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Ah! I See Liberals Still Don’t Understand Cause and Effect in Economics!

July 8, 2010

Pennsylvania Democrat and House Representative Chaka Fattah has introduced the “Debt Free America Act“.  In it, he proposes a 1 percent “transaction tax” taken on “every financial transaction — whether paid by cash, credit card or any
form of financial transfer, the only exception being transactions
involving the purchase or sale of stock.”  He figures that a lot of money moves around and if you only take one percent of it, you can pay off the debt! 

This would be reasonable except for a few small issues.  The first issue is the fact that this would not collect as much as he thinks because people would naturally make fewer financial transactions if this were enacted.  After all, many people don’t like making a lot of transactions at ATM machines because they get charged.  The number of people foregoing ATM’s would likely swell if, in addition to the two dollar atm fee, you got hit with an additional transaction tax.  The same goes for pretty much any transaction that gets taxed in this manner.

The second issue is that once transactions get taxed, buying and selling slows down.  This means that our economy in general takes a hit at a time when it is already teetering.  I don’t know if it would be enough to push us into another depression, but then neither does Rep. Fattah – or really anyone else for that matter.  Why would we be foolish enough to take that kind of a chance?

The third issue is that this tax would, in effect, be a direct assault on our banking system, which again, is not exactly in tip top shape.  The reason this hits our banks is because, since putting money into and taking money out of our banks are both transactions, it no longer makes any sense to put our money into banks.  After all, most savings accounts are paying out less than 2% per year, so if you expect to pull any money out in less than a year, it makes no sense to put it in the bank in the first place.  And if you plan on NOT touching it for more than a year, it makes more sense to invest it where it might actually outgrow inflation and income taxes imposed on it than to put it in the bank where it is guaranteed NOT to.

So instead of paying off our debt, this bill promises to fall short, kill our economy and destroy our banking system.  I doubt this is what Rep. Fattah wants, but it is hard not to see that this is exactly what will happen as a result.  The only way to miss it is to assume that this tax, which the quoted article suggests based on 2008 numbers would be somewhere in the $4 trillion per year area, would have no effect at all other than bringing in revenue.

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