Instead, let’s tax rich foreign investors. Here’s why.


Over the weekend, Treasury Secretary Janet Yellen launched the Biden administration’s latest tax idea – taxing unrealized capital gains held by billionaires to fund Biden’s “Build Back Better” law , a gigantic bill that has things you will love and things you will hate in it.

The billionaire’s tax will pay it, Yellen said.

The tax bill is in the Senate finance committee. Currently, the tax code stipulates that unrealized capital gains are not 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 realized gains each year.

If Jeff Bezos’ stake in Amazon grew by $ 1 billion in a year, he would pay tax on that gain whether or not he sold the stock. Few people will mourn for Jeff Bezos in America.

Even those who are not big fans of Bezos will explode Biden’s “Marxist” tax, the ploy of the rich that probably won’t stop at the super-rich, all to pay for his “even more Marxist” plans Build Back Better.

Others will stick to the well-worn slogan of “fair” payments. That pretty much sums up the whole debate.

However, taxing billionaires will be a difficult task and a headache for the Internal Revenue Service. It requires a whole new administrative machine and the IRS is already stretched.

Also, if you charge a billionaire a huge tax in the first year because their stock portfolio has gone up in value, do you all give them credit when that value goes down?

So here’s a better idea: Let’s tax foreign investors who buy US stocks and bonds instead. Robert Lighthizer was given a space in The Economist on October 5 to consider such an idea.

This would not only generate hundreds of billions in tax revenue, but it would make the US dollar and our entire economy more competitive globally. The overvalued dollar has been a problem for everyone except the US financial system for years. Economists at MIT Sloan School wrote about this in the 1990s.

Wall Street will hate a foreign entry tax as much as they hate the billionaire tax.

Clients could move money overseas, they would say of the billionaires’ tax plan (although that doesn’t mean they would lose a client as they all have opportunities overseas for their wealthy clients. in any event).

But under a market access fee, if they transferred money overseas, they would become a foreign investor. So if they bought US stocks from their Cayman account, let’s charge them a market access fee of, say, 2%, and collect the tax that way.

So few cry for Bezos, I can assure you they cry even less for the bond lords of London and the high speed forex traders of Tokyo. Most people probably don’t even know what it is, or the impact their trades have on our economy.

Foreign investors send hundreds of billions to the US securities market every year. They represent about 16% of all shares held in the United States. Some of them are European life insurance companies. Others are Japanese wealth fund managers. Some are cowboys of investing in global investment companies who borrow money at a very low interest rate from them and then invest it in higher interest rates, such as bonds. American companies. So it’s like that: they borrow at 0.5%, buy US bonds or dividends at 3%, pocket the difference. This increases the demand for the dollar and keeps the dollar strong.

When Wall Street wants a strong dollar, it’s because it wants companies to be able to source cheaply from overseas and – just as important (if not more) – it means more foreigners are buying securities. Americans.

In August, foreign investors bought US stocks worth $ 2.3 trillion (with a T). They bought an additional $ 2.2 trillion in U.S. government bonds, based on Treasury data. If you taxed these new purchases at 2%, you would get around $ 80 billion in taxes on investments in stocks and bonds made by foreign companies in a month.

Taxing European life insurers is less controversial than taxing Americans. Surely the United States could do both, but the latter would impact 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 American manufacturers. This means that American companies will have one less excuse to invest in factories overseas, because their dollar might not go that far. It would also make US exports more competitive., improving the trade balance.

The US trade deficit for goods will rise to a record $ 1.1 trillion this year. It is almost the size of the entire Mexican economy. Overall, not counting what we also export, the United States imported twice as much, which means that we consume more from overseas than the entire Mexican economy produces, which is what period that’s a huge problem. One of the reasons we can do this is the strong dollar. Not a strong dollar. A muscular, steroid-injecting dollar with 23 inch guns the size of a Hulk Hogan.

Of course, a tax on foreign portfolio inflows would cause certain currencies like the Mexican peso or a managed currency like the Chinese renminbi to follow the dollar lower. But if that happened, the United States would simply increase the tax as a counterweight by following clear technical guidelines. The dollar would at least be made competitive against the major currencies, namely the euro, the yen and the 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 of dollar assets from official and private foreign investors,” said Gagnon.

For PIIE, our trade deficits – which hurt the workforce, which hurt the domestic industry, which does everything on Facebook and learning to code – are largely caused by the overvalued dollar, not by the undervaluation of the Chinese peso or renminbi. While China is the global manufacturing hub, the United States is the global securities market.

“The US capital markets are the crown jewel of the US 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 sinking deeper and deeper into an economic abyss, and one of the reasons is that it is very difficult for the United States to compete globally if our competitors’ currencies are worth less. .

Income inequality and economic opportunities polarize the country. Taking on more debt under the Biden program won’t work if the United States 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 in stocks and US bonds. It is not a tax on business here, nor a tax on American investors.

Sectors of Wall Street won’t like either of these ideas – going after Bezos or Belgian bankers. Wall Street funded Biden’s campaign. Now he has an obstacle in his way.

But, a market access fee for foreign investors is an easier sale than taxes on American wealth, billionaire or not.

A foreign entry tax is easier because each transaction is already registered with the brokerage firm which then reports to the IRS. The declaration of purchases and sales of securities already exists.

Brazil did this years ago when the Brazilian real was too strong in a weak economy, at around 1.5 BRL to the dollar. Wall Street’s emerging market bond fund managers complained, but they haven’t given up on Brazil. Finally, the real weakened.

* * *

An overvalued dollar makes it cheaper for the United States to consume goods around the world instead of making more here.

The strength of the dollar does not necessarily indicate a good economy. Increasingly, the strength of the dollar is a sign of weak markets in Europe and weak performance in other major economies like Japan.

Our financial sector keeps them coming.

The closer you are to a short-term trader, the more you’ll hate a tax on the dollar. And the closer you get to the dollar king ideologues, the more you’ll hate taxing foreign entries just because you think a strong dollar means a strong economy (despite the fact that many of those same people will also tell you that our economy is in. mess).

It is complicated. But overall, an overvalued dollar does the United States a disservice. Most of this overvaluation is due to foreign portfolio money. Taxing foreigners will help tame it. This 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 the dollar’s price would be more popular and – like the billionaire tax – would pay for the plans. infrastructure of Biden.

To paraphrase a senator from the war on poverty in the late 1960s, Russell B. Long: “Don’t tax me. Don’t tax yourself. Tax this man beyond the sea.

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