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Saturday, November 5, 2011

Try a Financial Transactions Tax

A financial transactions tax would impose a small tax on certain financial transactions.  The main idea is to reduce the sort of unproductive speculation that resulted in the partial destruction of the world economy, the loss of hundreds of thousands of jobs, the loss of any realistic expectation of a comfortable retirement for millions of people (due to the low interest rates and uncertain stock market caused by the continuing crisis), and the loss of homes for thousands of families.

There are some very smart people on both sides of this issue.  Keynes proposed it in 1936.  Joseph Stiglitz (Nobel Laureate) is for it.  Kenneth Rogoff (Harvard Economist and International Chess Grandmaster) says it might do more harm than good.  Larry Summers was for it (1984) until he started making tons of money by being against it (see Summers, L. H. and V. P. Summers, 1989. When financial markets work too well: a cautious case for a securities transactions tax, Journal of Financial Services Research 3, 163–188).  President Obama was for it until he was against it.  James Tobin (Nobel Laureate who came up with one form of the idea, a tax on currency speculation) recanted, at least for a while.

Interestingly, Wikipedia discusses various flavors of the tax at length, and talks about experiences in different countries, without once mentioning that a form of it was in effect in the U.S. from 1914 to 1966.  According to the Center for Economic and Policy Research:

"The FST is not a new idea. The U.S. had a transfer tax from 1914 to 1966 which levied a 0.02% tax on all sales or transfers of stock. In 1932, Congress more than doubled the tax to help financial recovery and job creation during the Great Depression. Transactions taxes were imposed in most financial markets until the last two decades, and there still is a 0.5% stamp tax imposed on each trade on the London Stock Exchange. The U.S. already has a very modest FST, which is used to finance the Securities and Exchange Commission and the Commodity Futures Trading Commission."


Note:  I saw at least one site that purported to quote this paragraph but gave 0.2% instead of 0.02%.  I haven't done any double-checking.

I personally have not analyzed any of the proposals closely. There are clearly a lot of questions:  will it harm liquidity?  Will it decrease or increase volatility?  Can it be implemented in only one country or does it need to be implemented the world over?  Will it really rake in the projected $100 billion per year in revenue?

All of these are fair questions.  But we can sit around and theorize about them ad nauseam without ever knowing the answer.  Why not show some leadership on this issue?  It was OUR banks that plunged the world economy into financial crisis.  Why don't we try a bold solution like this and see what happens?

A couple of years ago, we pumped $700 billion of hard earned tax dollars into the economy, without any appreciable effect (well, except to enable a few upper middle class families to trade in their rusting minivans for a $5000 discount on Japanese-made Priuses (Prii?), and to feather the nests of replacement windows contractors who rely on cheap if not illegal itinerant labor to do the real work).  Why not see if we can make some of that back, while imposing a tax on the kind of reckless behavior that got us here to start with?

If it works, great.  If it doesn't work, we can always repeal it -- it's hard to imagine that it would cost us more than the $700 billion we've already spent on one try.

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