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 (D-IA) and Rep. Peter DeFazio (D-OR) 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 three 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.