Think about it. Those who earn their money by working have to pay full taxes. By contrast, those who passively make money through investments only have to pay half as much tax. Shouldn’t it be the other way around?
Canada’s current capital gains tax preferences cost the government $35 billion annually – with high-income families accruing most of the benefit. It’s estimated that 82 per cent of all gains go to families in the top 10 per cent of the Canadian income distribution (those with incomes of more than $196,000). Moreover, 57 per cent are received by families in the top one per cent (those with incomes of more than $511,000).
In the United States it’s a similar story. The richest one percent of Americans reported an estimated 75 percent of all long-term capital gains in 2019, with the richest 0.1 percent—people with annual incomes exceeding $3.8 million—bringing in more than half of all gains.
So, given that the rich and super rich obviously don’t need this tax break why do they continue to get it? Does our government not know that for every $100 of wealth created in the last 10 years in Canada $34 has gone to the richest 1 per cent while only $5 to the bottom 50 per cent?
Apparently addressing growing inequality is trumped by the argument that tax breaks stimulate the economy. How? Tax incentives encourage people to invest more, we are told. That, in turn, leads to greater corporate investments in research and development and to the jobs that go with that. Ultimately everybody across the economy is supposed to benefit.
Except that it doesn’t work that way, at least not anymore. Investment money seldom trickles down into the Main Street real economy. Instead, the stock market has, according to billionaire Warren Buffet, effectively been turned into “a gambling parlor’ in which large corporations have essentially become “market chips” for daily speculation.
Take as an example derivatives, which are basically side bets between two parties that some underlying investment (stocks, currencies, interest rates, etc.) will go up or down. The gross market value of outstanding derivatives – summing positive and negative values - was $18.3 trillion at end of June 2022, a 47% increase within six months. To put that in perspective, the GDP of Canada is 1.9 trillion dollars.
How do we begin to rein all this in? One seemingly simple idea is to put a modest “Robin Hood” tax of a mere .5 percent on the purchase of bonds, currencies, futures, etc. The billions raised would be spent on public services. It’s an approach supported by over 350 economists worldwide, as well as by well known politicians, religious leaders, hundreds of charitable organizations and even some well known billionaires.
The idea, which is an expansion of the Tobin Tax on currency trades proposed in the 1970s, has been around for well over a decade. But, like the Tobin Tax, it has gone nowhere. Why is that?
You know the answer. Wall Street and the Big Banks of the world don’t want it and their influence over governments is enormous. Think back to what happened in the 2008 banking crisis. The Obama government had a choice. It could rescue homeowners unable to make their mortgage payments and about to lose their homes because of interest rate hikes or it could bail out the banks. Obama chose the banks, effectively abandoning millions of homeowners. Black American communities which had been specifically targeted for those sub prime mortgages were the hardest hit.
So what happened to the nine million houses repossessed by the banks in America? A large proportion were bought up at rock bottom prices by venture capitalist, Wall Street kingpins, hedge fund magnates and asset managers. The US homeownership rate steadily fell from 69% pre crash to 64.2% in 2018. To put that in perspective, in big bad Russia the home ownership rate is 89%. In “communist” Cuba it’s 90%.
What happened next in the investment world was predictable. With little to no remorse, the banking executives gave themselves bonuses and then persuaded government to embark upon a quantitative easing policy. This spewed out enormous amounts of money to them at low interest rates, thereby allowing them to continue unchecked with their derivative trading through short sales, credit default swaps, leverage, mortgage backed securities, etc.
For an explanation of how the above instruments work out, check out this video we made back in 2012. Very little has changed since then.
What does this have to do with the current banking crisis?
The short, superficial answer to that question is not much. Recent bank collapses are largely the result of an insane interest rate policy over the last year on the part of Central Banks led by the US Federal Reserve. That will be the subject of our next blog posting.
But the central point of this posting is that we have an inherently unstable investment banking system lurking in the background which could collapse like a house of cards if things become unstable elsewhere in the system. It's led by greedy, irresponsible elites who serve the interests of their own class rather than the greater good.
That governments since the 1990s have been letting bankers undermine and neglect their mandate to serve the real economy says something alarming about the strength of our democratic governance, does it not? Things have to change.
Introducing a Robin Hood Tax or eliminating the tax reductions on capital gains won't make a huge difference but it's a start. These initiatives would be part of much broader reforms.
I think we need another Occupy Wall Street revolt.