AP Report: Just $31B from Buffett rule tax on rich

I agree with the bolded. Reducing loopholes, restoring capital gain levels, & reducing certain tax deductions would make the Buffet rule irrelevant.

Some of that would also be eliminating the Bush tax cuts. I do think we should keep the marriage penalty relief and the 10% tax bracket that was part of the Bush tax cuts.

What is a Tobin tax on financial transactions?

 

I'm in accounting, not finance, so my knowledge on the subject is limited, but by my general understanding is that it's a small tax levied on currency exchange transactions, to discourage short-term currency speculation. To my knowledge, where it's been implemented it's been successful in reducing dealings in currency markets, though I don't know if it really affects the volatility of currency prices.

The added revenue is a bonus, but I'm not sure how much it would actually bring in.

 

How we stop invading middle eastern countries? That may cut costs a bit...

 

It would be a nice amount of money.

 

obviously taxing is no way to get out of debt. At some point you just have to cut spending.

unfortunately, "taxing the rich" is just too catchy of a phrase for the mob to resist.

 

I think you need both to cut the deficit. We can't perpetually cut taxes.

 

tax both at 15%. works for me.

 

I would say so. It's a way of separating out "hot" portfolio money from legitimate FDI money from companies seeking to do business in the affected countries. You make the tax small enough so that it's not a disincentive for people who are there to make long-term investments, but large enough so that people investing on the drop of a hat (most FX traders) can't go in and out with impunity in a moment just based on major news items.

Latin America has faced this problem of "hot money" this year.

http://latinamerica.economist.com/news/latin-america-economy-combating-hot-money/185

If memory serves, Peru (though it could be another Latin American country---somewhere in the region at least) has implemented a small taxation system on capital inflows and outflows similar to a Tobin tax in order to alleviate this problem, and it has worked somewhat.

I think it's been pretty proven that Tobin taxes can help mitigate some currency/financial volatility. Whether or not that comes at the cost of discouraging capital inflows is a valid point; however, I do personally think the benefit outweighs the cost.

The revenue on that sucker could be huge. We're talking about a financial market that runs about $1 trillion in business...every day.

 

That's what I was thinking. Let's not do anything unless we can wipe out the deficit in one shot?

 

Neither will most spending cuts if you take them into isolation.

but yeah, don't let that stop you from quasi-starving 100,000+ or so low-income elderly for drop in the bucket savings.

 

Northside, you seem pretty knowledgeable when it comes to New Keynesian economics. I tend to subscribe more to a combination of heterodox models simply because none of mainstream schools seem to do a very good job of describing operational realities of a fiat free-floating exchange rate system. Why is there a need to reduce the deficit at all...especially at this juncture?

I think you and I can both agree that inflation is the main enemy here. The vast majority of bondholders are the Federal Reserve itself, government agencies, and mutual/pension/hedge funds who utilize Treasuries as an instrument to preserve wealth. Technically, the Fed can pay them all back overnight with "printed" money and the net financial assets in the private sector wouldn't change a penny (although I admit there would be a HUGE psychological impact on the populace).

I suppose I can only speak for myself, but if I had a $1000 bond, and the Fed took it away and gave me $1000 cash, I wouldn't consider myself $1000 richer. I wouldn't use the money to go buy myself a new TV. The whole reason I bought the bond in the first place was to preserve my wealth. More than likely, I'd go out and save it in some other format (money market fund, savings account, stocks, some other bonds). Unless that $1000 is out in the economy chasing goods and services, no inflation would ensue.

I've always viewed Treasuries not as a loan to the U.S. government (who's not operationally bound by a need to fund its spending), but more as a savings account with the Federal Reserve.

 

Politics aside,

What is your opinion on the wealth gap being similar to that during the great depression, as described in post #17 of this thread. Do you:

A.) Not trust that information to be accurate
B.) Don't believe those two variables to be related
C.) Agree it is a concern

If C, how would you deal with it?

 

if income and expenses needn't be correlated, why not just eliminate taxes all together, since the government can always fund its operations (spending) by printing more money?

 

The deficit, in of itself is just a prop being used to advance certain causes. The debt is manageable for now and the foreseeable future in the context of America being the controller of the reserve currency and Treasuries being the "go-to" risk-free instrument, propped up by a hell of a lot of forces (The Fed, China, Japan come to mind).

However, in the context of the American situation (where "solving" the deficit goes en vogue every decade or so), it is nice to push progressive causes, rather than regressive ones if everyone's stuck in the show anyways.

I'm actually not a believer in New Keynesian economics...I'm actually a bit more on the left with Post Keynesian economics. Not as academically approved, but if you are indeed a follower of hetroorthodox schools, I'm sure you can appreciate the differences.

I regard inflation as a threat, but not the biggest threat. For me, there are bigger problems; unregulated financial transactions, confidence-destroying deflation etc.. A small, controlled amount of inflation is a healthy component of any modern economy. However, I do believe that the Fed should begin to keep its' eye on inflation, and I applaud its' decision not to rush QE3.

With that said, I feel like your view is well-informed, but it is not one held by the majority of people. To be perfectly frank, a lot of Keynesian models and assumptions work on assuming most people are simply ignorant about economics by and large, an assumption that is (in my mind) somewhat on the mark.

The money multiplier, and the monetary policy framework would not work if individuals, firms, and banks, on the whole, thought as you did. I have a hard time believing banks swallow the pill anyways, especially in a recession, but my understanding is that political pressure can be brought to bare to help accelerate the process (quid pro quo---we give you, say, Bear Stearns with toxic assets guaranteed, or ensure AIG does not fail and mitigate counter-party risk on your credit-default swaps, and you go out and lend to restore confidence in the system). Whether or not that works effectively (especially as a lot of banks were holding reserves for a pretty long time) is a good question though.

 

Your bond would not preserve wealth if it pays less than the inflation rate on things you will want.

Printing money traditionally creates inflation, lately though it seems that all the excess money supply is being negated by the loss of wealth in the housing market and offshore storing from foreign bond holders.
(layman's theory... no expertise)

In Basso's extrapolation to absurdity, of course hyper-inflation would be the result. But you could continue to push your debt into the future until the end of the Sun when it won't matter.

?? Taxes reduce inflation??

 

Even new Keynesians agree that monetary policy is only a short-term measure at best. It relies largely on pushing the real wage down through inflation, and "money ignorance", and is best used to adjust the economy through otherwise deathly slow shock adjustments, and to coordinate market beliefs so as to create the optimal conditions for matching potential GDP as close as possible.

Using it as a main source of financing causes so many problems I can't even begin to describe them, but I'll posit one quick and stark rule; doing so will absolutely destroy any credibility monetary authorities have as independent agencies isolated from fiscal policy, and is probably one of the surest ways to ensure that the currency is devalued, and that there is hyperinflation.

 

This is going to be a long post, so apologies in advance.

basso, you ask an interesting question. If you look into the operational realities of how the government funds its spending, this is what actually happens:

1. Congress passes a budget. Due to our habitual deficit spending, there's usually an "income shortfall"

2. By law, the Treasury department's bank account with the Fed is not allowed to go into overdraft nor are they allowed to ask the Fed directly for a loan.

3. The Treasury department coordinates with the Fed and figures out the dollar value of bonds they need to auction. This number is usually the "income shortfall" of the Treasury Department plus whatever reserve drain the Fed wishes to accomplish.

4. The Fed coordinates with the primarily dealers (about 20 or so of the biggest banks in the world), and determines the level reserves in the banking system. 99% of the time there are enough reserves in the system cover the auction.

5. In the 1% cases there aren't enough reserves, the Fed works out repurchase agreements with the banks and temporarily buys back existing bonds owned by the banks with money created out of thin air. This action ensures there are enough reserves to buy all the bonds the Treasury department intends to auction.

6. The Treasury department holds the auction and the primary dealers are required to participate and make an offer on all the bonds. Most of the time the international community participates in the auction as well, so the primary dealers don't have to buy as many. However, even if China and Japan one day decided to stop "lending" us money, all those bonds still get bought by the banks via their reserves.

7. The end result: The Treasury department has the money it needs to "fund" its spending, and the Fed has drained the banking system of excess reserves in order to hit its target interest rate.

This information is all publicly available for anyone to see at the Fed website. You can read how and why the Fed open market operations here, and about how primarily dealers are required to participate in bond auctions here.

Once you realize that the government basically just funds itself through this bizarre revolving door of money creation, we finally get to your question. What's in the world is the point of taxes in the first place in a fiat currency system? I guess this is where we move beyond operational reality and into the world of interpretive economics.

In my opinion (and I can't stress enough, at this point forward it becomes an opinion piece), taxes serve three purposes:

1. Taxes help bolster demand for currency. Chartalist economists would argue that taxes are the only reason people demand currency. I don't think that's true. The fact that productive economic output can be bought by currency is the primary reason why we want it, but taxes help to bolster that demand. If I don't use this magical worthless paper to extinguish my tax liability to the government, I'm going to jail. It certainly makes me want to keep some of it around.

2. Taxes give the government more flexibility in controlling the money supply to counter recessions. The problem with monetary policy is that the only thing it truly controls is the level of reserves in the banking system. Fiscal policy more directly places (or takes away) money in the hands of the private sector.

3. Taxes put Congress in check. One of the inadvertently greatest things that happened after making the switch to pure fiat in 1971, is that everyone in power still thinks we have a gold-standard constraint. Despite their incorrect thinking that we need to "fund" our spending, they still spend ridiculous amounts of money on projects that neither improve our quality of life nor increase the country's economic output. Can you imagine the chaos if Congress suddenly realized there was no insolvency risk?

I guess my point is...although the government isn't operationally bound by a need to fund its spending, it still needs to closely needs to monitor where the money goes. Funding projects that produce nothing will result in an increase in money supply without a corresponding increase in quality of life or economic output, resulting in inflation.

Even in a fiat currency system, there's no such thing as a free lunch. However, with 8% of our workforce sitting around idly at home collecting unemployment checks, now is not the time to be talking about deficit reduction. The government should be spending money to get those idle resources producing. How? That's up for debate...

 

Funny that you mentioned the money multiplier. It's one of the things I can't seem to make up my mind about.

It's obvious that the money multiplier doesn't quite work during a recession like the one we're in right now. The level of reserves in the banking system doesn't spur lending when there's no consumer demand for loans. Moreover, a few bank managers I've spoken to have indicated that although banks try their utmost to lend excess reserves, they still adhere strictly to underwriting standards.

In times of economic boom, traditional wisdom dictates that banks lend freely and the money multiplier comes back into effect. However, with the advent of Basel I and II, banks are much more likely to hit capital constraints before they even come close to dipping below the reserve requirement. Moreover, with federal funds market and discount window, they can easily circumvent the reserve requirements if they wanted. I suppose that's the main reason Canada and several other countries completely kiboshed the reserve requirement years ago.

I swear...the more I learn about macro-economics, the more I realize I really don't know a damn thing.

 

This is my feeling exactly and it worries me that possibly no one knows exactly how economics work.

Thanks for your informative posts.