Here's One Way to Real Tax Freedom for Most

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Dean Baker
Houston Chronicle, May 3, 2000

Like spring break for college fraternities, Tax Freedom Day is an annual rite. It deserves to be treated with the same degree of seriousness. A conservative think tank calculated the percentage of national income that goes to taxes of all types (state, federal and local) and then figured out the date (currently May 3) when the same percentage of the year has passed. In other words, they say, you are "working for the government" until today. It's cute, but not terribly meaningful. The vast majority of government spending goes to programs like Social Security, Medicare and public education, which most of us support. Maybe in a better world we could find someone else to pick up the tab, but most adults recognize that it's necessary to pay for the programs from which we benefit.

Of course, the Tax Freedom folks also do some sleight of hand with the calendar. The date they've chosen is well past the date when the typical family would have paid their full year's tax burden by this measure. Because the nation has a progressive tax structure, where those who have the most income pay a larger portion of their income in taxes, the typical family actually faces a somewhat lower tax rate than what the Tax Freedom folks would have us believe.

A typical family in the middle of the income distribution pays approximately 28 percent of its income in taxes. This would place its "Tax Freedom" day back about April 12.

The difference between the typical family's Tax Freedom Day and the one calculated by the Tax Freedom folks raises an interesting question: Is it possible to shift more of the tax burden to the high-end families, the big winners in the new economy, so that middle-class families pay less?

The answer to this question is yes, and the tax change would actually be good for the economy. A small tax on financial transactions, such as the buying or selling of shares of stock, could raise a large amount of revenue, which could be used to reduce income taxes for low- and middle-income workers. A tax of only one-quarter of 1 percent on each purchase or sale of a share of stock could raise more than $ 100 billion a year in revenue. This would be enough to reduce the income tax for a typical family by close to 40 percent.

This sort of tax would be borne overwhelmingly by the richest families. While many of us will buy and hold shares of stock at points in our life, very few middle-income families actively speculate in the stock market. Most middle-income families buy stock to hold until they need it to pay for their kids' college or their own retirement. In such cases the one-fourth percent fee paid when a share is bought or sold would be an annoyance (this comes to $ 25 on a $ 10,000 sale of stock), but it would almost certainly be tiny compared to the reduction in their income taxes that this plan would allow.

On the other hand, if someone buys stock at 1 p.m. with the intention of selling it at 2 p.m., a one-fourth percent tax might be more of a concern. Such short-term speculators hope to profit from small changes in price. Even a small tax could take much of the profit out of this sort of trading.

Most of us should welcome less short-term trading. The huge see-saw ride of the Nasdaq in recent months has caused enormous anxiety for many investors. If a tax could reduce some of the short-term trading that led to these price swings, it could increase the stability of the financial markets for everyone.

While most of the people who engage in short-term trading are wealthy, there are some who are not. The massive growth of on-line brokerages in recent years has created a large contingent of day traders who are constantly buying and selling stock. These people, most of whom are not rich, would also notice a tax on speculation.

But, there is no reason to feel sorry for the day traders. Day trading is a form of gambling. Other types of gambling, such as state lotteries, horse racing or casino gambling, are already heavily taxed. A small tax on stock speculation would just make the playing field a bit more even.

A middle-class tax cut financed by a tax on stock trades could move Tax Freedom Day earlier by more than a week for a typical family. If Tax Freedom Day prompts the public to consider such reforms, then it will not have been a waste of time.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The End of Loser Liberalism: Making Markets Progressive. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues.