Both Bernie Sanders and Hillary Clinton recently proposed new Wall Street taxes, which reflect their strikingly different philosophies (and, perhaps, their different personalities). Bernie’s proposal is bold—he squeezes Wall Street to fund programs for our country’s future. Hilary’s proposal is targeted—she tackles a specific problem precisely.
Bernie goes big: he introduced legislation that included a “speculation fee” on “Wall Street investment houses and hedge funds” to collect a 0.5% tax on stock trades, 0.1% on bond trades, and .005% on derivative trades. The tax would hit a wide range of financial transactions—and market participants (not just investment houses and hedge funds). And his tax would be big: a stock buyer’s typical commission of $5-$10 on a $50 thousand stock purchase would jump by $250 under Bernie’s proposal.
Bernie expects his new tax to raise $300 billion annually to pay for free college for all.
In contrast, Hillary wants a more targeted financial tax. She would add a small tax on stock order cancellations, presumably along the lines of the French high-frequency tax. Her tax would apply to algorithmic traders, who place and then cancel millions of orders a year. She wants her tax to curtail harmful trading practices—and get “Wall Street to work for Main Street.” Raising revenue is not the goal—the best outcome would be the disappearance of the cancellations and hence no new revenue.
The flash tax approach has substantial merit, as I have written before. High-frequency traders impose real burdens on the rest of us. They use high-speed computers and fast connections to outrace investors to the market. And much of their activity is simply a new form of old-fashioned front-running, in which these traders exploit unfair information to buy or sell stock ahead of the rest of us (for example, they pay the exchanges for early glimpses of other investors’ orders). These traders simply extract a small toll from the rest of us who want to buy or sell stock.
High-frequency traders now account for more than half of all U.S. stock trades. And, asMichael Lewis observed, they spend billions to save milliseconds (by, for example, laying expensive high-speed fiber-optic cables directly between exchanges in Chicago and New York). They waste a lot of social resources, which could otherwise address important social challenges.
A Tax Policy Center discussion draft on financial transactions taxes finds that a financial transactions tax could raise a lot of revenue, mainly from higher income taxpayers. It could also address serious problems with parts of the financial sector—but might also impose substantial distortions.
Bernie’s financial transaction tax could raise a lot of much needed revenue—and there are few revenue options out there. Hillary’s small high frequency tax wouldn’t raise much but could limit the worst of market abuses, without disrupting the market place much.
So, the next presidential election may determine whether we go big, or go small, on Wall Street taxes.
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