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Letter to Rep. Lewis, Sen. Chambliss and Sen. Isakson Regarding “The Inclusive Prosperity Act”

In Open Letter on April 28, 2013 at 10:44 PM

April 28, 2013

Rep. John Lewis
343 Cannon House Office Building
Washington, DC 20515

Sen. Saxby Chambliss
416 Russell Senate Office Building
Washington, DC 20510

Sen. Johnny Isakson
131 Russell Senate Office Building
Washington, DC 20510

Dear Rep. Lewis, Sen. Chambliss and Sen. Isakson:

Please consider supporting “The Inclusive Prosperity Act,” (HR 1579), which would impose a financial activities tax (FAT) of anywhere from 0.5% to 0.005% on covered securities ranging from programmed high-frequency trading operations to more opaquely-traded derivative financial instrument transactions.

According to consumer activist Ralph Nader’s recent article,

“Consider this fact: American consumers in most states pay sales taxes on the necessities they purchase — cars, appliances, clothes, etc. The rate of such sales tax is, in some areas, as high as 7 percent. For example, a schoolteacher or police officer who buys a $100 pair of shoes pays up to $7 in sales taxes. Most people accept the idea of paying such a tax. But what about the folks on Wall Street? A trader can buy and sell millions of dollars of financial products each day without paying a cent in sales taxes. Why should financial transactions be exempt from a small sales tax? A financial transaction tax could raise $350 billion annually — money that could be used to repair critical infrastructure, create decent paying jobs, reduce the tax burden on individuals and start to rein in frivolous high-volume trading.”

Further, “Forty countries already have such a tax in place with little compelling evidence showing an adverse effect,” says Mr. Nader.

He additionally notes, “One supporter, the Capital Institute’s John Fullerton (a former managing director at JPMorgan), has stated that a financial transaction tax could have significant impact in lessening the use of high-frequency trading. He has estimated that nearly 70 percent of equity-trading volume falls under this category of highly speculative trading.”

In order to better understand the magnitude of taxpayer subsidization of the largest financial institutions, it is also helpful to realize that Bloomberg LP has recently calculated the balance sheet subsidy to large financial institutions to be $83 billion per year. Specifically, IMF economist Kenichi Ueda and University of Mainz economist Beatrice Weder di Mauro have estimated an 80bp funding advantage in costs of borrowings for the largest financial institutions.

Collectively, former Citigroup chairman John Reed’s ideas on the benefits of compartmentalization of banking activities, coupled with Byron Dorgan’s, former U.S. senator, prescription for declaring illegal particular credit default swaps insurance contracts that lack a recognized underlying insurable interest, represent two interviews worth listening to right now.

Commentary delivered by the Parliamentary Commission on Banking Standards in the U.K. and remarks by Lord Robert May and Andrew Haldane, Executive Director of Financial Stability at the Bank of England, you may also find helpful (read “Beyond Dog-Eat-Dog” and “The Dog and the Frisbee,” respectively). For instance, Lord May documents through his research conveyed in the article that, “it’s easier for banks to absorb a loan default shock if the retail and investment arms are separated as it is contained.”

Locally, the Peterson Institute for International Economics has produced a broader discussion on the subject worth your consideration. See the recorded event entitled “Financial Stability and the Problem of Too-Big-To-Fail Financial Institutions” dated March 5, 2013, available on their website.

Considering a requirement on managing LTV ratios, NINJA underwriting and/or the like continues to be additionally well-represented by the opinions of Thomas Hoenig, Vice Chairman of the FDIC, John Geanakoplos, economics professor at Yale University, and other regulatory figures of prior widespread financial crisis periods, e.g., William Black, formerly of the FHLB of San Francisco and Resolution Trust Corporation.

Lastly, I also ask that you close the “carried interest loophole” in order to rebalance the playing field between all occupations of taxpayers. Lynn Forester de Rothschild, writing in The New York Times, indicates that, “No other affluent Americans enjoy this benefit. A brain surgeon, stockbroker, corporate lawyer or actor will have to pay the new top marginal rate percent, while a general partner who manages other people’s money pays, on carried-interest income, only the 20 percent rate on long-term capital gains.”

Applied today, former president Ronald Reagan’s tax philosophy is right in line with this style policy rule. Rolling Stone magazine relays the following story of Mr. Reagan addressing an audience of Georgians in 1985,

“We’re going to close the unproductive tax loopholes that allow some of the truly wealthy to avoid paying their fair share,” he thunders to a crowd in Georgia. Such tax loopholes, he adds, “sometimes made it possible for millionaires to pay nothing, while a bus driver was paying 10 percent of his salary – and that’s crazy.”

Kenneth Arrow, the Nobel Prize-winning economist, has remarked as follows regarding the economics of the matter, “It is not superfluous to argue that steepening the income tax progression, removing a number of blatant loopholes, such as the special treatment of capital gains, and reducing the exemption level for estates would add considerably to post-tax equality.”

“What we cannot speak about we must pass over in silence,” once wrote Ludwig Wittgenstein.

I look forward to your response.

Regards,

James Breedlove

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