Just above a drawing of a very fat cat whose cigar smoke is wafting up into a dollar sign, an advertisement taken out by Merrill Lynch says: "Guess who won't bear the burden of a securities transaction tax?"
The ad appeared in Roll Call, a twice weekly newspaper that circulates on Capitol Hill, and the answer it gives is that the average American taxpayer will bear the cost of a tax on the buying and selling of shares of stock.
"It may look like a tax on wealthy fat cats, but it's anything but," the ad says. It explains that the tax would hurt economic growth, push up interest rates and damage U.S. financial markets and investors. It cites a study that says such a tax would cause a drop of 250 to 400 points in the Dow Jones industrial average. And it says that it is a regressive tax on savings and retirement income of millions of Americans.
"This tax is a terrible idea and should be opposed by everyone who favors economic growth and increased saving and investment," the ad concludes.
As White House and congressional negotiators meet to consider taxes that could help narrow the yawning budget deficit, industry groups and lobbying associations are mobilizing to fight specific taxes that could hit at their constituencies.
If you listen to the opinions of these associations, there isn't a single tax that can be passed without raining destruction on the economy and much of the American way of life. In some cases, the industry groups have strange bedfellows. Cigarette and beer makers have joined liberal and labor organizations in the Coalition Against Regressive Taxation (CART) to argue that excise taxes are regressive and that their burden falls unevenly on the nation's poor and middle class.
Anheuser Busch Co., the big beer brewer, is running television ads that show farmers walking up a country road, miners arm in arm, a young professional in his office -- all people who have worked to make America what it is. Now someone wants to take away what they've earned, the ad says, by taxing beer. Beer drinkers of America, unite! Tell Congress to "can the beer tax," the ad says.
The messages are timely. On Thursday night, House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.) and Office of Management and Budget Director Richard G. Darman met to begin their discussions of specific tax increases that might be included in a budget deal.
Timeliness, however, doesn't mean the arguments necessarily are right.
To a number of economists, it isn't clear whether dire consequences will follow from the taxes being considered in talks aimed at paring back the size of the federal budget deficit.
"You have to keep an eye on the big picture," said Robert Reischauer, head of the Congressional Budget Office. He notes that paring back the size of the federal budget deficit will produce lower interest rates, which will offset the effects of taxes by cutting mortgage payments and business costs.
As to whether such taxes are regressive, James W. Wetzler, commissioner of taxation and finance for the State of New York, said, "In evaluating a budget compromise, you need to look at the whole package. If taxes are spread across regions and income classes, that will give people the feeling that they are getting a fair shake."
What would be the actual effects on the industries of various taxes being discussed?
Jeff Becker, vice president of alcohol issues at the Beer Institute, said that a doubling in the beer tax would result in a 4 percent drop in the volume of beer sales, costing the industry about $820 million at retail levels. In an industry that employs more than 230,000 people, a beer or alcohol tax could cost thousands of people their jobs, Becker claims.
On the other hand, said CBO's Reischauer, less beer drinking might increase the efficiency of the American work force. Nor is the beer industry one that never undergoes change, Reischauer notes. "Shifts like this go on all the time because of changes in tastes, products and the economy," he said.
But Wetzler said, "It makes sense to tax things you want to discourage, like smoking, drinking and pollution." If these industries suffer losses in sales, there might be offsetting savings for the economy generally from improvements in health. CBO estimates that a pack of cigarettes costs society at large about 38 cents in medical and health-related losses.
Nor are federal taxes on cigarettes and alcohol close to previous levels.
The CBO notes that over the last 40 years, inflation-adjusted federal tax rates on cigarettes and alcoholic beverages have tumbled to fractions of their earlier levels. The federal tax rate on cigarettes has declined to half its 1950 level, the CBO reports. Federal tax rates on beer and wine, which haven't changed since 1951, have fallen by 75 percent when adjusted for inflation.
Makers of alcoholic beverages and cigarettes often point out that during that time, state and local taxes have risen rapidly. The CBO study found that the median state tax on cigarettes would equalize the 1950 and 1990 tax rates. But state and local taxes on beer would still leave the real tax rate far below the rates of four decades ago.
Moreover, according to the CBO study, combined taxes on beer, wine and distilled spirits in the United States are among the lowest in all industrialized countries. In 1988, the combined tax on beer in the United States was 15 percent of the average retail price, compared to a median of 31 percent in other industrialized countries. In 1988, combined taxes on distilled spirits were 45 percent of the average retail price in the United States, compared with a median of 51 percent in other industrialized countries.
Other trade groups are weighing in to influence the tax debate. Kenneth D. Simonson, chief economist of the American Trucking Association, said that a gasoline and diesel fuel tax would be a disaster for the industry.
"From the standpoint of the trucking industry, a tax on fuel could be especially harsh," Simonson said, even if it is as little as 5 cents a gallon. Simonson said that of 455 trucking companies in his association, the net profit margin averages only 1.87 percent. Typically, fuel equals 10 percent of operating costs, he said.
"A 5-cent tax would be enough to knock a lot of companies into the red," he said. "Those companies are running right on the edge now." If the companies pass the price increases through to customers, they risk losing business to the railroads, he added.
For that reason, the truckers and many economists prefer a broad-based tax, such as a one on all fuels based on their energy equivalents, measured in British thermal units (BTUs). That would also reduce the regional inequities of energy taxes. Fuel oil taxes would hurt the Northeast, gasoline taxes would hurt big Western states and carbon taxes would hurt heavy coal producing and consuming areas in the Midwest.
"It makes sense for an energy tax to be broad-based. You can raise a lot of money with modest increases in taxation," said New York's Wetzler.
Some industry groups argue that even that approach would make U.S. industry less competitive with foreign firms.
But Wetzler said that a modest energy tax shouldn't make much difference. Even in the most energy intensive sectors, like aluminum refining, energy makes up only 20 percent or so of costs. A 5 percent energy tax would raise overall costs by only 1 percent. "The value of the dollar regularly fluctuates by 1 percent a day. This is a relatively insignificant change in competitiveness," he said.
Some tax specialists have more sympathy with the securities industry's arguments that a securities transaction fee would reduce liquidity, raise borrowing costs and drive investors to overseas financial markets.
Micah S. Green, executive vice president of the Public Securities Association, notes that in an era of global markets, foreign countries are lowering their transactions taxes in order to compete more effectively. Japan lowered its tax recently, and Germany is considering following suit.
Wetzler agreed that it would be better to tax "bad behavior, and trading securities is not a bad thing. It adds liquidity." This industry group might not simply be making a case out of self-interest. The New York State tax commissioner does note, however, that the burden of a transactions tax would hit the cities with the biggest financial service industries: Chicago and New York.