Billions of dollars to pay for government infrastructure and jobs programs would be taken out of stocks, bonds, and derivatives trades under a bill introduced by Rep. Keith Ellison (D-MN) and six other House Democrats.
The Inclusive Prosperity Act (H.R. 6411) would tax the sale of stocks, bonds, and derivatives sold by Wall Street firms at rates of 0.5 percent on stocks, 0.1 percent on bonds, and 0.005 percent on derivatives or other investments. Ellison's bill is cosponsored by Reps. John Conyers (D-MI), Bob Filner (D-CA), Barbara Lee (D-CA), Jim McGovern (D-MA), Pete Stark (D-CA), and Lynn Woolsey (D-CA).
“The American public provided hundreds of billions to bail out Wall Street during the global fiscal crisis yet bore the brunt of the crisis with lost jobs and reduced household wealth,” said Ellison in a statement. “This is a phenomenally wealthy nation, yet our tax and regulatory system allowed the financial titans to amass great riches while impoverishing the systems that enable inclusive prosperity. A financial transaction tax protects our financial markets from speculation and provides the revenue needed to invest in the education, health, and communities of the American people.”
Aims to End Profitability
Ellison said because stock and bond markets are computerized, a tax would be easy to track and enforce and tough to evade. The tax would make high-frequency trading unprofitable, he said, which could reduce “the excess speculation on commodities like food and gasoline that has caused their prices to escalate.”
Others put much of the blame for rising prices on other factors, especially Federal Reserve monetary policies that weaken the dollar, government ethanol mandates that have 40 percent of the nation’s corn crop going to motor fuel instead of food, and restrictions on oil drilling and building of new oil pipelines.
Critics also say such a tax would damage financial markets and cost jobs instead of creating them.
Would It Backfire?
“This tax is particularly odious as it is not only a move to extract more taxes out of a weak economy but it also has another misguided goal: to reduce speculative trading. It’s the speculators who make our markets one of the most dynamic and liquid in the world, and this tax will damage that standing and eliminate many jobs,” said Jeff McKinley, principal at Senex Solutions LLC in Chicago, which provides technology-driven accounting and administrative services to hedge funds and proprietary trading firms.
According to a recent study by the Cato Institute, a transaction tax could actually worsen market volatility. The study found a positive relationship between transaction cost and price volatility. These results suggest “the imposition of a transaction tax could actually increase financial market fragility, increasing the likelihood of a financial crisis rather than reducing it. Perversely, the imposition of a financial transaction tax could have results that are exactly the opposite of those hoped for by its proponents,” wrote Cato authors George H. K. Wang and Jot Yau.
“Financial transactions allocate capital to their most efficient uses. They help create productive jobs. Taxing these transactions limits the flow of capital and destroys jobs,” said economist Robert Genetski. “Policies that tax financial transactions would add to the list of destructive policies that have limited the number of well-paying jobs and reduced household incomes.”
“Almost no tax imposed by the money grubbers and wealth redistributors in Congress raises the expected revenue or comes without negative unintended—or perhaps secretly intended—consequences. Among the worst offenders on both scores is a tax on financial transactions,” said Ross Kaminsky, an independent trader and investor.
Harm to Middle Class
“Data from markets as diverse as Sweden, China, and various futures markets show that financial transaction taxes, because they dramatically lower trading volumes and market participation, raise far less revenue than proponents claim while hurting the quality of the impacted markets,” he said. “It should also be noted that these lower volumes come with increased unemployment in the financial sector.
“Furthermore, while those with no understanding of financial markets may think of stock exchanges as a playground of the rich, the majority of Americans—including half of the Democrats and Independents—own stock, whether directly or through mutual funds, retirement accounts, or pensions. By making investing less efficient and more expensive, a financial transaction tax harms the financial security of tens of millions of Americans,” Kaminsky said.
Consequence of Bailouts
Economist William Bergman agrees. “My own belief is that transaction taxes hurt the common citizen, on balance,” said.
“The more important lesson here, however, is how this effort highlights the longer-term consequences of the role of our government in spawning and dealing with our recent financial crisis—the worst since the Great Depression. By avoiding the tougher but more valuable route of allowing market forces to play out and impose losses where they rightfully belonged, the bailouts helped a lot of wealthy people but sowed the seeds of a loss of confidence in capitalism in general. If transaction taxes like these do become the law of the land, we can thank in important part the special interest groups that pushed for the bailouts,” Bergman added.
“The sponsors note that the federal government needs to spend more on infrastructure programs. Wasn't that already tried with a very large federal stimulus program early in the president's term? Did that work? Their proposal seems disappointingly unserious and a distraction,” said Hilary Till, principal at Chicago-based Premia Risk Consultancy, Inc.
“Would a Financial Transaction Tax Affect Financial Market Activity? Insights from Futures Markets,” Cato Institute: http://heartland.org/policy-documents/would-financial-transaction-tax-affect-financial-market-activity-insights-futures-0