Representative DeFazio: Taxing Wall Street Won't Work

Representative Peter DeFazio has proposed a tax of 0.25% on "stock transactions, futures, swaps, credit default swaps and options" and to prevent it from affecting the pension funds or the average investor it would "be refunded for the first $100,000 of transactions annually, as well as for tax-favored retirement accounts, education savings accounts and health savings accounts." Half of the money would go to reducing the deficit, the other half would go to fund job creating programs." I have no beef with reducing the deficit, and the idea that we are on the right side of the Laffer curve is not true. In fact, if this was purely to reduce the deficit, I would be vaguely interested in supporting this. What I take exception with is the idea that this will "create jobs."

As I mentioned in my What's the Goal of an Economy? article, many arguments use the broken windows fallacy. I don't mean what Giuliani supposedly did with New York, I mean the idea that broken windows are good for the economy, because the homeowner will hire a glazier, who will then spend that money elsewhere and it ripples through the economy, improving it. Except it doesn't, because the homeowner now has less money to spend, and where the homeowner would have spent the money loses, and so on. The glass industry's gain was the homeowner's loss, and a loss to whatever industry he would have spent it on. The homeowner may have saved or created jobs in the glass industry, but was prevented from creating jobs elsewhere. We don't see where he would have spent the money, so too often we ignore it.

That situation is present with the DeFazio bill. He is proposing taking $150 billion out of the economy to pay for "job creation." We will see the jobs that get "created" through this bill if it passes, but we won't see where the people who were taxed would have spent (or saved) the money, and the jobs that would have been saved or created in those industries. For example, if that $150 billion would have been spent in the household appliance industry (in reality it's far more dispersed, but for simplicity, let's say all would have been spent there), people will either be laid off or not hired in the household appliance industry that would have had a job there if that money was not taxed. The same is true with savings. We don't see that money get saved, and don't see what investments would have gotten to take place from it if that money was not taken through taxation.

In short, with DeFazio's bill the economic improvement amounts to zero, mathematically. But, it actually amounts to negative, because instead of that money being spent or invested based on economic calculations, it's instead being spent based on political calculations. Furthermore, taxing and then subsidizing (except Pigovian) takes money away from higher-valued uses and spends it on lower-valued uses and moves capital and labor in that direction. This bill will do exactly that. If we want higher living standards, this bill is a step backwards.