A small tax on Wall Street could be a big help to US economy
A modestly higher financial transaction tax, or FTT, could discourage speculation, lead to less price volatility, and encourage long-term investment. One estimate projects such a 'sales tax' on Wall Street may raise $175 billion a year, even if it cut the total number of transactions in half.
Newton, Mass. — Liberal economist Dean Baker thinks a good – and fair – way to raise federal revenues is to impose a special tax on stock trades and some other Wall Street trading activities. He calls this a “financial speculation tax,” and says it could potentially raise big chunks of money.
The more neutral term is “financial transaction tax,” or for those historically minded, the “Tobin tax,” first urged by Nobel Prize-winning economist James Tobin in 1972. The economist saw it as a way to tame rampant foreign exchange speculation.
Nomenclature aside, advocates maintain such a tax would indeed dampen financial speculation on Wall Street – the financial gambling that was in considerable part behind the Great Recession and collapse of so many major American financial institutions. That, along with home buyers tempted by “liar’s loans,” eventually required Washington to rescue these troubled institutions.
A tax on financial transactions could both raise revenues and curb speculation. But prospects of a politically divided Congress actually passing such a tax are not good, at least in the near term. For one thing, the financial industry is a major if not dominant provider of campaign funds to federal politicians facing election in 2012. Politicians aren’t famous for biting the hands of contributors.
But times are changing. Today we have the Occupy Wall Street protests and similar demonstrations around the country. Media interviewers find the protesters are often fuzzy in their stated goals. Yet they voice a common objection to widespread greed and excess in the financial industry.
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That sentiment warms the atmosphere for a transaction tax. So does widespread and long-standing economic and financial distortion in the United States, which is now being more widely recognized.
For instance, extreme CEO pay. When this writer reported on gatherings of the chief executive officers of the nation’s largest corporations in the mid-1960s, their average pay was 30, maybe 40, times that of ordinary workers. These CEOs were generally bright and competent.
Today, top CEOs get 300 to 400 times the earnings of their regular workers. As an excuse they can usually note that compensation consultants tell their corporate boards these outlandish pay packets are deserved and normal. Maybe consultants should call for pay temperance, noting a political risk that Occupy rallies might explode into something hazardous.
Another long-time trend finally getting widespread attention, including by President Obama, is the growing spread between the really rich and the rest of Americans.
Since it is primarily the well-to-do who engage in financial speculation, one way to mildly slow this shift of income and wealth to the top would be to tax financial transactions. Washington could use that revenue to provide useful jobs for the unemployed – for instance, in infrastructure.
Some on Wall Street maintain that a financial transaction tax (or FTT) would send the financial trading business fleeing the country. Probably not if the FTT rate is low. Some modest speculation on Wall Street would remain, usefully lubricating its buying and selling business.
Abroad, the European Union is considering its own FTT for its 27 member countries. That tax would apply to stocks, bonds, derivatives, and other types of trades. The EU goal is to have it in place by its 2014-2020 budget cycle. European Commission President Jose Manuel Barroso says such a tax could raise $74 billion annually.
Maybe, or maybe not. Some argue generally that the tax would reduce trading and that promised tax revenues are too rosy. The tax, though, would shrink price volatility and thereby encourage financial investment by cautious middle-class people. In the case of the US, this trend might even boost the nation’s capital stock and, eventually, prosperity.
Two leading proponents of the tax in Europe are German Chancellor Angela Merkel and French President Nicholas Sarkozy. The European Parliament has voted overwhelmingly for such a tax. But all 27 nations must approve.
In the US, Ron Suskind’s new book, “Confidence Men,” holds that a financial transaction tax proposal was considered at the very top of the Obama administration, including by the president himself. A FTT bill is already before Congress, dubbed, “Let Wall Street Pay for the Restoration of Main Street Act.”
A long-standing tax of less than a half cent on stock trades already helps finance the Securities and Exchange Commission.
A modestly higher tax could discourage speculation, lead to less price volatility, and encourage long-term investment. One estimate is that a 0.5 percent “sales tax” on Wall Street could raise $175 billion a year, even if it cut the total number of transactions in half.
That is not peanuts, even by federal budget standards.
David R. Francis is a former Monitor economics reporter and columnist.