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Opinion

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.

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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.

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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.

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