Interesting proposal from Dean Baker. Not likely to get a warm reception on SI, particularly among the traders. But, first glance, sounds like something that should be taken seriously.
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Medicine for Wall Street: A Financial Transactions Tax
By Dean Baker - September 16, 2008, 8:24AM
In the best "kick em, when they're down" spirit of American politics, now is a great time to be pushing a financial transactions tax. The greed and incompetence of the Wall Street crowd has thrown the economy into a recession in which hundreds of thousands have already lost their job, millions are losing their homes, and tens of millions of losing their life's savings as their home equity vanishes before their eyes.
In the fallout, some of the big Wall Street firms are going down too, Lehman and Merrill Lynch yesterday, maybe AIG today. Of course Freddie and Fannie sank last week. But even with the collapse of these financial giants we still have a badly bloated financial sector that preys on the rest of the economy.
We should seize on this moment in which the public is rightly outraged by the greed and stupidity of these financial wizards to drive a stake into the heart of Wall Street. With a financial transactions tax we can bring this financial behemoth down to size once and for all.
The basic point is very simple. We impose a modest transactions tax on all financial transactions, for example a tax of 0.02 percent on the purchase or sale of a future contract or a tax of 0.25 percent on the purchase or sale of a share of stock. (The United Kingdom has had a tax of 0.25 percent on stock sales and purchases for many decades.) Such a tax could easily raise a $150 billion a year, enough to pay for a national health care program or a major clean energy initiative.
A tax of this magnitude will have almost no impact on someone who intends to buy and hold a financial asset. No airline is going to be discouraged from hedging on jet fuel futures because of a 0.02 percent tax, nor will any farmer be dissuaded from hedging on her corn crop.
Similarly, most long-term investors will not even notice the 0.25 percent tax when they buy or sell their stock. The reduction in transactions costs due to the development of computer technology over the last quarter century far exceeds the size of this tax. Most traders will be paying far less for their trades in 2009 with the tax, than they did in 1980 without the tax.
The only people who will really be hit by the tax are speculators; people who buy futures at 2:00, with the intentions of selling at 3:00. Even a modest tax can put a serious dent in the profits of those whose business is short-term speculation. We will therefore see less of this speculation, but it is hard to see why we should care.
Investors who focus on long-term fundamentals will still have every bit as much reason to be in the market. We will just have chased away some of those who use the financial markets for their gambling. In this sense, we would just be treating their gambling as we do other forms of gambling. Gamblers who place bets in Las Vegas or in state lotteries pay very heavy taxes. What is wrong with imposing a modest tax on those who place bets in financial markets?
Of course the financial firms who run the casinos will also face a big hit. The bulk of the tax revenue will be money that otherwise would have flowed into the coffers of the financial industry. This will be a serious blow to the financial industry.
But, this is a benefit, not a loss. We need a financial industry to facilitate the flow of capital from savers to people who want to buy a home or start a business. We don't need a financial sector that develops complex financial instruments as an end in itself. We will have the financial sector that we need with a modest financial transactions tax. We won't have the bloated parasitic sector that has produced the current crisis.
What about all the Wall Street wizards who will lose their jobs? Well what did these people say about the steel workers who lost their jobs in Pittsburg or the auto workers who lost their jobs in Detroit? They had to adjust to the modern global economy. The more liberal folks among the Wall Street crew proposed wage insurance and other measures to cushion the blow. We can give the same to the Wall Street crew.
Let's be clear on what has gone on over the last quarter century. Over this period, there have been enormous gains in productivity, however most workers have seen very little benefit from this growth. Foremost among the big gainers have been the Wall Street crew with compensation packages that routinely run into the tens of millions of dollars. The sector became so bloated that it accounted for more than 30 percent of all corporate profits at its peak in 2004.
The basic story is Wall Street has our money. There will be innocent victims in the battle to rein in Wall Street: the administrative assistants, the custodians, the ordinary workers who will also lose their jobs. This is unavoidable. If we eliminated sweetheart defense contracts with Halliburton and Blackwater, innocent people would also lose their jobs, however few would argue that we should therefore continue to throw taxpayer money in the garbage paying exorbitant fees to these firms.
We have a historic opportunity to correct one of the major distortions to the U.S. economy if we move now. There is no way to reverse the growth in inequality over the last three decades without attacking the elite Wall Street crowd. Those folks who back away from this task simply are not serious about addressing inequality. They have our money. It's that simple.
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