In the debate over the “fiscal cliff,” President Obama and congressional Republicans have returned to the proposals that they were sparring over before the election. They remain at odds over key elements of revenue and spending. Yet both sides are unwilling to consider a minuscule tax on financial transactions that could be a major source of income.
A financial transaction tax would apply to purchases and sales of derivatives, options and stocks. The tax would be small, half a penny or less on each dollar of the transaction value, depending on the product. This idea is often called a “speculation tax,” because it would hit hardest at frothy high-volume trading as opposed to sober long-term investment.
Wall Street might object, but taxing its sales is hardly a radical idea. Americans in all but five states pay state sales taxes, ranging as high as 7 percent, every time they buy a car, an appliance, a pair of pants or piece of furniture, but a trader on Wall Street can buy and sell millions of dollars’ worth of financial products each day without paying a cent in sales taxes. A teacher or police officer who buys a $100 pair of shoes in the District or Maryland pays $6 in sales taxes. Meanwhile, if a financial speculation tax were applied to stock trades at a rate of 0.25 percent, a day trader would pay just 25 cents on every $100 worth of stock bought.
A speculation tax isn’t a new idea, either. Congress enacted one in 1914, and it remained in effect until 1966; initially it imposed a tax of 2 cents on every $100 sale or transfer of stock. The late Nobel Prize-winning economist James Tobin proposed a version to curb foreign exchange speculation in the 1970s. And I wrote about it a year ago, urging Congress to use it to show that it wasn’t deaf to the sentiments of the Occupy Wall Street movement.
It is an idea whose time has come once again.
At the heart of the debate over the fiscal cliff is the need to shrink our nation’s deficit while safeguarding a lackluster economic recovery by limiting the financial impact on average Americans. A speculation tax could do just that by raising revenue while having little effect on most Americans’ pocketbooks and reducing the devastation of runaway speculative trading on Wall Street.
According to a joint report from the Center for Economic and Policy Research and the Political Economy Research Institute, a speculation tax could raise as much as $350 billionannually. Even if we make the unrealistic assumption that such a tax would reduce trading volume on the stock market by half, it could still boost federal revenue by $175 billion a year.
Compare that with the policies being discussed in the fiscal cliff debate. Extending the George W. Bush-era tax cuts for all but the top 2 percent — as Obama has suggested — would cost $171 billion a year in lost revenue. Patching the alternative minimum tax to ensure that millions more Americans are not affected by it would cost $40 billion. Continuing to pay emergency federal unemployment benefits would cost $26 billion. A speculation tax could pay for each and every one of these — and then some.