Who
Will Pay, Wall Street Or Main Street - The Tobin Tax Or
The VAT? Business Cycle or Class War?
07 July 2010
By Ellen Brown
Wall Street banks have been saved from bankruptcy
by governments that are now going bankrupt themselves;
but the banks are not returning the favor. Instead,
they are engaged in a class war, insisting that the
squeezed middle class be even further squeezed to
balance over-stressed government budgets. All the
perks are going to Wall Street, while Main Street
slips into debt slavery. Wall Street needs to be made
to pay its fair share, but how?
The financial reform bill agreed to on June 25 may
have carved out some protections for consumers, but
for Goldman Sachs and the derivatives lobby, the bill
was a clear win, leaving the Wall Street gambling
business intact. In a June 25 Newsweek article titled
“Financial Reform Makes Biggest Banks Stronger,”
Michael Hirsh wrote that the bill “effectively anoints
the existing banking elite. The bill makes it likely
that they will be the future giants of banking as
well.”
The federal government and Federal Reserve have
advanced literally trillions of dollars to save the
big Wall Street players, to the point where the
government’s own credit rating is in jeopardy; but
Wall Street has not had to pay for the cleanup.
Instead, the states and the citizens have been left to
pick up the tab. On June 17, Time featured an article
by David von Drehle titled “Inside the Dire Financial
State of the States,” reporting that most states are
now facing persistent budget shortfalls of a sort not
seen since the 1930s. Unlike the Wall Street banks,
which can borrow at the phenomenally low fed funds
rate of .2% and plow that money back into speculation,
states don’t have ready access to credit lines. They
have to borrow through bond issues, and many states
are so close to bankruptcy that their municipal bond
ratings are collapsing. Worse, states are not legally
allowed to default. Unlike the federal government,
which can go into debt indefinitely, states must
balance their budgets; and they cannot issue their own
currencies. That puts them in the same position as
Greece and other debt-strapped European Union
countries, which are forbidden under EU rules either
to issue their own currencies or to borrow from their
own central banks.
States, of course, don’t even have their own
state-owned banks, with one exception -- North Dakota.
North Dakota is also the only state now sporting a
budget surplus, and it has the lowest unemployment and
mortgage delinquency rates in the country. As von
Drehle observes, “It’s a swell time to be North
Dakota.”
But most states are dealing with serious, chronic
defaults, putting them in the same debt trap as
Greece: they are being forced to lay off workers, sell
public assets, and look for ways to squeeze more taxes
out of an already over-taxed populace. And their
situation is slated to get worse, since the federal
government’s stimulus package will soon be cut, along
with assistance to the states.
The federal government is not only leaving the states
high and dry but is threatening to impose even more
taxes on their beleaguered citizens. Paul Volcker,
former Federal Reserve Chairman and current White
House economic adviser, said in April that Congress
needs to consider a Value Added Tax (VAT) – a tax on
various stages of production of consumer goods. A VAT
of 17.5% is now imposed in Britain, and 20% is being
proposed; while some EU countries already have a VAT
as high as 25%. In Europe, at least the citizens get
something for their money, including federally-funded
health care; but that is not likely to happen in the
U.S., where even a “public option” in health care is
no longer on the agenda. The VAT hits the lower and
middle classes particularly hard, since they spend
most of their incomes on consumables. The rich, on the
other hand, put much of their money into speculative
trades, and those sales are not currently taxed.
Business Cycle or Class War?
Ismael Hossein-Zadehi, who teaches economics at
Drake University in Iowa, calls the whole economic
crisis a class war. What is being billed as public
debt began as the private debt of financial
speculators who offloaded it onto the public. The
governments that bailed out these insolvent
speculators then became insolvent themselves; but the
bailed-out banks, rather than lending a helping hand
in return, have demanded their pound of flesh, with
payment in full. The perpetrators are blaming the
victims and insisting on “fiscal responsibility.” Wall
Street bankers are dictating the terms of repayment
for debts they themselves incurred.
“Fiscal responsibility” means cutting spending,
something that is inherently deflationary during a
recession, as seen in the disastrous Depression-era
policies of President Herbert Hoover. Not that it was
solely a Republican error. In 1937, President Franklin
Roosevelt also cut public spending, tipping the
economy back into recession. Spending cuts cause tax
revenues to shrink, which results in more spending
cuts. Contrary to what we have been told, national
governments are not like households. They do not have
to balance their budgets and “live within their
means,” because they have the means to increase the
money supply. They not only have the means, but they
must engage in public spending when the private
economy is shrinking, in order to keep the wheels of
the economy turning. Virtually all money now
originates as bank-created credit or debt; and today
the money supply has been shrinking at a rate not seen
since the 1930s, because the banking crisis has made
credit harder and harder to get.
Instead of “reflating” the collapsed economy, however,
national governments are insisting on “fiscal
responsibility;” and the responsibility is all being
put on the states and the laboring and producing
classes. The financial speculators who caused the
debacle are largely getting off scot free. They not
only pay no tax on the purchase and sale of their
“financial products,” but they pay very little in the
way of income taxes. Goldman Sachs paid an effective
income tax rate of only 1% in 2008. Prof.
Hossein-Zadehi writes:
“It is increasingly becoming clear that the working
majority around the world face a common enemy: an
unproductive financial oligarchy that, like parasites,
sucks the economic blood out of the working people,
simply by trading and/or betting on claims of
ownership. . . . The real question is when the working
people and other victims of the unjust debt burden
will grasp the gravity of this challenge, and rise to
the critical task of breaking free from the shackles
of debt and depression.”
Working people don’t rise to the task because they
have been propagandized into believing that “fiscal
austerity” is something that needs to be done in order
to save their children from an even worse fate. What
actually needs to happen in a deflationary collapse is
to spend more money into the system, not pull it back
out by paying off the federal debt; but the money
needs to go into the real economy – into factories,
farms, businesses, housing, transportation,
sustainable energy systems, health care, education.
Instead, the stimulus money has been hijacked,
diverted into cleaning up the toxic balance sheets of
the financial gamblers who propelled the economy into
its perilous dive.
Evening Up the Score
While Congress caters to the banks, the states have
been left to fend for themselves. Where is the money
to come from to pull off the impossible feat of
balancing their budgets? Bleeding a VAT tax out of an
already-anemic working class is more likely to kill
the patient than to alleviate the disease. “Unlike EU
countries, where the VAT is the largest single source
of tax revenue,” notes Professor Randall G. Holcombe
in a recent study, “the states of the United States
already tax the VAT tax base with their sales taxes.”
This doubling down on the same base would not only
reduce the amount of money states are able to raise,
but it would seriously hinder VAT’s role as a money
generator. By 2030, says Prof. Holcombe, this effect
would have offset any increase in government revenue
from the VAT.
A more viable and more equitable solution would be to
tap into the only major market left on the planet that
is not now subject to a sales tax – the “financial
products” that are the stock in trade of the robust
financial sector itself. A financial transaction tax
on speculative trading is sometimes called a “Tobin
tax,” after the man who first proposed it, Nobel
laureate economist James Tobin. The revenue potential
of a Tobin tax is huge. The Bank for International
Settlements reported in 2008 that total annual
derivatives trades were $1.14 quadrillion (a
quadrillion is a thousand trillion). That figure was
probably low, since over-the-counter trades are
unreported and their magnitude is unknown. A mere 1%
tax on $1 quadrillion in trades would generate $10
trillion annually in public funds. That is only for
derivatives. There are also stocks, bonds and other
financial trades to throw in the mix; and more than
half of this trading occurs in the United States.
A Tobin tax would not generate these huge sums year
after year, because it would largely kill the
computerized high-frequency program trades that now
compose 70% of stock market purchases. But that is a
worthy end in itself. The sudden, thousand-point drop
in the Dow Industrial Average on May 6 showed the
world how vulnerable the stock market is to
manipulation by these sophisticated market gamblers.
The whole high-frequency trading business needs to be
stopped, in order to protect legitimate investors
using the stock market for the purposes for which it
was designed: to raise capital for businesses. As Mark
Cuban observed in a May 9 article titled “What
Business Is Wall Street In?”:
“Creating capital for business has to be less than
1pct of the volume on Wall Street in any given period.
. . . My 2 cents is that it is important for this
country to push Wall Street back to the business of
creating capital for business. Whether it’s through a
use of taxes on trades, or changing the capital gains
tax structure so that there is no capital gains tax on
any shares of stock (private or public company) held
for 5 years or more, and no tax on dividends paid to
shareholders who have held stock in the company for
more than 5 years. However we need to do it, we need
to get the smart money on Wall Street back to thinking
about ways to use their capital to help start and grow
companies. That is what will create jobs. That is
where we will find the next big thing that will
accelerate the world economy. It won’t come from
traders trying to hack the financial system for a few
pennies per trade.”
Besides protecting legitimate savers and investors by
exempting stock held five years or more, they could be
exempted from a Tobin tax on total stock purchases of
under $1 million per year. That would make the tax
literally a millionaire’s tax -- and a small one at
that, at only 1% per trade.
At the G20 summit in Toronto last weekend, a financial
transaction tax was discussed and supported by France
and Germany but was opposed by the U.S. and Canada,
although nothing binding was resolved. However, the
states do not have to wait for the federal government
or the G20 to act. They could levy a Tobin tax
themselves. Objection might be made that the Wall
Street speculators would take their revenues and go
elsewhere, but big banks and brokerages have branches
in every major city in every state. They are hardly
likely to pack up their tents and leave lucrative
centers of business. Nor can it be argued that we
should cater to the pirates who are looting our stock
markets because they are paying us a nice bribe,
because they aren’t even paying a bribe. Financial
trades do not currently generate tax revenues.
Two Green Party candidates for governor, Laura Wells
in California and Rich Whitney in Illinois, have
included a state-imposed Tobin tax in their platforms.
Both are also campaigning for state-owned banks in
their states, on the model of the Bank of North
Dakota. People around the world look to the United
States for boldness and innovation, and California and
Illinois are two of the hardest hit states in the
nation. If those states manage to turn their economies
around, they could establish a model for economic
sovereignty globally.
Ellen Brown developed her research skills as an
attorney practicing civil litigation in Los Angeles.
In
Web of Debt,
her latest of eleven books, she turns those skills to
an analysis of the Federal Reserve and “the money
trust.” She shows how this private cartel has usurped
the power to create money from the people themselves,
and how we the people can get it back. Her websites
are
www.webofdebt.com,
www.ellenbrown.com,
and
www.public-banking.com
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