Economic Prospects: A U.S. Financial Transaction Tax: How Wall Street Can Pay for Its Mess

As we continue to suffer the consequences of the 2008–2009 global financial crash caused by casino capitalism, one idea for bringing some measure of control over speculative financial practices that has gained worldwide support is to impose a tax on financial market transactions. This has been variously termed a financial transaction tax (FTT) and, more vividly, a “Make Wall Street Pay tax,” an “anti-speculation tax,” and a “Robin Hood tax.”

Over the past year, a movement to establish such a tax in the United States has been energized by the National Nurses Union under the theme “Heal America, Tax Wall Street.” The Occupy Wall Street movement has also strongly supported the idea as one of the few specific policy measures they are willing to endorse. Last November, Senator Tom Harkin and House Representative Peter DeFazio introduced a bill in the U.S. Congress for an FTT, although, as I discuss later, the tax rate they are proposing is far more modest than it needs to be. There is also strong support for an FTT throughout Europe as, among other things, one crucial new way for the European Union to raise public revenues and oppose the austerity agenda now engulfing the region. In Europe, this proposal is not only being supported by traditional progressive communities, but also by the Archbishop of Canterbury in the U.K., the Pope, and French President Nicolas Sarkozy, among others.

FTT Basics

In its essentials, the idea of a financial market transaction tax is simple. It would mean that financial market traders would pay a small fee to the government every time they purchased any financial market instrument, including all stock, bond, options, futures, and swap trades. This would be the equivalent of sales taxes that Americans have long paid every time they buy an automobile, shirt, baseball glove, airline ticket, or pack of chewing gum, eat at a restaurant, or have their hair cut.

The financial transaction tax can be used to address two distinct but equally important concerns. First, the tax discourages financial market speculation because it raises the costs—and thus reduces the profit opportunities—for speculators. But assuming the tax rate is not set high enough to shut down financial market trading altogether, the tax can also be a large new source of government revenues. The tax rates could be adjusted higher or lower, depending on whether the primary aim is either to shrink speculative market trading or to raise revenues, or to try to hit a sweet spot that achieves both aims to some meaningful degree.

Experiences with FTTs

It is important to recognize that the proposals now being advanced in both the U.S. and Europe by no means represent exotic flights into uncharted policymaking territories. In fact, financial transaction taxes have been a commonly used and generally effective policy tool throughout the world. Under financial market conditions closely comparable to those in the U.S., stock trading in the United Kingdom is subject to a 0.5 percent tax. This U.K. tax raises about $6.5 billion per year in revenues. Roughly forty other countries are either now operating with some version of such a tax or have done so in the recent past.

Even the United States has long operated with a small transaction tax whose revenues, to this day, finance the operations of the Securities and Exchange Commission. Moreover, in the aftermath of the 1987 Wall Street crash, such a tax or similar measures were endorsed by then-House Speaker Jim Wright, a Democrat, as well as the Republican Treasury Secretary Nicholas Brady and the Director of the Office of Management and Budget Richard Darman, serving under President George H.W. Bush.

How A U.S. FTT Could Work

For stocks, the buyer could be charged, for example, 0.5 percent of the sale price, which had been the amount suggested by former House Speaker Jim Wright when he proposed a bill in 1987, and is the current rate in the U.K. stock market (the buyer and...