Column: The Big Benefits of a Tiny Tax on Trading
In the debate over the “fiscal cliff,” President Obama and congressional Republicans have returned to the proposals that they were sparring over before the election. They remain at odds over key elements of revenue and spending. Yet both sides are unwilling to consider a minuscule tax on financial transactions that could be a major source of income.
A financial transaction tax would apply to purchases and sales of derivatives, options and stocks. The tax would be small, half a penny or less on each dollar of the transaction value, depending on the product. This idea is often called a “speculation tax,” because it would hit hardest at frothy high-volume trading as opposed to sober long-term investment.
Wall Street might object, but taxing its sales is hardly a radical idea. Americans in all but five states pay state sales taxes, ranging as high as 7 percent, every time they buy a car, an appliance, a pair of pants or piece of furniture, but a trader on Wall Street can buy and sell millions of dollars’ worth of financial products each day without paying a cent in sales taxes. A teacher or police officer who buys a $100 pair of shoes in the District of Columbia or Maryland pays $6 in sales taxes. Meanwhile, if a financial speculation tax were applied to stock trades at a rate of 0.25 percent, a day trader would pay just 25 cents on every $100 worth of stock bought.
A speculation tax isn’t a new idea, either. Congress enacted one in 1914, and it remained in effect until 1966; initially it imposed a tax of 2 cents on every $100 sale or transfer of stock. The late Nobel Prize-winning economist James Tobin proposed a version to curb foreign exchange speculation in the 1970s. And I wrote about it a year ago, urging Congress to use it to show that it wasn’t deaf to the sentiments of the Occupy Wall Street movement.
It is an idea whose time has come once again.
At the heart of the debate over the fiscal cliff is the need to shrink our nation’s deficit while safeguarding a lackluster economic recovery by limiting the financial impact on average Americans. A speculation tax could do just that by raising revenue while having little effect on most Americans’ pocketbooks and reducing the devastation of runaway speculative trading on Wall Street.
According to a joint report from the Center for Economic and Policy Research and the Political Economy Research Institute, a speculation tax could raise as much as $350 billion annually. Even if we make the unrealistic assumption that such a tax would reduce trading volume on the stock market by half, it could still boost federal revenue by $175 billion a year.
Compare that with the policies being discussed in the fiscal cliff debate. Extending the George W. Bush-era tax cuts for all but the top 2 percent — as Obama has suggested — would cost $171 billion a year in lost revenue. Patching the alternative minimum tax to ensure that millions more Americans are not affected by it would cost $40 billion. Continuing to pay emergency federal unemployment benefits would cost $26 billion. A speculation tax could pay for each and every one of these — and then some.
As if its deficit-reducing potential weren’t enough, a financial transaction tax could reduce risky speculative trading that diverts resources from productive economic activity and can be very destabilizing, as the 2008-2009 crash demonstrated.
In fact, this summer, more than 50 financial industry professionals, including past and present executives from Goldman Sachs, JPMorgan Chase and Morgan Stanley, signed a letter to the Group of 20 and European leaders supporting a speculation tax. They pointed out that financial market activity has skyrocketed in the past few decades: The value of transactions is now 70 times greater than the size of the real global economy. Trading volume has grown exponentially, skyrocketing from 188 billion shares of stock traded on the Nasdaq and the New York Stock Exchange in 1995 to nearly 1 trillion in 2011. Each year, the notional value of over-the-counter derivatives traded worldwide totals trillions more.
In their letter, these professionals cautioned that although the main purpose of financial markets is to raise investment capital, allocate resources efficiently and mitigate risk, today’s markets, full of computer-driven, high-frequency trading, often undermine those goals.
The Capital Institute’s John Fullerton, a former managing director at JPMorgan, has estimated that nearly 70 percent of equity-trading volume is composed of these types of speculative strategies.
Critics claim that a speculation tax would harm ordinary investors. But here is a reality check: Many of the automatic spending cuts and tax increases on middle-class Americans that are at stake in the fiscal cliff debate would be many times more painful for these investors. And the harmful aspects of a speculation tax can be addressed. Rep. Keith Ellison, D-Minn., Rep. Peter DeFazio, D-Ore., and Sen. Tom Harkin, D-Iowa, have proposed a financial transaction tax with mechanisms to protect most ordinary investors, either by exempting individuals with incomes below $50,000 or by providing a credit for the first $100,000 of stock transactions each year.
Other critics worry that a speculation tax would drive trading and wealth to offshore tax havens. However, this argument ignores the fact that Britain already subjects stock trades to a financial transaction tax, which generates billions every year. Forty countries had such a tax in place in 2011. Germany and France have voiced support for implementing one across the European Union.
It is now more than four years since the beginning of the financial crisis, and Americans are still feeling the pain. Unemployment is just below 8 percent, and underemployment hovers around 15 percent.
Meanwhile, the Obama administration has failed to hold the Wall Street banks that got us into this mess accountable. Instead, institutions such as Goldman Sachs, JPMorgan and Morgan Stanley — whose speculative trading arms helped fuel the crisis — all received huge bailouts from Treasury and massive interest-free loans from the Federal Reserve. These banks have a bigger market share than ever. Derivatives remain largely unregulated. And too many firms are still gambling with other people’s money.
But the financial transaction tax isn’t a cudgel for retribution against these institutions. It’s a practical tool to avert the financial woes that economists are predicting if we slide over the fiscal cliff. This tiny tax can produce modest salutary effects on behavior while generating much-needed revenue.
The president and congressional leaders need to find something that hasn’t been present in Washington for quite some time: the courage to place the interests of American workers ahead of the influence of Wall Street.
What’s more, we can use the money. Now is the time to enact — or, more accurately, re-enact — a financial transaction tax.
Ralph Nader is a consumer advocate. His new book, The Seventeen Solutions, lays out his prescriptions for curing America’s social and economic ills.