Sand in the Gears: The Case for a Tax on Financial Speculation

By Weissman, Robert | The American Prospect, June 2010 | Go to article overview

Sand in the Gears: The Case for a Tax on Financial Speculation


Weissman, Robert, The American Prospect


Buy a cup of coffee in Manhattan, and the sales tax is 8.875 percent. Buy a share of Exxon on the New York Stock Exchange, and the tax rate is just a hair more than zero. Like other double standards that benefit high finance, the zero tax rate on financial transactions both reveals and reinforces Wall Street's massive power and privilege.

But now a growing movement is coalescing around the idea of a financial-speculation tax, as an opportunity to confront Wall Street politically, shrink the bloated financial sector, diminish dangerous speculation, and raise significant sums of money to meet priority needs. The movement is drawing support among consumer, labor, and financial-reform groups associated with Americans for Financial Reform and also among climate-change and global-health campaigners, who hope a speculation tax can generate revenues for targeted purposes. The idea is attracting interest among congressional leaders and has the affirmative support of British Prime Minister Gordon Brown, French President Nicolas Sarkozy, and other European leaders.

There are numerous possible variants of a financial-transaction tax. Nobel economist James Tobin famously proposed a tax on currency transactions, and some advocates focus on currency trades. Even Larry Summers, as a young economist, wrote a scholarly paper supporting a Tobin tax as salutary "sand in the gears'--and that was before the explosion of derivatives trading. Today's leading proposals envision a sales tax applied to stocks, derivatives, and other financial instruments, scaled to prevent investors from circumventing the tax simply by switching from, say, stocks to derivatives.

A SPECULATION TAX HAS several distinct benefits. First, it can slow down the ever faster pace of buying and selling financial instruments. Far too many of Wall Street's transactions take the form of short-term trades intended to aggregate tiny margins. This insider business does little to promote efficient allocation of capital-Wall Street's purported service to the real economy. But it creates major risks because it uses very high leverage that endangers individual financial institutions and our whole financial system.

Vanguard founder John Bogle says he "loves" the speculation tax because it will curb the worst trading excesses. Bogle campaigns against high-turnover, speculative trading as an investor-consumer rip-off. Altogether, he points out, investors by definition can only do as well as the overall market return. The aggregate impact of frequent trading by mutual funds doesn't change this, but it does provide the rationale for high fund fees--the "croupiers'" cut, Bogle says. A speculation tax would encourage longer-term investing and give investors more incentive to urge for better management.

Second, by reducing trading volume, a speculation tax can also help shrink the bloated financial sector generally. Finance is an "intermediate good'--something that is supposed to help produce the goods and services we ultimately care about, not just be an end in itself. Dean Baker of the Washington, D.C.-based Center for Economic and Policy Research asks how we would react if trucking had tripled in size relative to the economy over the last three decades, as finance has by some measures. An oversized financial sector is not just an economic problem, of course; a bigger Wall Street is able to exert more political power.

Third, a speculation tax can raise serious money. Assuming a quarter-percent tax on stock trades, and a commensurate rate tax on other instruments, Baker and Robert Pollin of the University of Massachusetts, Amherst, estimate that a speculation tax could raise more than $100 billion a year.

Despite Wall Street's intense opposition to a speculation tax, such a measure remains politically viable because of its revenue-raising potential. A diverse set of interests are hoping to tap some of the revenue from a speculation tax. …

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