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Never Seek Economic Advice from a Regional Monopolist

Simply put, it will be the most idiotic thing you’ve ever heard in your life.

Now, the Berry Laker took a good shot at this last week, but I want to explore in deeper detail why this idea floated by Congress Steve Kagen, M.D (D-Appleton) isn’t just a dumb idea, but it’s bad economics as well.

Here’s how Wispolitics.Com described it:

U.S. Rep. Steve Kagen said Wednesday he favors a tax on Wall Street transactions — rather than on medical devices or other businesses — to fund part of the massive health care reform bill.

“I think that Wall Street should participate in the recovery of the American economy,” the Appleton Democrat told reporters during a conference call, arguing that questionable practices by those investors sparked the economic collapse last year.

Kagen said a fee of 0.25 percent on all trades would generate more than $100 billion annually, providing critical access to citizens in need of health care.

First off, it’s a bad idea because it’s double-taxation.  Depending on your income, you are taxed at a rate of 15% (it goes up to 20% in 2011 after the expiration of the 2006 Bush tax cuts) or 0% (that goes up to 10% in 2011) on your long-term capital gains.  Stocks are included in that definition.  What Kagen is proposing with his “0.25 percent fee” is in actuality a second tax of something the government’s already getting their hands on.

Further proof of Kagen’s economic ignorance, is how most economists on the left and right will tell you lowering the capital gains tax will spur economic growth in the private sector because it will increase private sector investment.  His idea, if made into law, would hinder economic growth and worsen the recession.

Secondly, it’s not just the transactions in which you are taking profits out of, it’s all transactions.  Much of Paul at Berry Laker’s post (see link above) was on any stock transactions in which a profit is taken.  That sort of situation is the general one, especially if you’re cashing out your investments as you diversify for retirement.  However, many transactions on a day-to-day basis are not of that variety.

Imagine if you notice a certain stock in your portfolio has pretty much gone in the crapper.  Heck, it’s not just in the crapper, it’s lower than it is when you purchased it initially and you’re losing money on the investment and you just want to get out of the stock completely.  That transaction — which warranted no profit and thus no capital gains — is taxed under the Kagen plan. This idea won’t just punish an investment ‘win,’ it will punish an investment ‘loss’ as well.

Next, Kagen appears to live in a world where he honestly seems to think only the rich and well-to-do own stocks.  He’s very wrong.  Even with the stock market collapse of last year, a number of people have a vested interest in the stock market thanks to 401Ks and a number of other private, small-investor programs like IRAs and so on.

If he’s released details to this idea, it’s going to have something to address them and how plan managers will be effected (not to mentioned taxed) and how the number of transactions which occur as people save for their retirement take place each and every day.

There’s also no guarantee this idea will even ‘pay’ for itself.  Kagen (or more likely his staff) doesn’t have any specifics on the plan, so it’s hard to take his numbers at face value at this moment.  Also, as any college freshman taking Econ 101 will tell you; you tax something, you decrease the likelihood it will be bought or used in the first place.

Basic economic common sense.

Finally, it might not effect Kagen at all.  Unless he was likely lying, in the 2006 campaign Kagen made it a point at many debates and candidate forums to mention he had sold off all of his stocks (His investments according to his 2009 Congressional Financial Disclosure form are stocks in Cisco Systems, Dell, GM, Home Depot, Microsoft, a large number of municipal bonds, and his multiple homes) because it “would avoid any sort of conflicts of interest.”  He’d even chide his opponents to ‘follow his example’ and do the same.

So unless Kagen’s once again caught in an “embellishment of the truth” about his previous campaign rhetoric regarding his investments, Kagen is advocating a tax he very well may never use.

(Of course, if Kagen was such an original thinker, he wouldn’t just be stealing the idea that’s exactly the same as this idiocy — H.R. 1068: “Let Wall Street Pay for Wall Street’s Bailout Act of 2009”)

One thing I’ve long wondered in the four-plus years I’ve been posting on and observing Dr. Kagen is just how does a man with multiple medical degrees and once called “One of the Best Doctors in America” be such an ignoramus when it comes to the economy.  My best theories run along his own arrogance being a large portion of it; the other part is the guy ran a regional monopoly with his allergy clinics for so long he’s forgotten what real capitalism looks and acts like.

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  • What about someone that withdrew money from their 401K because they lost their job and needed it to get by? Would that transaction be taxed as well? Talk about kicking someone when they're down.

  • glschilling

    It's the kind of “economic logic” one gets from a wealthy Physician, who ran an “allergy monopoly” who claims the “Modern, Liberal Wisconsin Democratic Party” was founded in his Families living room.

  • What about someone that withdrew money from their 401K because they lost their job and needed it to get by? Would that transaction be taxed as well? Talk about kicking someone when they're down.

  • glschilling

    It's the kind of “economic logic” one gets from a wealthy Physician, who ran an “allergy monopoly” who claims the “Modern, Liberal Wisconsin Democratic Party” was founded in his Families living room.

  • Hi,

    I am agree but not totally agree with your point that we can get also advice from regional people.

    thanks anyways