After Blame, Moving the Burden to Wall Street
“We’re gonna need some tax increases,” argued Michael Ettlinger, Vice President for Economic Policy at the Center for American Progress at a CAP event Tuesday on the prospect of a financial transactions tax that would give the federal government and the American public some much-needed revenue. Ettlinger was joined by Dean Baker, co-director of the Center for Economic Policy Research and Ellen McCarthy, managing director for government affairs at the Securities Industry and Financial Markets Association on a panel moderated by Greg Ip, U.S. economics editor for The Economist.
The appeal of the financial transactions tax is threefold: “the tax would raise revenue, would reduce trading volume… and will change culture…we want to change this Wall Street culture,” Baker asserted. The tax would be a 0.25 percent tax on trades of stocks, bonds, derivatives, and other Wall Street financial instruments that would easily raise between $50 billion and $150 billion annually.
Currently, The Wall Street Fair Share Act (S. 2927) and Let Wall Street Pay for the Restoration of Main Street Act of 2009 (H.R. 4191) are two modest transaction tax proposals in Congress, but the Obama administration has been only “lukewarm if not outright hostile” to these taxes, said Ip. The administration has proposed a liability tax on some of the largest banks as a way of retrieving bailout costs but “it’s important to emphasize this is not a transactions tax.”
For every tax, there’s a constituency who will argue against it saying it’s unfair and “will cripple an industry,” Ettlinger said. “If people are making that argument for the estate tax right now, they’ll make that argument for anything.”
The federal government needs revenues and there are few alternatives to the financial transactions tax. “Some people have been talking about a value-added tax. So what do you want to do? Do you want to tax financial transactions or do you want to tax people’s food and clothing?” asked Baker.
Besides raising revenues, the tax would increase efficiency by reducing the volume of short-term trading. This is not productive trading, and its reduction would free up resources for more productive ends. The more complex the financial sector becomes, the less efficient it is. And since computerization has caused financial transactions costs to drop dramatically over the last 30 years, if we raise transactions costs to where they were in the early 1990s, we will have similar “vibrant capital markets” to that era, according to Baker.
Ettlinger pointed out that the financial sector is “a $400 trillion to $600 trillion industry; it’s the richest industry in the country.” He added that while it’s a necessary industry, it’s one that can afford to pay the tax. “It’s important to put those kinds of dollars in perspective,” he explained. The $150 billion in annual revenue generated by this tax amounts to “one bad day in an entire year for the New York Stock Exchange. And not even that terrible of a day.”
“Main Street will end up paying” the tax, according to McCarthy, who believes the tax is “unlikely to have a negligible effect on the average investor.” She insisted that there will be “unintended economic consequences” to this tax that will “exacerbate distortions that already exist in the tax code” and “the hurdle that investors would have to jump over to sell their current investments in favor of more promising alternatives.”
“This tax applies to publicly traded securities” and “would impact jobs in the financial sector…I don’t think we want to lose jobs in any sector,” McCarthy added, concluding that even the Obama administration does not currently support such a tax unless it is implemented on a global scale.
Ettlinger conceded that, “some of it will be passed through to investors,” but the average investor and the median investor are very different. The financial transactions tax will have little impact on most investors who hold their investments for the long term because they are meant to curb short-term, risky behavior that amounts to nothing more than gentlemen’s gambling.
Wall Street argues that if you tax these transactions they will move elsewhere in the world, and even if securities trading doesn’t move, its derivatives could be done elsewhere. They also argue that traders who constantly buy and sell while making tiny profits on their many transactions would be driven from the market because the tax would diminish those tiny profits.
Advocates for the tax conversely argue that this second effect is actually a good thing for the market, because those countless tiny trades actually hurt the economy by creating excess volatility and add little in the way of productive value. Baker argued that we need a tax that provides a disincentive for Wall Street to invest in the short term at the expense of long-term investments. And he added that “most other countries have had financial transactions taxes” such as France, Germany, Japan, and the United Kingdom. England gets close to $40 billion a year from this tax. As London is the largest financial center in Europe, the tax is clearly “consistent with having a vibrant capital market,” Baker explained.
Wall Street gambled America’s wealth away, and while the global economy is slowly recovering, Wall Street is still raking in enormous profits and outrageous bonuses. That means Wall Street has a choice. They can either deal with a financial transactions tax or they can “design” a way for us to tax them, said Ettlinger.
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