warren and her fellow elitists-masquerading-as-populists can discern and then devise methods with which they can protect the common people (too fog-brained from their poverty to protect themselves). Those methods always usually involve the gentle ministrations of powerful federal bureaucracies staffed not by what Honore de Balzac once labeled as “pygmies,” but by legions of Mother Teresas and Mahatma Gandhi’s. After all, Lord Acton had it wrong: absolute power only absolutely corrupts the other guy.

Worstall begs to differ.

We’ve had one recent Nobel Laureate in Economics whose Nobel was for the study of taxation systems. That’s Sir John Mirrlees (along with Peter Diamond). And one of the points that they make is that transactions taxes, taxes like the FTT, are a really, really bad idea. It’s entirely fine to try to tax the financial sector more (I don’t know about Diamond but Mirrlees would think it OK) but the way to do that is through a consumption tax (like sales tax, or VAT) not a transactions tax. So, we’ve theory against Warren’s idea.

And then there’s that one single peer reviewed paper I’ve ever done. An early version of which is here:

There are several problems with the tax itself: it won’t reduce volatility, a desired aim, it will increase it. Banks won’t be paying the charge because corporations don’t pay taxes, only people do. The pain and grief it causes to those who will pay it will be more than the revenue raised. But more than all of these, there’s one really large problem that no one seems to have noticed yet – there just won’t be any extra money to spend.

That’s right, we’ve all these people licking their lips at being able to spend more of our money and there just won’t be any more of our money for them to spend: there will be less.

The secret to this comes from the EU Commission’s own attempt to persuade us that tens of billions can be taken out of the system without anyone noticing. They report that such a tax would raise 0.1% of GDP in revenues but would lower GDP by 1.76% while it did so. It’s a reasonable rule of thumb that 40-50% of the marginal changes in GDP consist of tax revenues. So, if we reduce GDP by 1.76%, we reduce tax revenues by 0.7-0.9% of GDP. In return we get tax revenues of 0.1% of GDP.

These are, recall, the EU’s own numbers, not those made up by some neo-liberal (I prefer realist) like me.

This is rather a serious problem for the argument in favour of a new tax. Not only won’t it raise any revenue, nor solve any of the perceived problems that it’s aimed at, but it will actually blow a hole in current tax revenues – leaving us with decidedly less money, not more, to do good things for poor people.

I’m all for the idea that we shaft the people who shaft us through the financial and tax system. But what Elizabeth Warren is proposing is this financial transactions tax. Something that will cost us, the people, more money and also, at the same time, reduce the amount of tax revenues that the government can collect to spend upon us, the people.

Worstall ends with purported wonder as to why, if the tax not only doesn’t do what its proponent wants it to do but makes matters worse, Warren would propose it. I know why: because it feeds her public image as an advocate of the common man and it appeals to the envy of that common man who feels (with much justification) that the system is rigged, and that “The Banks” are the dragons who must be slain if the common man is going to get his “fair share” of the economic pie. Tax the “rich.” Redistribute the taxes (or what’s left of them after feeding the maw of the bureaucracy) to the “common man.” Huey (“Every Man a King”) Long had quite a run with the theme of wealth redistribution in the 1930s until he was gunned down the day after he announced his run for the White House.

Today, we have The Massachusetts Mohican picking up the same war club and swinging it. No one wishes her the same personal fate as Long, but let’s hope that her crackpot ideas continue to shatter on the hard rock of the facts.

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