Taxing Wall Street to Fund Jobs and Recovery on Main Street

This was written and posted by Mitchell Hirsch last week at Working America's 'Main Street' blog, where he is a featured guest blogger. Mitch was kind enough to email me his HTML text to cross post it here. 

What if Wall Street's financial transactions could be taxed to help fund job creation and economic recovery on Main Street? Politically the idea is vastly appealing, especially in the wake of Wall Street's bailouts and the resurgence of its obscene bonus plans. But as it turns out a financial transactions tax also makes a lot of economic sense.

The basic idea is fairly simple. Impose a small percentage tax of anywhere from .02% to .5% on things like securities trades and derivatives transactions, thereby generating an estimated $150 billion annually.

Support is now growing for such a financial transactions tax (FTT), to help fund jobs and economic recovery programs in the next few years, and to help reduce fiscal deficits in the outlying years.

Recently the Economic Policy Institute (EPI) proposed a financial transactions tax, specifically to pay for the five-point American jobs plan being promoted by the AFL-CIO and its allies.

In endorsing a financial transactions tax, EPI stated:

An intelligently designed financial transactions tax should be a key item on the policy menu. Those concerned about the state of the job market today and the state of the deficit tomorrow should embrace a proposal that calls for increased action to boost employment in the next two years that is paid for with the implementation of an FTT. The economic bottom line is that a financial transactions tax is a progressive revenue-raiser that is likely to be either efficiency-neutral or even efficiency-enhancing. Few other revenue-raisers can make this claim.

Just last week Congressman Peter DeFazio (D-OR) introduced an FTT bill in the U.S. House of Representatives that he and 21 co-sponsors call the "Let Wall Street Pay for the Restoration of Main Street Act".

At a press conference announcing the bill, Rep. DeFazio was joined by Senator Tom Harkin (D-IA) who said he planned to introduce the legislation in the Senate.

The Oregonian quoted DeFazio at the news conference:

''The American taxpayers bailed out Wall Street during a crisis brought on by reckless speculation in the financial markets,'' DeFazio said. ``This legislation will force Wall Street to do their part and put people displaced by that crisis back to work.''

The Hawk Eye quoted Senator Harkin on a conference call:

"Until 1966, the United States taxed all stock transactions and transfers," Harkin said during a conference call with reporters on Friday. "Indeed, Congress doubled the transaction tax rate during the Great Depression in order to finance economic recovery initiatives."

Harkin's bill would place a 0.25 percent tax on each stock transaction and a 0.02 percent tax on options, futures and swaps, but it would exempt tax-benefited accounts like retirement plans.

Harkin said there's "nothing novel or untested" about such a proposal, as Great Britain levies a tax on such transactions.

Perhaps the most prominent and consistent supporter of a financial transactions tax has been economist Dean Baker, co-director of the Center for Economic and Policy Research (CEPR) in Washington, D.C. In September of 2008, as Wall Street's "too-big-to-fail" giants tumbled under the weight of multiple, bursting asset bubbles, hurling the rest of the economy into deep recession while the Bush administration frantically maneuvered to bail them out, it was Baker who wrote "Medicine for Wall Street: A Financial Transactions Tax".

Last week, as President Obama convened a White House jobs forum that included many supporters of an FTT, including Baker and Paul Krugman, Baker's CEPR announced that more than 200 prominent economists had signed a letter (pdf) supporting a financial transactions tax.

December 3, 2009 An Open Letter from Economists in Support of Financial Transaction Taxes

To Whom It May Concern:

A modest set of financial transaction taxes could raise a substantial amount of needed revenue while having little impact on trades that have a positive economic impact.

The cost of trading financial assets has plummeted over the last three decades as a result of computerization. This has led to an enormous explosion in trading volume, with most trades having little economic or social value and redistributing disproportionate resources to the financial sector. A set of modest financial transactions taxes, which would just raise trading costs back to the level of two or three decades ago, would have very limited impact on trades that have real economic value.

Such taxes could both reduce the volume of speculation in financial markets and provide substantial revenue for either important public purposes and/or deficit reduction. Financial transactions taxes could be an important part of a reform package that seeks to remake the financial sector so that it better serves the larger economy.

The various versions of the financial transactions tax proposal currently have differing tax rates, target different types and sizes of transactions, and would generate a range of revenues over different periods of time. They will all face stiff opposition from financial lobbyists, Wall Street's pundits and their allies in Congress. But support for a set of smart financial transaction taxes is growing.

And with the urgent need for immediate action to create jobs, extend and expand jobless benefits, and invest in a real recovery on Main Street, as Nobel Prize-winning economist Paul Krugman wrote recently

a financial transactions tax is an idea whose time has come.

 

Meta: 

Comments

I'm all for this

I need to read the actual legislation but I've been all for a Tobin tax, or transaction tax.

You might mention to Mr. Hirsch that he just needs to create an account, that we're not like other sites where there is only one account or requires special something....the architecture here is one of a community blog, so he could have his name on the piece as it goes out into the wild world of RSS feeds.

But great post and love DeFazio, now I just have to parse the actual bill.

We also need this on a global scale, else trades will happen on other exchanges not subject to the tax.

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I will push to keep that from happening

Sorry, but this tax will not do what you want. And there is no way you will get this to go global. There will always be a country that will want the capital, like Singapore or Hong Kong. If that's ok with you, then tell that to young companies that want to go public.

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We need money.

I also see this as way to get desperately needed revenue. We can pay for a jobs bill and benefit from less volatility in the markets.

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you won't get either

Once more, how do you think the Street will react once they see this bill pass? Secondly, when when you remove liquidity markets get more volatile as you remove participants. I'm trying to get a copy of the article mentioned below. But the fact remains, liquidity is a major issue.

 

Abstract This study examines the impact of a stamp tax rate increase on market behavior, using data from two stock exchanges in China. We find that when the tax rate increases from 0.3 to 0.5% (which implies that the transaction cost increases by about 1/3) trading volume decreases by 1/3. This implies an elasticity of turnover with respect to a stamp tax of −50% and an elasticity of turnover with respect to transaction cost of −100%. The markets’ volatility significantly increases after the increase in the tax rate. Furthermore, the change in the volatility structure indicates that the markets become less efficient in the sense that shocks are less quickly assimilated in the markets.

 

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Treasury handed out $38 Billion tax exemption

It seems the government is moving in the exact opposite direction.

The Internal Revenue Service on Friday issued an exception to long-standing tax rules for the benefit of Citigroup and a few other companies partially owned by the government. As a result, Citigroup will be allowed to retain billions of dollars worth of tax breaks that otherwise would decline in value when the government sells its stake to private investors.

The actual value of this exemption could be zero (if Citi makes no profits) or up to 40%, roughly $15 Billion.

The IRS, an arm of the Treasury Department, has changed a number of rules during the financial crisis to reduce the tax burden on financial firms. The rule changed Friday also was altered last fall by the Bush administration to encourage mergers, letting Wells Fargo cut billions of dollars from its tax bill by buying the ailing Wachovia.
"The government is consciously forfeiting future tax revenues. It's another form of assistance, maybe not as obvious as direct assistance but certainly another form," said Robert Willens, an expert on tax accounting who runs a firm of the same name. "I've been doing taxes for almost 40 years, and I've never seen anything like this, where the IRS and Treasury acted unilaterally on so many fronts."

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$15B

Thanks midtowng. I couldn't find the exact amount Citigroup was going to get when I saw this earlier.

It seems to be all about helping Citigroup look better than they really are.

If ever there is an institution that needs to be broken up, it's Citigroup, not only from their own current health, but what they have done since the repeal of Glass-Steagall. Their influence and activities from dot con to enabling offshore outsourcing (through capital, although they also offshore outsource) and bad trade deals....

It's just so obvious. A few "chosen ones" don't have to play by any of the rules others do....at all costs, even putting the U.S. in serious national economic risk.

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Regarding this tax

I will be blunt, I'm against this. First it would put me out of business, as I day trade to put food on the table and pay my bills. Secondly, this bill will not do what you think it will. Thirdly, despite DeFazio and Harken and your 21 congressional supporters, this bill will never get anywhere and thank god for that.

Do you really believe you will get the money to fund a jobs program with this? The moment you enact this, at best you will get one year's worth and even there it won't reach into the 100 billion mark. You will kill liquidity in the markets, and while you may not think you're affected because you don't actively trade stocks, you will get hit. How? Index and other funds. Each day they need to adjust their holdings to match performance to a key benchmark. You think they will eat up that cost? Never, they'll simply pass it on to you, and at best you will see a lower return on your money.

Then there's liquidity, though you may hate people like me, the fact is if you needed to get out of a position, we're here to do it. Instead, what will happen, you will see spreads widen, and volatility increase. You didn't care for the wild swings in Sept-Oct of '08? Well guess what, that may become norm.

You don't think there won't be exemptions? In the UK and other European nations there were. But for those not given such a privileged, they moved their money to either new instruments that were exempt or to other countries. And trust me, the moment this is passed, every big institutional player like Goldman or Merril will find a loop hole.

I know a lot of you think "speculation" is evil or useless, but it isn't. You will tell me that I should hold long term, but let me tell you that my risks are better when I close out. Buy-and-hold doesn't work, unless you can nail a good deal and buy like Warren Buffet size blocks. All those investors in Enron or At&T or GM or Fanny Mae, who held on for years got burnt. Me? Yeah I may make nickels and dimes and dollars here or there, but a I can sleep at night knowing I'm out of anything that would hurt me financially. Why is that so wrong to people like you?

Lastly, the blame, it wasn't the stock traders or the futures traders that did this. It was the real estate folks and the derivatives tied to that. I know I know, it's "Wall Street," well that's like me bashing all the unions because of some corrupt Teamsters in Chicago or something. If you want to say it's connected, then tell me where I caused someone to lose their house?

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No tax is painless to everyone.

But this comes extremely close. We desperately need new tax receipts. You can daytrade with a miniscule .25% tax on each transaction. Twentyfive cents on a $100. Come on seriously.

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Lets use me as the pinata for a moment

First why does this even have to be? I pay a cap gains tax, I also pay taxes on other income. here I pay a tax whether I make money or not! That's crap. You ever stop to think we pay too many taxes?

I actually trade S&P contracts, so for me the expenses would be far higher than that. But let us suppose I did trade stocks. Your example is wrong, because it wouldn't be $100 unless I purchased stock that was a dollar a share at 100 shares. Be real. Let's say a $25/share, so it's $6.25 to buy and then another $6.25 to sell, a total of $12.50. For me to break even on the tax (let alone the commission), that stock would have to move at least $.13 cents. Now also keep in mind that spreads, for the market makers to facilitate their own transaction tax, would have to widen the bid/ask spread to AT LEAST this mount (not .0025, but really .005). Today stocks are decimalized and the spreads are often a penny to two cents apart. My costs just went up about 500% just on the spread. Now if I'm able to adjust my trading strategy to accomodate this change, I may make a profit, but the average day trader (myself included) don't really make our money until perhaps 5 or 6th out of ten trades. Now, if I do make money, I've got to pay taxes on that.

Oh by the way, since you've now eliminated the independent trader or market maker, guess who steps in? Yeah that's right, you've just given Goldman Sachs a new fortune. And down the road, when Obama is out or the Republicans control congress or the white house, they will get exemptions like many instutionals did the last time we had a transaction tax.

Anyways, back to using me as the pinata. Using my S&P trading as an example (but for our hypothetical stock), I booked 27 trades yesterday (12/17/09). So let's see to buy I pay .0025 and to sell I pay .0025, that's half a percent each trade. So yesterday would have cost me just in paying the transaction tax (TT) and not counting the increased spread or commission or possible loss :

XYZ Stock: $25/share * 100 = $2500
Round Turn (RT) = .005 or $12.50
27 trades of XYZ would mean my TT cost would be $337

Now taking into account that yesterday that 60% of my trades were losses, let's assume I'm able to get out within the bid ask spread. Since market makers have to take into account the TT, then we'd expand the spread from say to .125 or $12.50.

60% of 27 trades is 16.2, so let's say 16. So let's say, I'm able to get out at the bid if I'm long or at the ask if I'm short, my cost would be $12.50.

16 * $12.5 = $200

So so far my loss for the day is $337 + $200, or $537. I've employed $2500 (or $25 * 100) to buy the stock. Now for the sake of fairness, say the remaining 11 trades are winners, and also within the new spread (or $12.50.), it could be more, but let's say I just want to play the Bid/Ask.

11 * 12.50 = $137.50
So subtract my wins from my losses and I'm at -$62.50 for my losses, plus the $337 in TT, so my total loss would be $399.50. This, I may add didn't include commission. That $337 was paid out during the day to use $2500, whether I made money or not.

Now I know what you're going to say. That's $67500! You can afford a measly $337. But that isn't exactly fair, because I'm using the same $2500 over and over again, it isn't additional money, it isn't new money, it's the same cash.

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doesn't make sense

because you can write off your losses on your taxes on the trades you just lost on. So it's not the "same $2500" over and over again.

Then, you have a $100k worth of underlying stocks as total trades before you're hit with any tax.

Also, if you paid $12.50 on a (buy-sell) trade I mean just come on, we just had bottom commissions from about $35 base on per trade,on trades to now you might be able to get them about $3 but that's still the range, with a lot of online commissions, base per trade ~$7 to $20. So you're crying over basically a "rebump up" in commission costs, which were about that 10 years ago.

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now hold your horses on this

Ok, firstly there is supposed to be a cap, which exempts a host of traders, including day traders from the tax.

Secondly, it has to be global and thirdly, the levels and frequency need to be very carefully tuned in order to not hurt the little guy, pension funds and so on.

So, before you go off, thinking it will destroy your livelihood, let's read the actual legislation.

Ok? My understanding is DeFazio introduced one just for oil futures exclusively and this was because oil is such a critical commodity and we had a bunch of derivatives where possession never happened and it created the bubble of 2008 in oil prices.

Then, the second idea is just for certain derivatives and to really hit those doing flash trading (you aren't getting a 30ms heads up on trades now are you? with flash trading combined with naked access).....

it's to stop hedge funds and others from market manipulation

Another idea was to discourage these really horrific, "bad math" derivatives that were out there, to tax them...

so, there are 1001 ways to tax a transaction so first let's see the actual tax architecture, design, structure, with the exemption levels and ceilings. before thinking somehow it's after you.

i.e. I saw it had to be 100k in volume and they also had frequency of trades exempt. Are you making 30ms trades daily w/ 100k volume? If the answer is yes you should donate some serious bucks to EP. ;)

I have yet to see any Tobin/transaction tax proposal that would affect you frankly....unless you're a billionaire that I'm unaware of.

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apples and oranges here

if you're looking to stop what I really think is the mother of all front running, then fine ban that. Goldman others pay the exchanges, well actually the latter offers the service if you can believe it, a nice fee. Just ban the exchanges from allow the 30ms "preview." You don't need a new tax for that!

Market manipulation will be done off exchange. Exchanges today are nothing more than software platforms with a clearing mechanism. You can do that anywhere around the globe. Given all the algo boxes running out there, manipulation of stock prices isn't as easy as it used to be, it would create momentary arb situations. And lets say that we still have manipulation, what makes you think it will be done in a US exchange? The tax would push it off shore and we would still face the consequences.

Bad math derivatives can be fixed very easily, you regulate them. If they're found to really not be a proper product for hedging, then eliminate them, won't be a first time for this. Otherwise put them on a regulated exchange and get participants to provide the bid and ask. But with that tax, this may not happen unless they're able to widen the spread to compensate.

You mentioned global, there are already at least five countries (Canada, Russia, Switzerland, Sweden, Singapore) who have said they won't enact or participate in any such crazy scheme. So with this massive hole in a "global" transaction tax regime, these gaps would be akin to the holes in our southern border. Capital will flee to those countries, the trading will go to those countries. Now I know some here will say "good riddence", but you now won't get all that money you thought you were going to collect.

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that's true

which is why the effort must be global and there are various proposals around the globe as a result.

JV, you need to get to specifics and calm down.

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since we're posting articles about this

 

Ag groups call financial tax counterproductive

 

Spokeswoman says action 'would put jobs at risk'

By Wes Sander
Capital Press

Commodity groups oppose a tax on trading financial instruments proposed by Rep. Peter DeFazio, D-Ore.

The bill -- HR 4191, the "Let Wall Street Pay for the Restoration of Main Street Act" -- was introduced in the U.S. House of Representatives on Thursday, Dec. 3. Sen. Tom Harkin, D-Iowa, was expected to introduce matching legislation this week.

DeFazio calls it a "minuscule" tax, amounting to 0.25 percent of stock transactions and 0.02 percent of the sale of futures contracts.

Farmers and ranchers use futures contracts as a hedge against price fluctuations, as do elevators that buy and sell grain.

Bethany Shively, spokeswoman for the National Cattlemen's Beef Association, said such a tax would impact a producer's effort to stay in business by buying and selling futures.

"Any additional taxes or fees on these instruments would be a tax on ag producers, and that is unacceptable," Shively said. "This type of proposal would put jobs at risk, not help offset their creation."

DeFazio said the tax could raise $150 billion annually. Half of that will fund job-creation programs and half will go directly to reducing the federal deficit, he said.

DeFazio said the measure skirts the middle class by exempting retirement, education- and health-savings accounts from the tax, and $100,000 in taxable transactions would be exempted annually.

Daren Coppock, CEO of the National Association of Wheat Growers, said the tax would only degrade the markets that commodity growers rely on to help moderate exposure to market swings.

"Adding a tax on financial instruments and futures contracts would be counterproductive to the goal of helping those markets recover or function more efficiently," Coppock said.

 

 LINK: Ag groups call financial tax counterproductive

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JV come on

you're linking to some commodities lobbyists in food futures?

Please do not link any lobbyists propaganda on this site.

We're going to have to look over the legislation itself and be objective...

Now I know you wouldn't appreciate us linking the health insurance lobbyists "analysis" on single payer universal health care.....so let's not go there, regardless of topic.

Last I heard legitimate hedging which has been done in Ag commodities futures forever, would be.....exempt for the most part. Same with retail energy purchases, like utilities who also use futures as a hedge.

Bottom line, let's read the various bills please first.

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I've read the bills

I've read DeFazio's bill, and his isn't the only one waiting to be looked at. Regarding lobbyists, how is that any different than linking to a labor union? Both have their agendas. Don't tell me they're different things, because both are representing a group for a fee. And once more, if you have one exemption, then you will open the door to the big guys.

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Defazio's bill

H.R. 4191: Let Wall Street Pay for the Restoration of Main Street Act of 2009 .

Exemptions:

1) tax-favored retirement accounts,
2) education savings accounts,
3) health savings accounts,
4) mutual funds and,
5) the first $100,000 of transactions annually that are not already exempted.

Taxes:

stocks - 0.25%
futures, swaps - 0.02%
options (unclear) but looks like underlying asset (stocks) at 0.25%

So, if I buy $200k of GLD, that means a transaction tax of $50 bucks on top of the trade fee.

I think DeFazio's bill needs some work, such as first 100 transactions are exempt additionally. But still $50 bucks for a sale of $200k isn't that much really. Not too long ago brokers were collecting way more than that per trade.

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Alice in Wonderland

According to New Deal democrat initial jobless claims in November at 480,000 implies that “actual job growth is taking place in the economy this month.” This proposition gives new meaning to “Orwellian.”

This is not to criticize his analysis, which is consistent with other economist. Rather, to indicate what a ridicules discipline Economics is. The English language has no meaning in the mouth of economist.

Yes! Yes! I know. “Different Surveys!”
(What’s up is down and what’s down is up”, said “The Red Queen” in Alice’s Wonderland).

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ah, such stuff dreams are made of

Tell ya what, I'll take a look at it and post in an Instapopulist. We stopped linking to bonddad because those guys have some serious issues not only with analysis but with some sort of need to insult/attack "economics blog/economist du jour" these days.

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