Tax the rich!

• Author: Baker, Dean

The quest to increase taxes on the wealthy is not a gratuitous attack on upper income households; it is driven by the need to raise more revenue to run the government. While many deficit hawks have been irresponsible in raising fears of an impending collapse of the American government, the projected deficits for years following the recovery are in fact larger than is desirable.

There are areas of American spending at the federal government level that could be reasonably cut, but even after we have zeroed out the "waste, fraud, and abuse" category of federal spending we will still likely need additional revenue of between 1-2% of GDP to keep budget deficits in an acceptable range. That leaves a choice between increasing taxes on the wealthy or imposing more taxes on the middle class.

The vast majority of the income gains in the United States over the last three decades have gone to the richest 5% of the population, largely as a result of policies that were explicitly designed to redistribute income upwards. Therefore it is far more appropriate to tax the richest 5% of families who have prospered than the broad middle class who have suffered.

Of course, taxes can be designed in a better or worse manner. The best way to increase taxes on the wealthy, in addition to allowing the Bush tax cuts to expire, would be to apply a modest financial transactions tax (FTT).

There is a long history in both the United States and the rest of the world with FTT. Until 1964, the United States imposed a tax of 0.12% on new stock issues and 0.04% on stock trades. Britain still has a tax of 0.25% on each stock sale or purchase, raising five billion pounds a year. This would be equivalent to roughly $30 billion a year in the American economy.

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Robert Pollin and I calculated that a scaled set of FTT on stock, futures, options and other financial instruments could raise approximately $150 billion a year. This would go far towards bringing the long-term budget deficit down to a manageable level.

An FTT would be hugely progressive. While many middle income families own stock, their holdings are dwarfed by the holdings of the wealthy. Furthermore, few middle income families are active traders. Their intention is to hold their stock to support their retirement or their kids' education, not to shuffle it around on a daily or hourly basis. Some mutual funds do engage in frequent trading. An FTT would encourage investors to move their money to funds...