January 16, 2010
January 16, 2010
Following his State of American Business address, Tom Donohue mentioned at a press conference that protectionist policies and tax increases transformed a severe recession into the Great Depression. Is history repeating itself?
Well, we have a severe recession. The failure to enact trade agreements, like the one with South Korea, I will leave for other to opine on. However, the administration is poised to propose one new tax on banks, while others in Congress are pushing a tax on stock transactions. The reasons for these tax increases are to raise revenue, curb risky bank practices and stop excessive trading of stocks.
These taxes are most troubling because they will hurt the ability of business to access capital. If we think of the economy as our circulatory system, capital liquidity is like the blood that courses through our veins and arteries. The financial crisis that erupted in full with the collapse of Lehman Brothers was like a cardiac arrest. Liquidity evaporated, the real economy began to contract at an alarming rate and unemployment skyrocketed. TARP stabilized the system and the economy has slowly started coming back to life. But we are not out of the woods.
The potential tax on banks will make it less likely for banks to make the loans that businesses need to expand and create jobs. In fact, the tax may be linked to the liabilities a bank holds. The more loans a bank writes, the more liabilities held the more taxes to pay. Yesterday, the Chamber sent the administration a letter asking to reconsider a bank tax.
The proposed tax on stock transactions will increase the costs for individual investors and make it harder for businesses to raise money, or for a small business to become a large business. Capital will simply leave our shores and our economy will suffer as a result.
Ironically, in 1932 President Hoover had Congress pass a dramatic increase to the then existing stock transaction tax to stop what he thought was needless speculation. The result- 60 days after the increase was enacted the stock market hit its low for the Great Depression and two years later the Treasury Department issued a study stating that the tax failed to end speculation or raise much revenue. Over 30 years later, the tax was repealed as a part of the Tax Reforms first proposed by President Kennedy.
200 years ago it was a common practice for a doctor to bleed a patient and very often the cure would kill. These proposals may be well intentioned, but the ramifications could be deadly.