Securities Trading Transaction Fee

By John Ballard

Wanna see a simple, reasonable idea with no political chance? How about a micro-tax on securities transactions, maybe a fourth of a penny?

This was published a year ago.

Deal-makers may need to start budgeting for a special transaction tax if some members of Congress get their way. While such a tax is not expected to be passed anytime soon, it is one of the ideas being floated about on Capitol Hill these days as a way to raise money to fill the expanding hole in the federal budget.

The tax could be levied on transactions ranging from over-the counter derivatives trades to large mergers. Its intent is to help curb excess speculation as well as a way to build revenue.

The United States had a transaction tax from 1914 to 1966. The Revenue Act of 1914 levied a 0.2 percent tax on all sales or transfers of stock. In 1932, Congress more than doubled the tax to help overcome the budgetary challenges during the Great Depression. It was phased out in 1966 and has not been seriously considered as a revenue source until now.

�I am not offering this as a solution to any particular problem but whatever it does is beneficial,� Lawrence Mishel, president of the Economic Policy Institute, a progressive Washington-based policy research organization, told DealBook. �The idea that people have to buy and sell lots of stuff in a day is hard for me to understand as to why that is essential in the real economy.�

Mr. Mishel proposed a transaction tax to Congress last week as a way to pay for a program that would help the millions of Americans that have lost their jobs find new employment. Such a tax would be levied on both the buyers and sellers in all financial transactions including stocks, bonds, derivatives and futures.

�Think of it as a very small sales tax on financial transactions, somewhere between 0.1 percent to 0.25 percent of the value of the transaction,� Mr. Mishel said in his Congressional testimony last week. �A reasonable rate could produce revenues from $100 billion to $150 billion each year.�

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�Imposing a very small fee on each Wall Street transaction would make speculation less profitable, keeping some of the speculators� greed in check,� [Senator Bernie] Sanders told DealBook. �A transaction fee would have another major benefit: it would encourage Wall Street to invest more of their resources in the productive economy to the benefit of all Americans, instead of just the wealthy few.�

The Wall Street Journal had an article referring to the idea a few weeks ago. For some reason (Wonder why?) it disappeared from a regular search but I found it in the Google cache.

The idea of a tax on financial transactions championed by France and Germany is unlikely to gain much traction at the next meeting of leaders of the world's 20 largest countries because it faces opposition both within the European Union as well as from countries such as the U.S. and Canada.

French President Nicolas Sarkozy Thursday said the EU will propose a tax on financial transactions to the G-20 when it gathers at the end of next week in Toronto, stressing that France and Germany would work together to make this a "major issue" and are even ready to implement it without the support of others.

Sarkozy didn't specify, however, what the proceeds of such a tax would be used for, but France has said in the past it favors using it to fund efforts to control climate change, foster innovation or fight poverty. Germany, on the other hand, sees such a tax as a way to curb speculation.

"It's primarily a tax that brings money... It could be used to tackle all the challenges we face in terms of development and climate change as well as for anything else... It's not impossible that the G-20 agrees to carry out extra work on the issue next week," a senior French official told Dow Jones Newswires.

A financial transaction tax could be levied on currency or derivatives trades, for instance. The idea would be to apply a very low rate of tax on a very wide volume of transactions, along the lines of the tax proposed by Nobel Prize winner James Tobin in the 70s to curb speculation.

The idea might be called bi-partisan, but the term is now archaic. Believe it or not, somebody brought up a similar idea during President Bush's last term, four years ago.(pdf 4 pages)

The Bush Administration has revived a proposal, made by every President since
Ronald Reagan but never enacted by Congress, to impose a user fee on trading in the
futures markets in order to fund the Commodity Futures Trading Commission (CFTC).
Fees paid by other financial market participants already provide funding for the
Securities and Exchange Commission (SEC) and the federal banking regulators. To
fund the CFTC at the level requested for FY2007 ($127 million) would require a fee of
about seven cents on each futures contract and option traded on the exchanges that the
CFTC regulates. The futures industry argues that such a fee would be anticompetitive
and could divert trading to foreign markets or to the unregulated over-the-counter
market. However, it is not clear that a fee of this relatively modest size would have a
significant impact on trading decisions in a market where the value of a single contract
may rise or fall by hundreds or thousands of dollars in a day. This report summarizes
the arguments for and against the proposal and will be updated as legislative
developments warrant.

(Seven cents on each futures contract sounds like a lot, but "contract" usually refers to transactions of 100 shares so the proposal is really minuscule.)

Which brings us to the present day.

Nobel laureate James Tobin, mentioned above, suggested a global safety net (the Tobin Tax) which would have gone a long way toward averting the global meltdown of 2008.
If frogs had wings the wouldn't bust their butts when they jump.

I didn't look very hard, but this is the most recent link I found.

The Tobin Tax: The Deficit-Busting Levy Wall Street Hates
by Martin Hutchinson

The Tobin tax, proposed by Nobel laureate James Tobin in 1974, would tax transactions of all types - including those in the stock market, on foreign exchanges, in the derivatives market, or even possibly in the mundane daily transfers we use to pay our bills.

Some commentators have suggested instituting a broad-based Tobin tax at a rate as high as 1%. I think that's very unlikely, since it would be hugely damaging to life in the overall economy.

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However, a Tobin tax at a low rate - perhaps 0.01% - is a different matter. Even if this tax were extended to all transactions in the economy, it would have only a small effect on most of us. Someone with a $70,000 after-tax income, for example, receiving pay-slips net of tax, would have total annual transactions - including credit card spending, withdrawals of cash, and other recorded actions - of less than $100,000. Thus, that consumer would pay an annual tax of no more than $10, which could be painlessly extracted by computer. (It would also be possible to exempt "retail" banking and credit-card transactions from the tax.)

Go to the link for more details and arguments. The usual mix of crap comes floating up in the comments thread from contributors more interested in talking than listening. Some guy was even advancing arguments for the so called "fair tax" (not to be confused with Forbes' flat tax) a truly nutty idea which would require a Constitutional amendment eliminating income tax.

I didn't waste a lot of time reading because as I read my mind was distracted by the rumble of Tea Party activists. How sad, I thought, that the very people who would likely embrace this simple idea are too closed-minded, pre-programmed and ignorant to get past the opening sentence.

I liked this comment.

I agree totally with the main purpose of the Tobin Tax�that it would probably reduce the Wall Street rent-seeking. As you stated, this is an activity that has absolutely zero economic benefit or function (other than increasing the bonus pool of the derivatives houses). And it would be totally painless, because these activities are not raising entrepreneurial capital for our businesses on Main Street. And one other benefit might accrue: Individuals would be a little less likely to want to make day-trading a career and actually think like investors.