As US presidential candidate, Bernie Sanders, gained momentum in the presidential primaries earlier this year, the attack on his proposed economic programs have grown proportionally.
Leading the assault have been supporters of Hillary Clinton, especially Paul Krugman, and other ‘stars’ of the economics profession like Christine Romer, Laura Tyson, Alan Kreuger, and Austan Goolsbe—all of whom have served in past Democrat administrations and are no doubt looking to return again in some capacity in a Hillary Clinton administration. Sometimes referred to as the ‘gang of four’, this past month all have been aggressively attacking Sanders’ economic programs and reforms. However, the target of their attacks, which began in February and continue, is Sanders’ proposals for financing a single payer-universal health care program by means of a financial transactions tax.
The irony of the Krugman-Gang of Four attack is that Sanders’ proposals represent what were once Democratic Party positions and programs—positions that have been abandoned by the Democratic Party and its mouthpiece economists since the 1980s as that party has morphed into a wing of the neoliberal agenda.
The Krugman-Gang of Four have been especially agitated that their own economic models are being used to show that Sanders’ proposals would greatly benefit the vast majority in the US. But debating Krugman and his gang of four neoliberal colleagues on the ground of their faulty economic model—a model that failed miserably under Obama since 2009 to produce a sustained, real economic recovery in the US—is not necessary. Their model has been broken for some time. Some straight-forward historical facts and recent comparative studies are all that’s need to show that a real financial transaction tax can generate more revenue than is needed to fund a single-payer type program. Here’s how:
A Real Financial Transaction Tax
Let’s take four major financial securities: stocks, bonds, derivatives, and foreign currency purchases (forex).
A European study a few years ago involving just 11 countries, whose collective economies are about two-thirds the size of the US economy, concluded that a miniscule financial tax of 0.1% on stocks and bonds plus a virtually negligible 0.01% tax on derivatives results in an annual tax revenue of $47 billion. In an equivalent size US economy one third larger that would be abouit $70 billion in revenue a year.
Wealthy investors’ buying of stocks and bonds is essentially no different than average folks buying food, clothing or other real ‘goods and services’. Why shouldn’t investors pay a sales tax on financial securities purchases? In the US, average households pay a sales tax of 5% to 10% for retail purchases of goods and many services. So why shouldn’t wealthy investors pay a similar sales tax rate for their retail financial securities’ purchases?
A 10% ‘sales tax’ on stock and bond buying and a 1% tax on derivatives amounts to a 100x larger tax revenue take than estimated by the European study. The $70 billion estimated based on the European study’s 0.1% stock-bond tax and 0.01% derivatives tax yields $7 trillion in tax revenue with a 10% and 1% tax on stocks and bonds and derivatives.
Too high, Krugman and the Gang of Four would no doubt argue. Wealthy stock and bond buyers should not have to pay that much. It would stifle raising capital for companies. OK. So let’s lower it to half, to 5% tax on stocks and bonds and 0.5% on derivatives. That reduces the $7 trillion tax revenue to a still huge $3.5 trillion annually.
Still too high? Ok, half it again, to a 2.5% tax on stocks and bonds and a 0.25% on derivative trades. That certainly won’t discourage stock and bond trading by the rich (not that that is an all bad idea either). The 2.5% and 1% tax still produces $1.75 trillion a year in revenue.
But what about an additional financial tax on currency trading, like China is about to propose? Currency, or forex, trades amount to an astounding $400 billion each day! Not all that is US currency trading, of course. However, the US dollar is involved in 87% of the trading. A 1% tax on US currency trades conservatively yields approximately $3 billion a day. Assuming a conservative 220 trading days in a year, $3 billion a day produces $660 billion in financial tax revenue from US currency financial transactions in a year.
$1.75 trillion in revenue from stock, bonds, and derivatives trades, plus another $660 billion in forex trade tax revenue, amounts to $2.41 trillion in total revenue raised from a financial transaction tax of 2.5% on stocks and bonds, 0.25% on derivatives, and 1% on US dollar to currency conversions.
So how much will that $2.41 trillion a year cover is needed to fund a single payer-Medicare for All program in the US?
Paying for Single Payer Health Care
Nearly every advanced economy in the world provides a version of single payer health care to its citizens—except the USA. On the other hand, no country spends as much on health care as the US. The UK spends 9% of GDP, Japan about 10%, France and Germany 11%, for example. The USA, in contrast, pays 17% plus of its GDP on health care. Given that the most recent US GDP is about $18 trillion a year, 17% of $18 trillion equals just over $3 trillion a year.
If the USA spent, like other advanced economies with single payer, about 10% of its GDP a year on health care, it would cost $1.8 trillion instead of $3 trillion a year. The US would save $1.2 trillion.
Where does that current $1.2 trillion go? Not for health services for its citizens. It goes to health insurance companies and other ‘middlemen’, who don’t deliver one iota of health care services. They are the ‘paper pushers’, who skim off $1.2 trillion a year in profits that average returns of 20% a year and more. They are economic parasites, or what economists refer to as ‘rentier capitalists’ who don’t produce anything but suck profits and wages from those who do actually produce something. They then used the $1.2 trillion a year to buy up each other, expand globally, and deliver record dividend and stock buybacks for their shareholders.
In other words, a true financial transactions tax, that is still quite reasonable at tax rates of 0.25% to 2.5% can pay for all of a Single Payer health care program in the US and still have hundreds of billions left over–$641 billion to be exact ($2.41 minus $1.8 trillion).
That $641 billion residual could then be used to better fund current Medicare programs. It could eliminate the current 20% charge for Medicare Part B physicians services and provide totally free Part D prescription drugs for everyone over 65 years. The savings for seniors over 65 years from this, and the tens of thousands of dollars saved every year by working families who now have to pay that amount for private company health insurance, would now be freed up with a single payer system, to be spent on other real goods and services.
A financial transaction tax and single payer program would consequently have the added positive effect of creating the greatest boost in real wages and household income, and therefore consumption, in US economic history. More consumer demand would mean more real investment.
Yes, there would be less spending by the wealth speculating in stocks, bonds, derivatives, forex and other financial securities. But so what? If rich and wealthy investors don’t like that, well then let them eat cake…or some other four letter word.
Jack Rasmus is author of the just published book, ‘Systemic Fragility in the Global Economy’, by Clarity Press, 2016. He blogs at jackrasmus.com.