I have been a proponent of financial transactions taxes (FTT) since I first came to Washington more than a quarter-century ago. Back then, the idea of taxing Wall Street was considered pretty ridiculous. Among elected members of Congress, only then-Rep. Bernie Sanders and a few other progressive types were willing to publicly get behind the idea.
Things have changed. Most of the candidates in the race for the Democratic nomination, including all three of the leading contenders, have made FTT part of their agenda. It is no longer just the fringe of the Democratic Party that supports FTT — many centrist members of the House and Senate now support it, too.
We got new evidence of the growing political acceptability of FTT last week. Antonio Weiss, along with his co-author Laura Kawano, released a paper advocating a financial transactions tax. Weiss had been a top Treasury official under President Obama, and previously a partner at the investment bank Lazard, so he is not the sort of person who would typically be expected to support FTT.
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More importantly, the paper was published by the Hamilton Project at the Brookings Institute. The founder and main funder of the Hamilton Project is Robert Rubin. Rubin has a long career in the financial sector, including top positions at both Goldman Sachs and Citigroup.
Between his jobs at these two Wall Street behemoths, Rubin held top positions in the Clinton administration, serving as both head of the National Economic Council and Treasury secretary. There is probably no one who has been more visibly associated with the idea of giving the financial sector free-rein than Rubin. For this reason, it is striking that a paper advocating FTT would come out of the Hamilton Project.
The Weiss and Kawano piece agrees with much prior work, finding that a financial transactions tax can raise a large amount of money while doing little harm to the operation of financial markets. They calculate that a tax on trades of 10 basis points (0.1 percent) could raise $60 billion a year. This would a bit less than annual spending on SNAP, the food stamp program.
Following other analyses, they also conclude that the tax would be hugely progressive. Half of the population does not even own any stock, even including assets held in retirement accounts. These people would not see their taxes rise at all as a result of the tax.
The top quintile of households would pay almost 70 percent of the tax, with the top 1 percent paying just under 23 percent of the tax. That is quite progressive by any standard. But this analysis actually understates the true progressivity of a financial transactions tax.
In their analysis, Weiss and Kawano assume that trading falls in response to the increase in trading costs resulting from the tax. They actually assume that the reduction in trading volume is 25 percent larger than the increase in trading costs stemming from the tax. This means that if the tax raises trading costs by 20 percent, Weiss and Kawano assume that trading volume will fall by 25 percent.
This is important. It means that the tax will substantially reduce the amount that investors spend on commissions and other trading costs. In the example where the tax raises trading costs by 20 percent, the Weiss and Kawano piece effectively assumes the reduction in trading volume will lead investors to spend 25 percent less on other trading fees. This means that if we add the tax to other trading costs, investors will spend less in total on trading with the tax than without it.
Of course, investors will be doing less trading, but the reality is that trading on average is a wash for investors. If I sell a stock at a good price for me, then the person who bought the stock paid a bad price. I won and they lost. Every trade is like this, with one side paying too much or too little, so that on average, the trades are a wash.
While we do need some trading to ensure that markets reflect the economic fundamentals, this would almost certainly still be true even if volume was cut by 50 percent, putting us roughly back where we were in the 1990s. This was the great insight of Jack Bogle, the founder of Vanguard. He recognized that people don’t typically gain from trading, so the best investment strategy was simply to hold an index fund that tracks the market.
When we factor in the savings on trading, it is not investors that bear the tax, it is the financial industry, which will see sharp fall in fees and commissions. That is the truly great feature of a financial transactions tax: We will collect more than $60 billion a year (higher taxes can yield larger sums) by eliminating waste in the financial sector.
That is ultimately why the FTT is such a great tax. It eliminates a substantial amount of waste by reducing the bloat in the financial sector — which, by the way, is one of the major sources of inequality in the economy. This is why we should all be happy that even centrists can now talk about financial transactions taxes.