MAKING SENSE -- September 13, 2013 at 1:52 PM ET
A new tax to raise money for the US and slow high-frequency trading
With Congress dueling over spending plans ahead of the Oct. 1 deadline to avert a government shutdown, Mark Rosenman makes the case for a new revenue-generating measure: a financial transaction tax. Photo courtesy of Jewel Samad/AFP via Getty Images.
Paul Solman: We first met Mark Rosenman, director of Caring to Change and a professor emeritus at the Union Institute & University, as a skeptic in our two-part series on "social impact bonds," which you can watch here and here. He was skeptical of the idea that social impact bonds could marry modern finance to fix social policy problems like recidivism in the "corrections" system.
Recently, he has been promoting an idea of his own: tax financial transactions to raise money for our famously strapped Uncle Sam. I asked him to make his case to our audience. Here it is.
Mark Rosenman: Congress is finally turning its attention to the looming budget and debt-ceiling deadlines approaching next month. In the House on Thursday, conservatives bucked a stopgap measure that would have funded the government at sequester-levels and gutted "Obamacare." (Read more about why here.) Without a new spending bill, the government will shut down on Oct. 1.
Americans across the nation already are paying a painful price for sequestration and other deficit-cutting initiatives. But there is little discussion on the revenue side of the debate despite a legislative initiative that could add billions of dollars in federal revenue.
Sen. Tom Harkin, D-Iowa, and Rep. Peter DeFazio, D.-Ore., have introduced a financial transaction tax (FTT) modeled after the one the European Parliament approved (to be implemented in 11 nations). It also takes after existing laws in Singapore, Hong Kong, Switzerland and elsewhere.
Oddly, although the Harkin/DeFazio version of a Wall Street speculators' sales tax has gathered support from some 20 co-sponsors and been endorsed by over 40 national nonprofit organizations and labor unions, it has not caught the imagination of many policymakers, charity leaders, or others concerned about the deteriorating circumstances of most Americans.
An FTT could make a very real and significant contribution to moderating recent cuts in the federal budget in a way that is minimally intrusive -- perhaps even beneficial -- to our economy. Since first proposed by Nobel Laureate economist James Tobin in 1972 (it's often called a "Tobin Tax"), the FTT has been the focus of occasional discussion, but it badly needs more attention today.
What Does It Get Us?
According to the projections of an admittedly optimistic study, up to $350 billion a year might be raised by an ambitious tax on stock and bond trades, options, swaps, futures trading, etc. This FTT would not apply to the day-to-day financial transactions of individuals and business, such as banking, loans and initial capitalization (raising money from investors).
To generate so large a sum, stock transactions would remain at or above their present volume and be taxed at a 0.5 percent rate. In financial parlance, that would be 50 "basis points" or hundredths of one percent. Fifty basis points or bps (pronounced "bips") is equivalent to $5 on each $1,000 traded.
Yes, taxing a good or activity tends to discourage buyers and result in less demand. But how much less would you buy -- of anything -- if the price went up by half-a-percent? Moreover, for bonds and other speculative transactions, the rate would be only a tiny fraction of even that amount (1 basis point; that's 10 cents on each $1,000. Existing FTTs in other countries vary from 10-50 bps on stocks.)
But, as calculated several years ago by the Center for Economic and Policy Research, even allowing for a 50 percent decline in trading volume, 50 bps of extra revenue on trading would still generate more than $175 billion annually.
More politically realistic, however, is the much lower rate of 3 basis points (less than a third of the 10 levied by the European model). That's what the Harkin/DeFazio legislation proposes. Even such a modest tax proposal -- so popular that it is has been approved by over 60 percent of Americans -- is projected to generate an average of $35 billion annually in additional revenue over the next 10 years.
But there is still a cost to the economy, is there not? As mentioned above, people run away from a tax. And while you or I might not be much influenced by a half-a-percent increase in price, professional traders -- and especially those computers now dominating the markets -- would be. So any "transactions tax" would indeed be likely to prompt a decrease in trading volume.
Paul Solman explained the intricacies of high-frequency trading in his 2012 interview with novelist Robert Harris.
But is that a bad or a good thing? Some believe that such a drop in trading would be, in and of itself, a salutatory contribution to the health of our markets. Computer-generated high-frequency/high-speed transactions today constitute over 50 percent of daily activity. Such trading arguably distorts and disrupts the market and works against the interests of the individual investor.
Other critics suggest that evading an FTT would be easy, given the international fluidity of capital, which was part of the initial experience when Singapore first established its tax, even though Singapore is one of three FTT countries rated in the top five nations for greatest economic freedom on the conservative Heritage Foundation's list. So, the argument goes, if we tax our markets, they'll all flee to cheaper climes (aka "tax havens").
The Harkin/DeFazio bill addresses that problem, however, by applying the tax to all U.S. investors, no matter where they transact -- although there is an exemption in the legislation for tax-sheltered retirement investment and education funds.
But Is It Fair?
The effects of a transactions tax might actually be positive, then. But the real argument for imposing one is fairness. Who would pay the vast majority of revenue from such a tax? Wealthy individual and institutional speculators, the very people who have benefited disproportionately from tax breaks and tax cuts in recent years, as well as from financial deregulation.
The data are as well known and discouraging. The top 1 percent of Americans have dramatically increased their share of income since the 1970s; in the last decade, it climbed to levels not seen since the Roaring '20s. Since the recovery began in 2009, the top 7 percent have seen their wealth increase by almost 30 percent while the rest of Americans have seen a decline of about 5 percent. A land of opportunity alright: for those already ahead of the game. And stock market transactions have been a major driver of growing inequality.
As a result of these trends and the Great Recession, surely accelerated if not actually caused by speculation, the American middle class has shrunk to an all-time low while income inequality has continued to grow. In a nation that prides itself on upward mobility, inequality is now much greater in the U.S. than in any of the world's 26 "advanced economies." And mobility itself is under siege, as we've seen on the Business Desk.
The good news is that most of those affected by growing inequality have benefitted from safety-net and other domestic government programs at the national, state and local level. But those programs depend on tax revenues for their funding streams. Federal spending on programs for the poor fell by more than $28 billion between 2011 and 2012; for healthcare, the drop was over another $25 billion. And that was before sequestration. Since the sequester went into effect, $31 billion more in cuts have been made to domestic programs, many of which are critical to the neediest among us.
Those cuts have very real consequences. For instance, close to 60,000 Head Start slots have been lost for needy children, along with over 18,000 staff positions. State-by-state examples of the sequester's impact on diverse nonprofit organizations and government agencies show significant reductions in programs such as Meals On Wheels, child care, housing, senior services, job training, homeless services, student support and more.
So Why Isn't it Time for a Transactions Tax?
While the news media and other outlets have chronicled some of the effect of sequestration's cuts, surprisingly few political or nonprofit leaders have called for restoration of these funds. Nor have enough expressed concern about the additional cuts congressional Republicans have recently proposed. They would reduce the budget of the Environmental Protection Agency by a third (eliminating its ability to enforce greenhouse-gas regulations and targeting energy programs), cut arts and humanities funding for poor students and eliminate at least 4 million hungry people from the food stamp program.
But to simply fight against past and proposed cuts is to let others define the debate. Public figures should fight for a revenue-increasing alternative to fund domestic programs. They can do this by supporting the Wall Street Trading and Speculators Tax, or an even more ambitious effort, and dedicating it to domestic needs.
So, faced by the out-sized and increasing wealth of market speculators, the resulting and alarming growth of inequality and immobility, and proposals for still more damaging cuts in domestic programs and charity funding, doesn't it make sense to support a financial transaction tax? Shouldn't individuals and institutional speculators who have done so well at the expense of the rest of us appropriately bear an increased share of the costs necessary to meet public needs and advance the common good?
Wall Streeters got us into this mess. They should welcome the chance to use some of their profits to help clean it up.
Earlier this month, Making Sen$e explored "BerkShares," the local currency of Berkshire County, Massachusetts.
Paul Solman: Let's try to squeeze in a few questions-and-answers here at the end of the week. Mostly, this week, they concerned our story on the local currency of Massachusetts' Berkshire County, "BerkShares."
The first question, though, concerned haberdashery.
Hank H. -- Tuscaloosa, Ala.: You are one of my favorite people on TV and I love your hats. Please do not wear your hat indoors. In all other respects you appear to be a gentleman; gentlemen remove their hats when indoors. Thank you.
Paul Solman: When did I wear a hat indoors, Hank? If I did, it was inadvertent. Or dumb.
Marc N. -- Washington, D.C.: Paul, I so much enjoy your segments, but I was left perplexed by your piece on "BerkShare" currency. I don't quite understand the point of Berkshares. Why should they encourage use of local rather than global business outlets, which seems to be the main purpose? Okay, if the local bank gives you 105 BerkShares for $100, you are ahead if the local stores accept BerkShares at par for what they would charge in U.S. dollars.
But what that essentially represents is a 5 percent sales discount. Why not just discount their dollar prices by 5 percent rather than doing it through an elaborate (and time-consuming) parallel currency system? Is BerkShares really just a fad intended to "pump up" the attraction of what a 5 percent dollar discount would equally bring? Am I missing something here? Some real economic/business advantage to BerkShares? I'd welcome your views.
Paul Solman: The premise is that more and more businesses will accept BerkShares, in which case, the currency will continue to circulate within Berkshire County instead of outside it, thereby encouraging local spending again and again instead of a simple one-shot 5 percent discount.
Ron G. -- Savannah, Ga.: I always enjoy your pieces on the NewsHour. My question on the BerkShares is why this is not Constitutionally illegal, per Article 1, Section 8?
Paul Solman: The relevant quote is that "The Congress shall have power...[t]o coin money." So BerkShares can't be coins, but they can be paper.
John S. -- Springfield, Va.: How do they protect against counterfeiting? Is there a dollar/BerkShare limit? What is the difference between 4.3 million and 130,000? What stands behind and backs up the BerkShare (full faith and credit of what)? Fun piece. You have great segments.
Paul Solman: The company that prints the currency for the U.S. Mint, Crane and Co., is based in Massachusetts. It also creates the paper, with special security features, for BerkShares. So I wouldn't worry too much about counterfeiting.
The limit on Berkshares redeemable for dollars? The total in the banks. But with only $130,000-dollars-worth in circulation, I wouldn't try to launder any ill-gotten gains in BerkShares. My $700 transaction at the bank was a whopper by historical standards.
What stands behind Berkshares? Hey, what stands behind any currency? Belief. Credibility. As I've written here time and again, "credit" comes from the Latin "credere": to believe. And money is nothing, in the end, but credit.