December 14, 2009
The Guardian Unlimited, December 14, 2009
There is a growing movement in both the United States and around the world for taxing financial speculation. The logic is simple: even a very small tax on trades in stock, options, credit default swaps, and other derivative instruments can raise an enormous amount of revenue.
Even assuming large reductions in trading volume due to the tax, the country could still raise more than $100 billion a year in revenue or more than $1 trillion over the 10-year budget horizon. Trading costs have plummeted over the last three decades due to improvements in computer technology. Therefore, modest taxes on financial speculation, such as a 0.25 percent tax on the purchase or sale of a share of stock, would only raise trading costs back to the level of the 70s or 80s.
The United States already had a vibrant and well-developed capital market in these decades, so there is no reason to believe that raising trading costs back to earlier levels would prevent these markets from performing their economic function. Higher trading costs will just act to discourage speculation.
Furthermore, the bulk of the money raised through the tax would be coming out of the pockets of the Wall Street crew, the same folks whose greed brought us this economic disaster. What better holiday gift could we give Wall Street than the opportunity for make up for some of the damage that it has caused the country?
There is not much of an argument against a speculation tax on the merits, so most of the opponents focus on enforcement issues. The claim is that if we put a tax in place unilaterally in the United States, then all the trading would go overseas, therefore we would not collect any revenue.
There are three problems with this argument. First, we already have a model that disproves the basic claim. The United Kingdom has had a tax on stock trades for decades. Relative to the size of its economy, it raises the equivalent of more than $30 billion a year in the United States from just taxing stock trades. Obviously the trading has not simply fled overseas.
If reality is not a sufficient refutation of this argument, one can also turn to the basic logic of the claim. The leaders of most other wealthy countries have already indicated their support for imposing financial transactions taxes in the wake of the crisis. If the United States were to join with the leaders of Germany, France, the United Kingdom, and other countries whose leadership has publicly called for financial transactions taxes, it is difficult to believe that they could not craft an international agreement. This is not a necessary condition for successfully imposing a speculation tax, as the example of the United Kingdom proves, but international coordination would nonetheless be desirable.
Then there is the question of places like Lichtenstein and Cayman Islands, which can ostensibly operate as tax havens, allowing for speculators to escape the tax. This argument also strains credulity. Can these tiny countries really act in ways that are harmful to the interests of the world’s largest and most powerful countries?
What would happen if instead of being tax havens, these countries allowed themselves to be used as arms conduits to Al Queda? Would President Obama and other world leaders just sit back and complain that there is nothing that could be done? The reality is that these tax havens can only exist with the willing cooperation of the wealthy nations. If they were cut off from access to the international banking system, their usefulness as tax havens would quickly vanish. The tax evaders of the world will not fill ships with gold to hide their income in the Cayman Islands.
We can also be a bit clever about cracking down on evaders. Suppose that we gave a reward of 10 percent of the tax collected to workers who turn in their bosses. There are few Wall Street billionaires that physically do the trading themselves. They have assistants for this task. And many of these assistants would be happy to make themselves rich by turning in their bosses.
In reality, the idea that a tax on speculation is unenforceable is laughable on its face. Compare the difficulties of enforcing a speculation tax with enforcing copyrights. In the case of a speculation tax, the issue is a relatively small number of very large transactions. No one cares if trades involving a few thousand dollars go untaxed. The real issue is a relatively small number of trades involving millions, or even billions, of dollars.
By contrast, copyright enforcement is all about billions of small transactions involving movies with a copyright-protected price of $15 or $20 or songs with a copyright-protected price of less than a dollar. The problem of enforcing copyrights is several orders of magnitudes greater than the problem of enforcing a financial transaction tax. Yet, none of those insisting on the impossibility of enforcing financial transactions taxes have said that copyrights are unenforceable. The issue is clearly what they want to enforce, not a question of what is enforceable.
The country does need to let itself be ripped off by the Wall Street crew indefinitely. We can make them pay a price for the damage they have caused. We just have to stop listening to the Wall Street apologists and get serious.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, “Beat the Press,” where he discusses the media’s coverage of economic issues.