Democrats propose a TAX ON CAPITAL and give authority to a new bureaucracy to SET THE RATE.
Perfect time for the Republicans and ESPECIALLY PRESIDENT BUSH to show some leadership.
The bill, written by Sen. Paul Sarbanes (D., Md.), would create an accounting oversight commission. Instead of Congress giving this entity a budget, the new agency will simply determine what it needs each year, then assess each publicly traded company in the nation, based on the company's proportion of the total market capitalization of all publicly traded firms. In other words, for the first time in U.S. history, Congress is prepared to enact a tax, not on income, not on sales, but on capital, and one that is determined by an unelected bureaucracy, not by the legislative branch.
"Cost of capital" is a concept absolutely central to all financial thinking and all but lost on most Washington policy makers. In essence, if a company or industry's return on investment exceeds its cost of capital, it tends to draw more investment, either through reinvested profits or successful stock offerings. If returns don't make the mark, investment goes elsewhere.
It doesn't take an MBA to see that a tax of a 10th or even a 100th of 1% on a company's market capitalization is little different from increasing interest rates by the same amount. The latter boosts the cost of debt financing, the former of equity.
It doesn't take a Ph.D. in economics to see that with the Federal Reserve Board having dropped interest rates farther, faster in the last year-and-a-half than at almost any time on record, desperately trying to boost a faltering economy, a tax on equity capital goes in exactly the wrong direction at the most delicate possible moment.
And it doesn't take even an undergraduate degree in political science to know that new taxing mechanisms tend to start small and grow unimaginably, just as the income tax itself did.
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