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By Greg Noth, originally published on Next New Deal

Taxing speculation would raise revenue and make markets safer for everyone.

In January, 11 European countries implemented a Financial Transaction Tax (FTT), which places a small tax on stocks, bonds, and other products traded in financial markets. They expect to raise billions of dollars in revenue, and there are signs the idea for a similar tax may be gaining traction in the United States. Senator Tom Harkin and Rep. Peter DeFazio are reviving their Wall Street Trading and Speculators Tax Act, which includes an FTT but died in committee in 2011.

The purpose of a Financial Transaction Tax is to raise revenue by requiring buyers and sellers to pay a very small fee for each trade they make. The FTT proposed by Harkin and DeFazio, for example, places a three-basis-point charge on most stock, bond, and derivative trades. (In comparison, the European FTT taxes stock and bond trades at 0.1 percent of their value.) A basis point is one-hundredth of one percent, meaning a tax of just 3 cents would be paid for every $100 traded, $3 for every $10,000 traded, and so on. It would apply to any trade in the U.S. and by any U.S. individual or company, so corporations’ offshore subsidiaries would not be able to get around it.

The bipartisan Joint Committee on Taxation projects a three-basis-point FTT could raise as much as $352 billion over the course of 10 years – an average of $43 billion a year. This is a significant amount of money. With it, many of the harsh across-the-board cuts put in place by the 2011 Budget Control Act (BCA) (also known as sequestration) could be alleviated. For example, the $38 billion scheduled to be cut from non-defense discretionary spending – for things like housing assistance and community development – could be avoided entirely.

The FTT is a very low-risk bet, and, as mentioned, the returns could be huge. Most Americans are not trading derivatives or credit-default swaps, and thus would have nothing to worry about. The International Monetary Fund (IMF) examined Europe’s FTT and said it was “quite progressive.” According to the European Tax Commissioner, banks and other financial institutions, such as hedge funds, carry out as much as 85 percent of taxable transactions. In practice, the FTT would function in a similar way to the capital gains tax, which affects a very small number of people, most of whom are already wealthy. It would not be like the sales tax, which is regressive and falls disproportionately on the poor.

A Financial Transaction Tax would create a less volatile and speculative stock market, something few Americans would have a problem with. Because trades would be taxed (albeit at a very low rate), investors and financial managers would have an incentive to think long-term when making investments. This would discourage high-frequency trading (HFT), which offers very little to normal investors and has exploded in recent years, making the market more volatile  and dangerous. If HFT did not decline, however, it would simply result in more revenue.

Opponents of the FTT say it would harm financial markets and companies looking to raise money. However, smart legislation can avoid that problem rather easily. For example, the Harkin-DeFazio FTT would exempt the initial issuance of stocks, bonds, and other debts. Loans from financial institutions, companies’ initial public offerings (IPOs), and a city’s sale of municipal bonds, for example, would all be exempt from the FTT the first time they are sold. If a financial institution decided to trade a company’s debt after issuing it a loan, however, the FTT would come into effect.

Those arguing against the FTT also say the costs incurred by the tax would be passed on to retail investors -- through increased ATM fees, for example. But this is entirely avoidable with the right legislative language. The law could simply ban the practice, but even without an explicit ban, it is unlikely banks would take that course. Since some banks’ activities would fall under the FTT more than others’, not every bank would have the same incentives to raise fees on customers. As a result, if only a select few banks did so while others did not, marketplace competition would drive consumers to institutions without FTT-related fees.

In the wake of the 2008 financial disaster, which banks and financial institutions played a large role in creating, it makes sense to have policies designed to incentivize responsible trading practices and reign in reckless behavior. A Financial Transaction Tax would result in a more stable and less volatile stock market. It would also raise billions of dollars that could help avoid the harsh cuts set to begin March 1 – and it would do it all without touching the vast majority of Americans’ wallets.

Greg Noth is an intern in the House of Representatives and has formerly worked with the Center for American Progress and Iowa Senate Democrats. He is a graduate of Knox College in Galesburg, IL.

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Comment Preferences

  •  I like this plan (15+ / 0-)

    and think the amount of the tax is thoughtful and not enough to change trading patterns. Most of the transaction tax diaries here at DKOS have proposed taxes that were too high.

     A tip and a REC.

    "let's talk about that"

    by VClib on Mon Feb 11, 2013 at 09:50:09 AM PST

    •  Significant increase from .0034 Section 31 fee (8+ / 0-)
      The US imposed a financial transaction tax from 1914 to 1966. The federal tax on stock sales of 0.1 per cent at issuance and 0.04 per cent on transfers. Currently, the US has a very minor 0.0034 per cent tax which is levied on stock transactions. The tax, known as Section 31 fee, is used to support the operation costs of the Securities and Exchange Commission (SEC). In 1998, the federal government collected $1.8 billion in revenue from these fees, almost five times the annual operating costs of the SEC.[41]
      http://en.wikipedia.org/...

      FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

      by Roger Fox on Mon Feb 11, 2013 at 10:10:31 AM PST

      [ Parent ]

      •  It should all go to the SEC... (2+ / 0-)
        Recommended by:
        elwior, Roger Fox

        Imaging what the SEC could do with adaquate funding and Elizabeth Warren in the senate giving their bite some teeth.  

        Maybe we could afford a new attorney general too...

        "Perhaps the sentiments contained in the following pages, are not YET sufficiently fashionable to procure them general favour..."

        by Buckeye Nut Schell on Mon Feb 11, 2013 at 02:14:07 PM PST

        [ Parent ]

    •  Changing trading patterns... (4+ / 0-)
      Recommended by:
      Zinman, JWPinNYC, Hirodog, elwior

      ...is one of the reasons for the tax I believe.

      It's proponents often sell it on the basis of the revenue it will raise, but another thing it has going for it is it's potential to reduce risky, socially useless short-term trading. If it does that then it won't raise as much revenue as expected, but it's win-win either way and could save a hell of a lot of money that would have been pissed away in future bailouts.

      If I can shoot rabbits, then I can shoot fascists- Manic Street Preachers

      by Liberal Of Limeyland on Mon Feb 11, 2013 at 01:02:39 PM PST

      [ Parent ]

      •  I have not heard of any evidence... (0+ / 0-)

        ...that short-term trading is bad.

        When I retire, I will begin to sell off my 401K. I would like to have the option of selling to short-term traders in addition to long-term traders.  Having more buyers increases the chance that I'll get a good price.

  •  It's sensible, raises desperately needed revenue, (10+ / 0-)

    and provides a modest disincentive to programmed trading 'churning' that provides the greatest potential for unintended Wall Street armageddon down the road.

    So, of course, it's doomed. Instead we'll keep talking about gutting Social Security and Medicare to make sure the U.S. budget is balanced using the flesh and blood of the poor and working class.

    •  Transaction tax is a horrible idea. (0+ / 0-)

      Transaction Taxes are a very bad idea.

      One reason why is that it will force trading to move overseas, where we cannot regulate it. If Bank of America had been based in Dubai, they would not be getting sued today. The SEC has no authority in Dubai. We would also lose the income taxes we collect on trader's salaries.

      Another is that the people pushing it don't seem to understand Finance, which is scary. For example: The "$43 billion/year" number is highly suspect. How can a transaction tax raise that much? Total profits for all Wall Street firms were only $61.4 billion in 2009.  How can you cut a $43 billion steak from a $61 billion cow?

      The biggest reason is that it takes us off message. We need to continue to focus on two things:

      1) Raise high-bracket income taxes
      2) Raise Capital Gains taxes.
      Don't tax the trade -- tax the trader. The real drag about this tax is that you must pay even if you lose money on a trade! We need to increase taxes on winners, not impose new taxes on losers.

      I hate big banks as much as anybody. I hope they die. But this is not the way to do it. Even if we can pass it, it will hurt more than it helps.

      There are two types of people who support this tax:

      1) People who don't know how much it will hurt the US but assume that anything banks hate must be good.

      2) Foreigners (like Oxfam) who don't care that it will wreck the US financial industry because they aren't Americans.

      •  Permit me to guess you work in finance. (0+ / 0-)

        And you think that microsecond programmed trading is just a wonderful idea that is immensely helpful to the real world bricks 'n mortar economy.

        Wall Street's casino 'economy' is a vampire sucking the life out of the United States without doing a damn thing for the 99% other than picking our pockets. And the threat to move trades overseas? Sounds like "buy this magazine or we shoot this dog".

  •  We have an FFT, a small one. (11+ / 0-)

    The reason market speculation is so popular, is the entire US tax system is set up to encourage it.

    Raising cap gains to between 28-33% would go a long way to disincentivizing Market speculation, returning to a Pre 1986 tax Reform Act environment would incentivize domestic investment.

    Taxing legit uses of markets isnt needed, whats needed is to stop the crazyness.

    I'm not against increasing the FTT, but by itself it wont do much vs the root of the problem.

    FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

    by Roger Fox on Mon Feb 11, 2013 at 10:06:54 AM PST

  •  Spread the gospel truth... T and R'd. (3+ / 0-)
    Recommended by:
    elwior, ask, middleagedhousewife

    “The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane.” — Marcus Aurelius

    by LamontCranston on Mon Feb 11, 2013 at 10:17:20 AM PST

  •  This approach makes a great deal of sense. (3+ / 0-)

     The best way to raise revenues is in the most painless ways possible, and in effect, this relatively small tax hurts no-one, yet raises a lot due to the breadth and width of trading.
       It'd a great, common-sense idea.

    "We the People of the United States...." -U.S. Constitution

    by elwior on Mon Feb 11, 2013 at 10:36:53 AM PST

  •  Fine with me nt (2+ / 0-)
    Recommended by:
    Roger Fox, elwior
  •  It should be large enough to discourage (6+ / 0-)

    massive, unproductive computer trading. Whatever that number is.

    Also, if banks are allowed to trade in advance of their customers on the basis of knowledge of their customers' orders -- which I personally think should be outlawed -- then at least it should be taxed to limit its value.

    The Class, Terror and Climate Wars are indivisible and the short-term outcome will affect the planet for centuries. -WiA "When you triangulate everything, you can't even roll downhill..." - PhilJD

    by Words In Action on Mon Feb 11, 2013 at 11:00:54 AM PST

    •  1/4 of 1% as FTT would do it (5+ / 0-)
      Recommended by:
      elwior, ferg, Mac in Maine, VTCC73, Hirodog

      At least that's the opinion of some of my U of C classmates that work in the financial markets (I don't).  How valid is that number - which by the way would equal 25 basis points, with Europe set to go to 10 basis points, whereas the US is "talking" about 3 basis points: .0003 of total, or .03%.  The prevailing opinion was that a .25% FTT would severely cut programmed microtrades, down to maybe 1/3, 1/4 or less of today's volumes.  It would also mean that the fees collected would not be  $250B per year but perhaps only $50B-75B per year.

      IMO, drastically cutting programmed microtrades would be a good thing and, no, I don't want to start that arument/thread (lots of websites for that already).  The other question I have is whether it might not hurt to have an equalization between the (proposed) US FTT and the European version.  If they are at .1% (10 basis points), then why not have the US match it?

    •  Is there any evidence... (0+ / 0-)

      ...whatsoever that high-speed trading is bad?

      I have not seen a single shred.

  •  I'm tired of being harmed by financial markets (6+ / 0-)

    so  I welcome the opportunity to harm them back. So if we triple this tax, so that a vampire squidster who traded 10 million in stocks or bonds or whatever in one day, they would have to pay a whole $3,000? And we would raise over $1 trillion in new revenue?

    But, oh my, what's going to happen to sales of Dom Perignon?

    Actually, the financial markets trade, what? $10 trillion every day? Who knows? The last Bank for International Settlements survey showed $4 trillion a day just in the forex market.

    So, yeah, I love the opportunity to harm the financial markets back.

    A conservative is a scab for the oligarchy.

    by NBBooks on Mon Feb 11, 2013 at 11:01:03 AM PST

  •  Each time a gambler, er, trader has to pay a penny (6+ / 0-)

    in tax, an angel dies. Think of the evil this proposal would let loose if we adopt it.

    Other than that, it's a great, and necessary idea.

    I'd maybe make trades in derivatives and other invented "financial instruments" pay at, say, a 30% rate though. And then tax profits from such trades at another 60% or so. Make the rates so high it would be better to invest in a real-world business.


    We live in a nation where doctors destroy health; lawyers, justice; universities, knowledge; governments, freedom; the press, information; religion, morals; and our banks destroy the economy. -- Chris Hedges

    by Jim P on Mon Feb 11, 2013 at 11:30:04 AM PST

    •  Don't tax each transaction. (0+ / 0-)

      The best way to tax exotic derivatives is to tax them once, when they are created.

      The big pain that CDOs and other derivatives cause was because there was no market for them and they therefore could not be valued. Clogging up the market with a transaction tax only increases the pain.

      You don't tax a farmer every time he plants a seed. You tax him on his profits after he sells his crop. Financial taxes should work the same way -- let trades happen, but tax the profits at higher levels.

      •  Manhattan Man, pls consider posting a diary on (2+ / 0-)
        Recommended by:
        elwior, david78209

        your point of view. IMO we need some good discussions on economics so that we can all be more knowledgeable and come up with solutions.

        Some of the things wrong with our financial system now are so blatant that even I can see them.  For example lack of Federal control so that Savings & Loans could gamble with deposits and if they won, keep the money--but if they lost the US Treasury (us taxpayers) would cover their losses.

        Lack of accountability so that no one goes to jail no matter what the Corporation does--that's another big problem.

        I think derivatives should be out-lawed.  I saw one of the Kochs on TV sneering that the Occupy Wall Street people, "don't even know what a derivative is."

        I know what it is--it is cutting up ownership of something into smaller and smaller pieces and selling them until each piece is worth nothing, but the profit has been made.

        Fiscal conservative: a Republican ready to spend $5 to save a dime--especially if that dime is helping a non-donor.

        by Mayfly on Mon Feb 11, 2013 at 01:41:21 PM PST

        [ Parent ]

      •  I want gambling parted from finance. Period. (0+ / 0-)

        Let gamblers gamble, and with their own money. Not with somebody's retirement funds or anything else not theirs.

        Stop giving it a patina of legitimacy, when it's really plain old, ugly, and destructive, greed addicted to gambling.

        Tax derivatives out of existence as a way to force money into actually useful enterprises. Let the greed heads either grow up or go broke, I don't care which.


        We live in a nation where doctors destroy health; lawyers, justice; universities, knowledge; governments, freedom; the press, information; religion, morals; and our banks destroy the economy. -- Chris Hedges

        by Jim P on Mon Feb 11, 2013 at 05:20:14 PM PST

        [ Parent ]

  •  There may be another reason for opposition (1+ / 0-)
    Recommended by:
    elwior

    The size of the tax cannot be the primary objection -- it is far too small.  However, consider the mechanism necessary to collect it.  Each trade would have to be reported to the government, even if it were exempt from the tax.

    There is a lot of sllimy methods on wall street that the perps would not like the government or the public to know about.  I suggest this would be the biggest reason for opposition.

    Bene Scriptum, Bene Intellectum.

    by T C Gibian on Mon Feb 11, 2013 at 11:44:47 AM PST

  •  This tax would be trivial for anyone but (2+ / 0-)
    Recommended by:
    Liberal Of Limeyland, elwior

    financial instituions, day traders and the massively wealthy if they churn their assets continuously. It might hurt those brokers that are constantly pushing clients to flip their assets frequently. The tax might make financial markets a bit more secure.

    They should go for a transaction tax at the European rate though I cannot imagine it passing.

    We have only just begun and none too soon.

    by global citizen on Mon Feb 11, 2013 at 12:10:07 PM PST

  •  It is worth mentioning (3+ / 0-)

    the 11 EU members that now will proceed with the Tobin Tax (and who chickened out).

    11 EU states to introduce tax on stock trades

    The countries planning to introduce the tax include the eurozone's top four economies, Germany, France, Italy and Spain. Austria, Estonia, Belgium, Greece, Portugal, Slovakia and Slovenia are also on board. The group of states decided to move ahead after attempts to adopt a trading tax at the EU and eurozone-wide level failed in 2011.

    The United Kingdom, Europe's leading financial center, will not adopt the new levy and abstained during the vote, along with Luxembourg, the Czech Republic and Malta.

    Previous UK Prime Minister Gordon Brown expressed support for a Tobin Tax, but the current Cameron administration chickened out.

    Paranoia strikes deep. Into your life it will creep. It starts when you're always afraid. You step out of line, the man come and take you away. - S. Stills

    by ask on Mon Feb 11, 2013 at 12:10:11 PM PST

    •  We already have an FTT of sorts (1+ / 0-)
      Recommended by:
      david78209

      We charge stamp duty of 0.5% whenever someone buys publicly listed stock. It raises a useful few billion a year and certainly doesn't drive financial activity offshore. It's funny how the Tory government overlooks that.

      As far as I'm concerned this tax is a win-win. Either it raises some useful revenue, or it reduces risky short-term trading, or a bit of both.

      If I can shoot rabbits, then I can shoot fascists- Manic Street Preachers

      by Liberal Of Limeyland on Mon Feb 11, 2013 at 12:55:14 PM PST

      [ Parent ]

      •  Don't try to sell it in the US as a "stamp duty" (0+ / 0-)

        One of the causes of the American Revolution was the "stamp tax" imposed on the Colonies by Britain -- or at least, that's what I was taught in American History.

        The principle is fine, but I'd suggest a different name.

        We're all pretty strange one way or another; some of us just hide it better. "Normal" is a dryer setting.

        by david78209 on Mon Feb 11, 2013 at 03:01:43 PM PST

        [ Parent ]

    •  Of course the UK is not for it... (0+ / 0-)

      ...because the UK has thousands of workers making billions (and paying taxes on those billions).

      For the same reason, the US should be against this tax. Unlike "Germany, France, Italy and Spain. Austria, Estonia, Belgium, Greece, Portugal, Slovakia and Slovenia", we actually have a world-recognized financial market that brings in billions to our country.

      Letting the French and Italians bullsh-t us into crippling our markets is as dumb as the the Italians letting us levy a Global Tax on wine and olive oil.

      Financial Services is one of the few industries where the US is still #1. Why do we want to kill it?

      We need to forget this crazy Transaction Tax and focus on raising the Capital Gains Tax, the Corporate Income Tax, and the Personal Income Tax.

  •  Of course (2+ / 0-)
    Recommended by:
    Liberal Of Limeyland, elwior

    the vultures will kick and scream:

    Paranoia strikes deep. Into your life it will creep. It starts when you're always afraid. You step out of line, the man come and take you away. - S. Stills

    by ask on Mon Feb 11, 2013 at 12:14:04 PM PST

  •  A good idea, long overdue (1+ / 0-)
    Recommended by:
    elwior

    Apparently its getting enough discussion in the DC bubble that a recent lobbyist/financial expert was forced to declare that enacting it would "drive the stock market offshore".

    From your diary, it appears there's a solution for that.  Would we need to watch out for a shadow stock trading system, as we now have a shadow banking system?

    Thanks for the informative diary.

    Democratic Leaders must be very clear they stand with the working class of our country. Democrats must hold the line in demanding that deficit reduction is done fairly -- not on the backs of the elderly, the sick, children and the poor.

    by Betty Pinson on Mon Feb 11, 2013 at 01:52:32 PM PST

  •  capital gains @ 15% should be limited too (1+ / 0-)
    Recommended by:
    elwior

    Why do these hedge-funders get all of their income taxed at 15%, while honest work is more like 30-35%???

    We should limit this 15% rate to only the first $100,000 of income.  After that, you pay 40%.  

  •  High speed trading (1+ / 0-)
    Recommended by:
    elwior

    I've been hoping for something like this for a long time. It basically gets rid of a major cause of positive feedback in the control system that is the stock market. However, I wish it would also get rid of penny stocks (true penny stocks, not the current definition of anything <$5). This can be done by including a fixed portion in the rate (i.e., x% + y cents per share, where y is a fraction of a penny).

    Of course both of these would be highly unpopular on Wall Street since lots of traders and quants make their living this way. Rumors are that Obama was for such a tax (and what better time than right after the financial crisis), but was vetoed by Summers/Gaithner.

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