Every Tax Needs A Victim

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The trouble with tax reform is how quickly it devolves into zero-sum haggling and partisan entrenchment.

It seems no one engaged in the debate over how to trim some of the four million-plus words from the current tax code can put forth an idea without vilifying someone.

Leading Republican tax plans, known as theFair Tax, call for eliminating the IRS, and effectively sucker-punching the entire financial services industry, by simplifying and automating the U.S. tax system. Granted, the overwhelming need for tax professionalsis tied to the absurd size and complexity of the existing (and growing) tax code.

Even so, this unambiguous targeting of an entire branch of the federal bureaucracy--and the skilled industry it comprises--is meant to be one of the most attractive features of the plan, rather than an unfortunate-but-necessary side effect. Ted Cruz famously called for IRS agents to be put to work guarding the nation's southern border, rather than waste their time processing tax returns.

Cruz is not exactly an outlier; the Fair Tax has the support not just of several current lawmakers, but looks set to feature prominently in the 2016 presidential race, through the primaries and beyond.

Hillary Clinton, now in full campaign (and hedging her platform) mode, has yet to aggressively champion an alternative reform plan. Historically--at least during her 2008 primary debates with Obama--she was not so much out for full-scale reform, as for nudging up taxes on the wealthy and down for the middle class and the poor.

While Clinton is thus far the only announced Democrat, a potential challenger has been quietly building steam: Sen. Elizabeth Warren.

Warren hasoutspokenly endorsed a tax idea that has so far managed to avoid any particular partisan alignment: the financial transactions tax (FTT).

The FTT is something of a consumption tax, but limited to trading activities like exchanging stocks, bonds, and especially futures. But unlike the Republican Fair Tax, which levies a flat 23% on all impacted transactions, the FTT championed by Warren and the economists she listens to would amount to something from .01% to .2% per transaction.

So rather than penalizing the vast population of individuals and businesses engaged in trading, the FTT would hit hardest those engaged inhigh-frequency trading (HFT) through the use of computers running sophisticated algorithms.

The negative economic impact of axing thousands of accounting jobs would undoubtedly be more dramatic than taxing pennies on the hundreds of dollars in financial transactions on Wall Street. What is more, it would raise revenues while simultaneously increasing security and stability on the markets, by making high-frequency trades too expensive to continue.

In other words, the tax disproportionately targets people engaged in shady--if not outright criminal--behavior, at its worst known as "spoofing," which can artificially manipulate markets and even cause damaging crashes. By running programs that robotically issue and immediately cancel electronic orders in the futures market, spoofers stand to make money only when they can achieve volume without any associated cost. A fractional per-transaction cost would hit HFTs because of this volume, while human traders (professional or at-home) would see only minimal fees from the tax.

Interestingly, while the GOP-favored Fair Tax exempts interest and dividends, it does rely on a tax for most every other transaction--including healthcare, legal fees, and even gaming--it exempts "investment" activities, under which stocks, bonds, and futures fall. That isn't to say that, with some insulation from Wall Street interests, Republicans wouldn't at least reconsider an FTT bill or addition to the Fair Tax.

It may be too much to hope that Hillary will get on board. Her former boss, President Obama, was opposed to the FTT bills circulating the legislature during his first term. Unfortunately, in the years since the idea was floated, lines have quietly been drawn around the issue, with special interests on Wall Street preventing it from getting another airing.