No income tax, no VAT tax, no property tax: Just a Debt Tax

[ThePythonicCow]

I would have posted the following in the I've Lost My Mind Just Now sub-forum, but that sub-forum is for those who are otherwise perfectly sane, and I figured I did not qualify.

How about we replace various income, sales and property taxes with a debt tax.

Anyone lending money in exchange for a future income stream would have to pay a tax on the value of the collateral backing that loan. Uncollateralized debt is not a problem; the lender simply loses on default. But leveraged collateralized debt becomes a problem when excess leverage places the risk of multiple claims of ownership on a single piece of property or a single income stream.

Insurance, derivatives and credit default swaps would be subject to the same tax. Take for example your medical insurance. You provide an income stream to the insurance company in exchange for the promise of a conditional large payment in the future. If you stop those payments before your "lucky" (gravely ill) day arrives, you lose your "collateral" (rights to that large payment that can keep you out of bankruptcy and pay for continuing medical services.)

In each case (debt, insurance or similar), whichever party normally enters into such contracts with the deeper financial resources would be the one to pay the tax, and the tax would be based on the value of what the other party risks losing in default.

We should tax that which we consider harmful to society in excess. Certainly debt and the various leveraging mechanisms of debt and insurance-like financial innovations are clearly on that harmful list when issued in excess.

Obviously this can't be done now, with Bozo the Clown's 535 closest cousins in Congress, and given that this tax would cause the U.S. Mortgage market to self-destruct within 24 hours. But if the Mortgage market can manage its own self-destruction anyway (seems likely) and if we can elect some competent and honest representatives (that's the hard part) then this should be a piece of cake.

[c1ue]

Re: No income tax, no VAT tax, no property tax: Just a Debt Tax

The objective is admirable, but I don't think this means is the correct one.

Loans can be good or bad - the difference lies in the combination of the use of the proceeds, the effects of the total loans on systemic stability, the real economic cost of interest, etc etc.

The proposal you've put forward just massively discourages loans while simultaneously increasing interest costs for those people who want loans (the rentiers will just jack up interest rates to compensate).

The problem we're having today is IMO a securitization issue. The proximate cause was easy money, but the means was the offloading of risk: a Nasdaq stock market spiral in the case of the .com bubble, the repackaging of loans into MBS in the case of the housing bubble.

The easy money in question furthermore wasn't due to private lenders - it was due to Greenspan and the Fed.

I somehow doubt said tax would apply to that fine institution...

[ThePythonicCow]

Re: No income tax, no VAT tax, no property tax: Just a Debt Tax

The easy money in question furthermore wasn't due to private lenders - it was due to Greenspan and the Fed.

The easy Fed money was a tiny percentage of the total debt, swap, securitization, and financial innovation allowing for increased leverage.

[c1ue]

Re: No income tax, no VAT tax, no property tax: Just a Debt Tax

The easy Fed money was a tiny percentage of the total debt, swap, securitization, and financial innovation allowing for increased leverage.

You can say that, but we both know that Fed lack of regulation as well as near 0% rates in the 1999 and post 2001 periods was what led to the increases in leverage, total debt, and what not.

You've also not addressed my other points: that taxes on debt will just be passed from lender to lendee and that more expensive loans mean more relative power for rentiers.

[ThePythonicCow]

Re: No income tax, no VAT tax, no property tax: Just a Debt Tax

You can say that, but we both know that Fed lack of regulation as well as near 0% rates in the 1999 and post 2001 periods was what led to the increases in leverage, total debt, and what not.

You changed the assertion, to include lack of regulation as well. Even so, we don't both know what you state. That last big debt bubble was a run-away freight train with six engines, three in front and three in the rear. The Fed was but one of those engines.

You've also not addressed my other points: that taxes on debt will just be passed from lender to lendee and that more expensive loans mean more relative power for rentiers.

Correct. I did not address them.

[c1ue]

Re: No income tax, no VAT tax, no property tax: Just a Debt Tax

The Fed was but one of those engines.

Depends on your point of view.

In my view, the increase in liquidity which the Greenspan Fed engineered in 1999 to prepare for Y2K was the impetus which caused the .com to explode. Cash everywhere and nowhere as attractive to invest as in the 'New Economy'.

In turn, the decrease of the Fed funds rate from 6% to 1.25% in 2001 was the impetus for the housing bubble - by squeezing fixed income investor to search everywhere for yield.

The securitization scam would not have exploded were it not for this; securitization existed but was a specialist niche in the late '90s.

The ratings agency games and MBS packaging was all for feeding to the pension funds and foreign banks.