Why is Congress running away from a financial transactions tax? The intensifying struggle on Capitol Hill over revenue, spending and deficits, coupled with the widely felt, reckless behavior of Wall Street, would seem to provide an ideal atmosphere to debate a major source of new income that also helps to restrict rampant speculation.
A bill to impose such a tax, introduced by Democrat Representatives Peter DeFazio and Peter Welch, is going nowhere. Apart from sporadic mentions at various Congressional hearings on the financial meltdown, this levy, with antecedents back to Abraham Lincoln and the Civil War, is a taboo subject.
Lawmakers will say their hands are full with the struggle to enact financial reform. Republicans, in their customarily indiscriminate fashion, say an economic recovery is no time to increase any taxes, notwithstanding the large budget deficit.
Democrats are smarting from the daily lobbying against their lenient treatment of hedge fund managers’ so-called carried interest as ordinary income. They aren’t ready to incur the full wrath of private-equity managers and other industry executives. This is especially true in an election year when the Democrats are craving for what is already a declining amount of campaign money from Wall Street.
Nonetheless, the case is a strong one from a taxation, economic and political standpoint. Growing support among economists is reawakening an old debate over whether the tax burden should fall more on work -- the present income and payroll taxes -- or shift more to a variety of unearned income.
In 1909, Winston Churchill made his preference known when he argued successfully for passage by the British Parliament of a special tax on gains from land. He said, “Formerly the only question of the tax gatherer was, ‘How much have you got?’ Now we also ask, ‘How did you get it?’”
In contrast to the more widely discussed value-added tax, which is opposed by most Republicans and Democrats in Congress, the financial transactions tax is simpler to administer, involves a far smaller number of taxpayers, and unlike the recessive, complex VAT, can raise large sums of revenue.
The U.K. has had a tax on stock trades for decades, mostly collected by brokers. The cost of collecting the tax, which is about 0.05 percent of the revenue stream, is one 10th the cost of collecting the income tax, which is 0.7 percent. Japan is one of several other countries with financial transaction taxes.
Recently, economists Dean Baker and Robert Pollin estimated that the impost could raise $353 billion annually in the U.S., based on 2008 trading volumes. This figure was based on a tax of 0.5 percent on stock trading; 0.01 on bonds for each year to maturity; and a 0.01 percent on trades in swaps for each year of maturity. If there is a 25 percent reduction in trading volume, the revenue would be $265 billion annually.
High-velocity computer-trading volume is likely to increase over time, as it has dramatically in the past. Brokers active in the mid-1950s viewed a 3 million-share day on the New York Stock Exchange as heavy volume. Now it can reach 1.5 billion or more on the exchange, not to mention others such as the Nasdaq. The volume in derivatives has gone from almost nothing in 1980 to $600 trillion in notional value in 2008 and, once over the recent dip, really shows no sign of appreciably diminishing.
The authors recognize that a transactions tax could reduce the amount of financial trading “in the U.S. economy relative to the economy’s level of productive activity.” They say that would be a good development, both damping short-term, destabilizing speculation and getting investors in “financial markets to focus more on longer-term investment opportunities.” This would “more effectively allocate capital” for long-term growth, they say.
Baker and Pollin contemplated many of the expected criticisms of such a tax, citing a consistently growing technical literature in this country and abroad, especially in Germany and the U.K.
On the issue of more or less market efficiency, they argue that computer technology has cut trading costs dramatically since 1980, so a transactions tax at the suggested levels would replace those savings just since 1990 in most markets. Markets today would be no less efficient than back then, when there were no financial transaction taxes.
During the past century, prominent economists have urged financial transaction taxes. John Maynard Keynes was a supporter in his classic “The General Theory,” believing that increasing incentives for longer-term investment is more productive than having capital markets looking like casinos.
In 1978, James Tobin proposed what is now known as the “Tobin tax” on foreign-exchange transactions. In 1989, both Joseph Stiglitz and Lawrence Summers, who is now President Barack Obama’s chief economic adviser and a former Treasury secretary, recommended a securities transaction tax.
In 2009, more than 200 economists from universities, colleges and research centers in our country issued an open letter in support of financial transaction taxes.
There is also the serious matter of equity. When people, who pay 6 percent to 8 percent in sales taxes on necessities every day, learn that there is zero sales tax on daily purchases of billions of shares, bonds and derivatives, they understandably get upset. It doesn’t matter whether they are conservatives or liberals, or whether it is during normal years on Wall Street or the recent massive collapse and bailout.
If anything, the political climate for a financial transactions tax has never been better. It is time for a robust public initiative to replace the stagnant taboos now plaguing Congress and the White House.
(Ralph Nader is the founder of Public Citizen and author of the book “Only the Super-Rich Can Save Us!” The opinions expressed are his own.)
To contact the author of this column: Ralph Nader at firstname.lastname@example.org