Robert Kuttner Supports the TOBIN TAX…on Wall St. Financial Transactions
Let the ones who destroyed our economy be fiscally responsible for restoring it-
The state and government tax our food and clothing. What makes Wall St so special they get away scott FREE not paying taxes on their speculative gambling habits? Read on as Robert Kuttner explains how easily it can be done.
One prime cause of the financial collapse is that financial trading markets have become speculative worlds unto themselves. Instead of adding efficiency to the real economy, they mainly add risk that the rest of us now have to pay for.
There are many ways to damp down financial speculation, but a very effective strategy is to tax it. Given the huge costs of the clean-up (now being borne mainly by taxpayers) it would make a lot more sense to require financial markets to pay for their own bailout.
One very neat way of doing this is through a very small tax on all financial transactions. Ordinary retail sales are taxed, as are wages. But oddly enough, financial transactions are exempt from tax.
This idea was first proposed in modern form by the Nobel Laureate James Tobin in 1972, after the collapse of fixed exchange rates led to massive increase in currency speculation. Tobin proposed a small tax on short term currency trades to make extreme speculation less profitable.
Since them, short term speculation and the invention of exotic securities that lend themselves to speculation has become the dominant activity of Wall Street. So a Tobin-style tax on all financial transactions has three big things going for it.
First, a very small tax in all kinds of financial transactions, say one tenth of one percent, would not be felt by legitimate long-term investors. But in the case of traders who get in and out of exotic derivatives minute by minute, making huge numbers of quickie trades, it would add up to a lot of money and would cut into both their profits and their entire socially destructive business strategy. So a universal financial transaction tax would discourage purely speculative activities and encourage investing for the long term.
Second, such a tax could pull in hundreds of billions of dollars a year, at a time when large deficits are giving the political right (and center) an excuse to cut social spending, and no form of taxation is popular. But this tax would be the least unpopular. It would not just fall primarily on the very, very wealthy. It would fall on the least socially defensible part of Wall Street, the people who make their billions from speculative short term trades. And that raises the third benefit.
What’s missing from the entire debate about financial reform is a progressive brand of populism. Regular people know that they got done in by excesses on Wall Street, and they see a Democratic administration shoveling trillions of dollars to the same Wall Street banks that caused the mess. No wonder people are confused about whether government is on their side. What is overdue is a little bit of populist retribution against the people who brought down the system — and will bring it down again if the hegemony of the traders is not constrained.
Do we have a shot of injecting the case for a Tobin Tax into the debate? In the past few weeks, Adair Turner, the head of Britain’s Financial Service Authority, cautiously expressed support for the general idea.
Peer Steinbrueck, Germany’s finance minister, explicitly called for such a tax last week, as did the AFL-CIO. In an unguarded moment early in his career, even Larry Summers, President Obama’s market-friendly chief economic adviser, embraced the idea, as throwing some salutary sand in the gears when financial markets “worked too well.”
The Group of 20 meetings next week in Pittsburgh are not likely to produce very much in the way of real reform, because even after the disgrace of Wall Street, the usual suspects are still making policy in most nations. But a global campaign for a Tobin Tax should begin in earnest now. It could bear early fruit, as speculative excess continues and as government finds itself searching for defensible taxes.
AFL-CIO, Dems push new Wall Street tax
By Alexander Bolton – 08/30/09
The nation’s largest labor union and some allied Democrats are pushing a new tax that would hit big investment firms such as Goldman Sachs reaping billions of dollars in profits while the rest of the economy sputters.
The AFL-CIO, one of the Democratic Party’s most powerful allies, would like to assess a small tax — about a tenth of a percent — on every stock transaction.
Small and medium-sized investors would hardly notice such a tax, but major trading firms, such as Goldman, which reported $3.44 billion in profits during the second quarter of 2009, may see this as a significant threat to their profits.
“It would have two benefits, raise a lot of revenue and discourage speculative financial activity,” said Thea Lee, policy director at the AFL-CIO.
“The big disadvantage of most taxes is that they discourage some really productive activity,” she said. “This would discourage numerous financial transactions. People flip their assets several times in an hour or a day. They make money but does it really add to the productive base of the United States?”
Lee said that taxing every stock transaction a tenth of a percent could raise between $50 billion and $100 billion per year, which could be used to pay for infrastructure projects and other spending priorities. She said the tax could be applied nationwide or internationally.
The proposal would hit especially hard those hedge funds and large banks earning hefty profits despite the shaky economy from a practice known as high-frequency trading. High-frequency traders use powerful computers to conduct hundreds of thousands of orders in mere seconds, taking advantage of slower traders.
Only the biggest investment firms can afford to develop the technology, which delivers handsome profits at little risk. The growing popularity of the practice has contributed to the soaring volume of trades on Wall Street in recent years and, some critics argue, market volatility and rampant speculation.
High-frequency trading is estimated to earn about $20 billion in profits for the nation’s biggest investment firms, who guard the their practices zealously. Goldman Sachs, for example, has accused a former computer programmer of stealing the valuable code, launching a high-profile legal battle.
The AFL-CIO and some allied Democrats would like to cut down on the overall level of trading, or at least give the U.S. government a piece of the action, which would likely tamp down trading.
Democrats and labor officials would also like to take a bite out of Goldman’s profits. Liberals are angry the company, which immersed itself in the frenzy of speculation leading to last year’s financial collapse, is now making huge profits after accepting (and repaying) $10 billion in government aid. Goldman employees are on track to earn an average of more than $700,000 this year.
There is also a growing realization among Obama administration officials and lawmakers that tax increases may be necessary to curb the ballooning federal deficit.
The idea of taxing financial transactions has gained some support on Capitol Hill and among senior government officials in London, a major foreign financial center.
In Congress, Rep. Peter DeFazio (D-Ore.), chairman of the Highways and Transit Transportation Subcommittee, has seized on the idea as a way to help pay for a new massive surface transportation reauthorization bill, estimated to cost $450 billion over six years.
Instead of taxing all stock transactions, as the AFL-CIO has contemplated, DeFazio wants to focus on oil-based derivatives.
At the end of July, shortly before the House broke for the August recess, DeFazio introduced legislation that would impose a 0.2 percent transaction tax on crude oil futures contracts. The legislation would tax the options for oil futures (in other words, the premium paid to have the option to buy a futures contract) at 0.5 percent.
“The tax is simple; it imposes a small burden that penalizes short-term traders for speculating on the price of oil,” DeFazio said in a statement. “This legislation exempts legitimate hedgers from the transaction tax. Since the tax is on speculation only, it deters speculation and undermines much of the crude oil price bubble.”
DeFazio estimates his proposal, which has been referred to the House Ways and Means Committee, would raise $190 billion over six years. It has 29 cosponsors.
An aide to a liberal Senate Democrat said a transaction tax seems like a good idea but did not know who might champion the cause in the upper chamber. An aide on the Senate Finance Committee was not aware of discussion of the proposal.
Taxing financial transactions has gained some momentum in Europe. Lord Adair Turner, chairman of the Financial Services Authority, Britain’s top banking regulator, voiced support for taxing financial transactions in a recent magazine interview. The French government has endorsed the idea as a way to fund development in poor countries.
The proposal to tax financial transactions is also known as a “Tobin tax,” after the late American economist and Nobel laureate James Tobin. Tobin proposed a transactions tax in the early 1970s to discourage currency speculation after the collapse of the Bretton Woods fixed-exchange-rate system.
CNBC coverage, 9 September:
De Fazio, March 2009