Friday, March 20, 2009

My tax fantasies

It seems that the consensus is that the punitive tax passed today is not the right response to AIG. I don't know the details of the bill and I don't have strong feelings about it. It isn't what I have been dreaming about, when my dreams turn to taxes.

For a host of complicated reasons, reasons that I have instincts about but haven't thought very carefully about yet, it seems that our economy has gotten off kilter. And I don't mean the financial crises--though that is a consequence of the imbalance. But even prior, way too much of our productive energies were going into finance. The idea that the financial sector hired more physicists than other sectors is crazy. Finance is important, but only because it facilitates the really important business of providing the goods and services that allow us to live our modern lives. Too much energy in finance acts as a drain on the really productive energies of our life (not to mention becoming a political economy nightmare).

So one way to help nudge us back to a better distribution of talents is using the tax code. I have been thoroughly convinced that Dean Baker's idea of a 0.1% transaction tax on trades makes lots of sense, and would slow the worst types of trades (i.e. speculation). But on top of that tax, lets have a much smaller than the 90% bonus tax but still significant surtax on gross income exceeding some threshold ($100,000? $250,000? Who knows?) when that income is earned in the finance sector. Let's be agnostic about the reason for that pay (bonus versus salary--congress has a bad trackrecord when it comes to legislating the proper form of compensation), but something on the order of an additional 5% or 10% on earnings above the threshold. Perhaps adding several high brackets with progressive increases.

I want it to be less attractive to be a supernova in finance than it is to be one in another, more productive field. And let's be explicit that the surtax is in place until Treasury is repaid for all of the costs of the bailout. (Let the transaction tax on trades go towards covering the stimulus.) I think that if such a tax were enacted simultaneously with additional bailouts (assuming those bailouts are needed to avoid more catastrophes) I think that the politics will go down much more smoothly. Not to mention that it would be fair and maybe even good policy....

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