Over the weekend, Treasury Secretary Janet Yellen threw out the latest tax idea from the Biden administration – tax unrealized capital gains held by billionaires to fund Biden’s “Build Back Better” Act, a mammoth bill that has things you will like in it and things that you will hate in it.
The billionaire tax will pay for it, Yellen said.
The tax bill is in the Senate Finance Committee. Currently, the tax code stipulates that unrealized capital gains aren’t taxable income. The new proposal would tax unrealized capital gains, meaning people with hundreds of millions of dollars in securities investments can no longer defer tax payments on gains made each year.
If Jeff Bezos’ holding in Amazon went up by $1 billion in a year, he would pay tax on that wealth gain, whether or not he sold the stock. Few will cry for Jeff Bezos in America.
Even those who aren’t big fans of Bezos will blast Biden’s “Marxist” tax the rich scheme that likely won’t stop at the super affluent, all to pay for his “even more Marxist” Build Back Better plans.
Others will stick with the tired slogan of “fair share” payments. That pretty much sums up the entire debate.
However, the billionaire tax will be a difficult task and a headache for the Internal Revenue Service to do this. It requires a whole new administrative machinery and the IRS is already stretched.
Plus, if you charge a billionaire a huge tax in year one because their equity portfolio rose in value, do you give them all a credit when that value declines?
So here’s a better idea: let’s tax foreign investors buying U.S. stocks and bonds instead. Robert Lighthizer was given space in The Economist on October 5th to contemplate such the idea.
This would not only raise hundreds of billions in tax revenue, it would make the U.S. dollar, and our entire economy, more competitive globally. The overvalued dollar has been a problem for everyone except the U.S. financial system for years. MIT Sloan School economists were writing about this back in the 1990s.
Wall Street will hate a tax on foreign inflows as much as they’d hate the billionaire tax.
Clients might move money offshore, they’d say about the billionaire tax plan (though that doesn’t mean they’d lose a client as they all have offshore avenues for their high net worth clients anyway).
But under a market access charge, if they did move money offshore, they’d become a foreign investor. So if they bought U.S. stocks from their Cayman account, let’s hit them with a market access charge of, say, 2%, and collect the tax that way.
If few cry for Bezos, I can assure you that even less cry for London bond lords, and high-speed Tokyo currency traders. Most people probably don’t even know what that is, or the impact their trades have on our economy.
Foreign investors send hundreds of billions into the U.S. securities market each year. They account for around 16% of all stocks owned in the U.S. Some of them are European life insurance firms. Others are Japanese wealth fund managers. Some are investment cowboys at global investment firms that borrow money at super low interest at home, then invest it in higher interest rates, like American corporate bonds. So it’s like this: they borrow at 0.5%, buy American bonds or dividends paying 3%, pocket the difference. This drives up demand for the dollar and keeps the dollar strong.
When Wall Street wants a strong dollar, it is because it wants companies to be able to source cheaply overseas, and — just as important (if not more so) — it means more foreigners buying U.S. securities.
In August, foreign investors bought $2.3 trillion (with a T) of U.S. stocks. They bought another $2.2 trillion worth of U.S. government bonds, based on Treasury data. If you taxed those new purchases at 2%, you’d get around $80 billion from taxes on stock and bond investments made by foreign firms in one month.
It is less controversial taxing European life insurers, than it is taxing Americans. The U.S. could surely do both, but the latter would have an impact on dollar inflows into the country, and that would make the dollar more competitive.
A competitive dollar would make our imports more expensive, giving more business to U.S. manufacturers. It means American companies will have one less excuse to invest in factories abroad, because their dollar might not go as far. It would also make U.S. exports more competitive, improving the trade balance.
The U.S. trade deficit in goods will come in at $1.1 trillion this year, a record breaker. That’s nearly the size of the entire Mexican economy. On balance, not counting what we also export, the U.S. imported double that, meaning we consume more from abroad than the entire Mexican economy produces, that’s how huge of a problem this is. One reason we can do that is because of a powerhouse dollar. Not a strong dollar. A steroid injected, muscle-head dollar with 23 inch Hulk Hogan-sized guns.
Sure, a tax on foreign portfolio inflows would lead some currencies like the Mexican peso or a managed currency like the Chinese renminbi to follow the dollar downwards. But if that happens, the U.S. would just raise the tax as a counterweight following clear technical guidelines. The dollar would at least be made competitive against major currencies — namely the Euro, yen, and pound.
Joseph Gagnon, an economist at the Peterson Institute for International Economics (PIIE) , wrote about this last year.
“The main cause of the deficit is a secular overvaluation of the dollar, driven by excessive financial flows into dollar assets from foreign official and private investors,” Gagnon said.
For PIIE, our trade deficits – which hurt labor, which hurt domestic manufacturing, which make everything about Facebook and learning to code – are largely caused by the dollar’s overvaluation, not by the undervaluation of the peso or the Chinese renminbi. If China is the world’s go-to manufacturing hub, the U.S. is the world’s go-to securities market.
“U.S. capital markets are the crowned jewel of the U.S. economy,” says Eric Lorber, Senior Director of the Center on Economic and Financial Power at the Foundation for Defense of Democracies in Washington.
America is falling deeper and deeper into an economic pit, and one reason is because it is very hard for the U.S. to compete globally if our competition’s currency is worth less.
Income inequality and economic opportunity is polarizing the country. Going deeper into debt under the Biden agenda won’t work if the U.S remains uncompetitive and a dumping ground for Asian manufacturers.
The Competitive Dollar for Jobs and Prosperity Act, which Tammy Baldwin (D-MN) and Josh Hawley (R-MO) introduced in the Senate two years ago, would tax foreign investors of U.S. stocks and bonds. That’s not a tax on doing business here, or a tax on American investors.
Sectors of Wall Street won’t like either of these ideas – going after Bezos or going after Belgium bankers. Wall Street funded Biden’s campaign. Now he’s got an obstacle in his way.
But, a market access charge for foreign investors is an easier sell than taxes on American wealth, billionaire or not.
A tax on foreign inflow is easier because every transaction is already registered with the brokerage firm who then reports to the IRS. The reporting of purchase and sales of securities already exists.
Brazil did this years ago when the Brazilian real was too strong in a weak economy, at around BRL1.5 to the dollar. Wall Street emerging market bond fund managers complained, but they didn’t abandon Brazil. Eventually, the real weakened.
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An overvalued dollar makes it cheaper for the U.S. to consume goods from around the world instead of making more of those goods here.
Dollar strength isn’t a sign of a good economy, necessarily. Increasingly, dollar strength is a sign of weak markets in Europe and low yield in other big economies like Japan.
Our financial sector keeps them coming.
The closer you are to a short term-trader, the more you are going to hate a tax on the dollar. And the closer you are to the king dollar ideologues, the more you’re going to hate taxing foreign inflows just because you believe a strong dollar means a strong economy (despite the fact many of those same people will also tell you that our economy is in shambles).
It’s complicated. But on balance, an overvalued dollar does the U.S. no favors. Most of that overvaluation is thanks to foreign portfolio money. Taxing the foreigners will help tame it. It will help fund Biden’s plans.
Also, taxing foreign speculators who add nothing to America’s productive economy and can destroy America’s competitiveness by forcing up the dollar’s price would be more popular, and — like the billionaire tax — would pay for Biden’s infrastructure plans.
To paraphrase a Senator from the War on Poverty days in the late 1960s, Russell B. Long: “Don’t tax me. Don’t tax thee. Tax that man beyond the sea.”