For decades the idea of a financial transactions tax (FTT), in effect a modest sales tax on stock, bonds, derivatives and other financial assets, has been a fringe idea pursued by a small group of progressive politicians. While the concept had drawn the interest of many of the world’s most prominent economists, including former Treasury Secretary Larry Summers, and Nobel laureates Joe Stiglitz, James Tobin, and Paul Krugman, few political figures in the United States were willing to go near an FTT. That situation is changing.
The latest news in this area is the release of a report last week on financial transactions taxes from the Tax Policy Center (TPC), a joint project of the Brookings Institution and the Urban Institute. The report assessed the potential revenue and the burden by income group from a FTT. This report, while not providing an endorsement of FTT, provides further support to an FTT as a serious policy.
This is an important development because the TPC has developed a strong reputation in policy circles as a reliable source for non-partisan analysis. For this reason a report from the TPC can be seen as comparable to a report from the Congressional Budget Office. The center exists to analyze policy, not to advocate for it.
With this in mind, its assessment of the FTT is quite useful for several reasons. First, the report argues that a FTT is clearly feasible based on the existence of a large number of FTTs in countries around the world and the likelihood that one will be instituted in the euro zone in the near future. Second, the report finds that a scaled tax, similar to the one being debated in the euro zone, with a rate of 0.1 percent on stock trades, would raise over $50 billion a year in additional revenue and more than $540 billion over the next decade. (This is more than twelve times the size of the cuts to the food stamp program that Republicans pushed last year.) Third, it shows the tax to be highly progressive, with the top quintile paying 75 percent of the tax and the richest one percent paying over 40 percent of the tax.
The report does point out issues that critics have raised about a FTT, such as its impact on liquidity and the extent to which it may lead to market distortions, but concludes that it is a doable policy deserving serious consideration. This should provide a huge boost to advocates of a FTT who are used to being treated as children pushing silly policies. Of course the “adults” in this story were doing things like deregulating the banks and pushing mortgage backed securities.
The TPC report follows a series of other developments that also have advanced the prospects of a FTT. While members of the euro zone continue to debate details, it appears increasingly likely that a FTT will be implemented in much of Europe in the next two years. In addition, Representative Chris Van Hollen, a member of the Democratic Party leadership in the House, recently put forward an economic plan that had a FTT at its center as a financing mechanism.
This was striking, because Van Hollen is very much at the center of the Democratic Party. Previously only solid progressives, like Peter DeFazio and Keith Ellison in the House and Tom Harkin in the Senate, had publicly supported a FTT. Adding to this momentum, Bernie Sanders, who has long supported a FTT, made a FTT a major part of his economic agenda in his presidential campaign.
The TPC report helps to draw the lines more clearly on the FTT. While many politicians of both parties now claim they want to reduce income inequality, there is probably no policy can do so more effectively than a FTT. Not only is the tax itself highly progressive, but even the small amounts paid by the middle class would come almost entirely out of the pocket of Wall Street.
The TPC study assumes that the volume of trading will decline by even more than any cost increase associated with a FTT. For example, a middle class worker with a $100,000 in a retirement account may now pay $200 a year in costs associated with the turnover of stock in their account.
A tax of 0.1 percent on stock trades might cost this worker around $30 a year in payments to the government. But it would lead her to reduce her trading so much that her other trading costs fall to $140 a year. On net she would now be paying $170 a year for trading ($140 in costs charged by the industry and $30 for the tax). This means that this worker will actually be saving money on her trading and the financial industry would be looking at a loss in revenue of $60. This is money taken out of the pockets of the Wall Street gang.
In short, an FTT raises a huge amount of money from many of the richest people in the country in a way that is actually likely to make the economy more efficient by reducing waste in the financial sector. There is no better policy in our tool chest for addressing inequality. Those who are serious about reducing inequality support a FTT, the other politicians are sitting at the children’s table.