Fear of heights has consumed Washington; more specifically the fear of the dreaded fiscal cliff. The stakes are big if President Obama and House Speaker Boehner hold hands and drive over the cliff, like the Washington version of the final scene of Thelma and Louise. The defense sector faces more than $50b in cuts and a million jobs lost. Already unemployed people will lose benefits. Employed people will pay higher payroll taxes. Doctors who see elderly patients will get lower payments. The agriculture sector is concerned about how higher estate taxes will hit farm land prices.
Wall Street expresses a lot of concern about the fiscal cliff. But the financial sector doesn’t have a direct stake in the political drama. Financial taxes won’t go up, investors will continue buying and selling, traders will still make money. Even while much of America is still struggling economically, the titans of finance are back in the black with profits, big bonuses, and parties.
Which raises a question: how is the financial sector contributing to digging the country out of the budget hole? The hole created by the economic crisis? The economic crisis that was created by the financial sector’s mismanagement, irresponsible risk-taking, and gross misbehavior?
Really, not much.
I have argued that a Robin Hood tax is justified on that basis—in addition to other reasons. But it was shouting into the wind. President Obama hasn’t supported it and there seemed no chance that Congress would embrace the idea. But maybe a window of opportunity is opening…
A likely outcome of the negotiations around the fiscal cliff is a punt. Congress and President Obama can put off the most severe cuts and tax increases in the hope that a broader and more comprehensive deal can be forged later. So, a second act is in discussion that would involve a significant tax reform. Tax reform, as the term is used in Washington, generally means trying to do four interrelated things: simplify the rules, broaden the base, lower the rates, increase (or reduce) revenue. Simplifying the rules is self-explanatory, except that the complexity is usually there for a reason—and behind every tax deduction is a lobbyist (or 10) working hard to keep it. “Broadening the base” means increasing the tax base, or the number of people and activities that are taxed. That will tend to increase tax revenues. Lowering rates is what politicians love to do: give away goodies to voters! Raising or lowering revenue can be done most simply by raising or lowering rates. But there are other strategies, like creating new deductions and exemptions.
A big tax measure comes around every 10 or 15 years. So we’re due.
Big tax bills are monsters: huge, complicated and sometimes politically dangerous. Once they start moving, they become vehicles for all sorts of ideas and initiatives. They are heavily lobbied by every possible special interest and group. So the question is whether a tax reform might offer an opportunity to push a Robin Hood tax, that asks for a bigger contribution from the financial sector and uses the revenues to pay for critical social needs. That would be broadening the base. And raising revenues.
Something to consider.