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Regulatory Road to Ruin

06/01/2010 12:30 pm EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Forecasts & Strategies, says efforts to tax Wall Street and the financial industry will cripple wealth creation and lead to slower growth.

Today, Wall Street and the global markets are threatened at every side. Labeled as greedy speculators who brought on the latest financial crisis, investors and financial institutions both here and abroad are facing a slew of new taxes and regulations.


1. Congress and European legislatures [may impose] a new transaction tax on stocks. Democratic Reps. Peter DeFazio (Ore.) and Ed Perlmutter (Colo.) have introduced a bill entitled “Let Wall Street Pay for the Restoration of Main Street Act.” The sale and purchase of financial instruments such as stocks, options, derivatives, and futures would face a 0.25% tax.

The amount seems small, but [the tax] is expected to raise $150 billion and would, according to Princeton economist Burt Malkiel and other experts, reduce trading volume in New York by 30% or more, or it may increase significantly the bid-ask spread on stocks.

2. The US and Europe want to raise taxes on investments. President Obama wants to raise the tax on dividends and long-term capital gains to 23.8% (20%, plus the 3.8% tax to pay for health care reform). For the past eight years, this investment tax has been at a low 15%, one of the few tax breaks for conservative investors and retirees. Now, that is about to disappear in 2011.

3. Last month, German regulators banned certain kinds of short selling on euro zone government bonds and credit-default swaps, as well as on the shares of the ten largest German banks. The German regulators are following in the footsteps of the US Congress, which [temporarily] banned short-selling in 2008.

Not surprisingly, Wall Street and global stock markets sold off sharply following the onslaught of these anti-business measures.

One of the greatest threats to capital formation (and, therefore, economic growth) is taxation, specifically taxes on savings, dividends, interest income, capital gains, and estates.

It is time that our legislators recognize that a tax on investors and Wall Street is a tax on capital and economic growth. That money taken out of a savings or investment account and sent to Uncle Sam is capital wasted, never to return.

John Maynard Keynes warned in 1920 that “the virtue of the cake [savings] was that it was never to be consumed, neither by you nor by your children after you.” But that’s what taxation precisely does—it consumes the savings/investment cake, the source of future wealth.

It seems that the government is hell bent on finding every means possible to tax these sources of wealth creation, all in the name of taxing the wealthy and those “greedy speculators.”

If you want to look at a place where Adam Smith’s vision of “easy taxes” has been adopted, look to Hong Kong. It has no tax on dividends, capital gains, stock transactions, or estates, and it has a relatively low flat tax on business and personal income. The Heritage Foundation rates Hong Kong as the freest economy in the world and one of its fastest growing.

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