THE FIRST thing to be said about Sen. Bernie Sanders’s (I-Vt.) hot new democratic socialist idea — a levy on stock, bond, derivative and partnership interest transfers big enough to fund free public college tuition for all — is that it is neither new nor particularly socialist. The very capitalist United States actually taxed securities transactions at various times during the 100 years before 1966. Britain has taxed stock trades for centuries. We don’t know how “democratic” the tax is, but it’s certainly not exclusively Democratic: Republican President George H.W. Bush’s treasury secretary, Nicholas Brady, was a big supporter.
Whether the idea is hot, or not, depends on the many trade-offs involved. Mr. Brady saw taxing trades as a way to discourage “short-term time horizons” on Wall Street, a centrist synonym, you might say, for “speculation,” Mr. Sanders’s preferred term. And we agree: One attraction of a financial transaction tax is that it could reduce the incentive for certain high-frequency trading strategies, with all the potential for rent-seeking, waste and exploitation that goes with them — just as higher gas taxes would discourage excessive driving and the resulting air pollution.
The problem, however, is distinguishing between socially productive trading and the other kind; we know no tenet of socialism, free-market economics or any other system of thought that can guide that analysis with perfect objectivity. It’s worth noting that the United States had a 0.02 percent tax on stock trades in force during the 1920s, and the market still crashed in 1929. If the tax is too high, however, you could stamp out needed price-discovery, hedging and liquidity, thus destroying efficiency and economic growth. Oh, and you also could end up collecting no revenue, or less than you expected, as market activity dried up or fled to more lightly taxed jurisdictions overseas. For these and other reasons, in 1991 Sweden had to repeal a financial transaction tax it had imposed just seven years earlier.
An analysis of financial transaction taxes, both actual and proposed, by the nonpartisan Tax Policy Center noted last year that they represent a “tempting” option that might help the United States raise revenue while curbing speculative excess. The U.S. financial market is so huge that traders might find it impossible to avoid, especially now that the European Union is on its way to a similar tax. Furthermore, most of the burden of such taxes would fall on top earners, who tend to play the markets more. However, a tax would undoubtedly dampen some productive trading and not necessarily raise that much revenue, the report found — about $50 billion a year, in contrast to the $75 billion figure Mr. Sanders floats. Interestingly, the report shows rapidly diminishing returns once the tax rate exceeds a certain level; a 0.5 percent tax brings in about the same amount of revenue as a 0.1 percent rate.
Financial transaction taxes make the most sense, in short, if they are well-targeted and not too high, and — crucially — if other countries go along, too. That’s a lot of “ifs.”