Tax Where the Money Is

Conveniently, that's also where the economy-killing scams are: financial speculation.

David Atkins "thereisnospoon" at Hullabaloo:

The problem is that the bigger lack of progressive punch in the tax code doesn't apply so much to marginal rates on income (though that's certainly a factor), as it does to rates on speculative behavior. And that's where the sickness in the system lies: we have incentivized speculative behavior at the expense of slower, constructive long-term investment in stable enterprises.

The 15% capital gains rate is preposterously low; a higher rate would affect a few middle class 401K holders, but by far the most affected class would be the super wealthy. Capital gains is where they really make (I refuse to use the word "earn", as it would be a misnomer) their money. Doubling the capital gains rate to 30% would make long-term investors take a hit as well--but not as much as speculative short-term day traders. For a long-term investor, a good investment is still a good investment whether taxed at a 15% or a 30% rate. But for a speculative short-term grifter, many trades wouldn't be worth the risk at a 30% rate. And that's a good thing. If that means many day traders would have to find a different line of work, then good. Consider it a sin tax. Update: as pointed out in the comments, the capital gains rate is only for investments held over a year. Thanks for the correction.

Similarly, a transaction tax of even half a cent on each trade would go completely unnoticed by responsible long-term investors, but would do serious damage to the front-running and blatant cheating that is high frequency trading:

High-frequency techniques are used by Wall Street banks and hedge funds, but it is new independent firms that account for the bulk of this new kind of activity. Most of them were founded in the last 10 to 12 years. Many are still relatively small, employing a dozen to a hundred people, though some have as many as 250.

Trading mostly with their owners’ money, they scoop up hundreds or thousands of shares in one transaction, only to offload them less than a second later before buying more. They can move millions of shares around in minutes, earning a tenth of a penny off each share.

As a group, they earned $12.9 billion in profit in 2009 and 2010, according to the Tabb Group, a specialist on the markets.

These sorts of taxes on Wall Street behavior are not only where the money is, but also where the real impact on public policy is.

Redistributive progressive taxes on the wealthy are a good thing, but they don't really address the problem of how the great disparity in income happened in the first place. All they do is mitigate a public policy problem by treating its symptoms. Don't get me wrong: treating the symptoms is good. But it's in taxing speculative short-term gambling on Wall Street, with the aim of encouraging long-term productive investment in activity that actually creates stable jobs, that legislators can help cure the disease.