Taxing Wall Street – event review
(Intro by Jeremy) I see Chris just posted something about international speculation taxes. Closer to home, proposals are floating around in both the House (DeFazio) and Senate (Harkin) to impose a similar transaction tax of financial speculation. The Center for American Progress hosted an event on the issue last Tuesday, and our intern James Hazzard wrote the following review of the event:
Facing persistent revenue shortfalls and motivated by a healthy amount of populist anger directed towards Wall Street, Democrats in Congress are considering the unprecedented step of raising taxes in the midst of a recession. The concept gaining steam is a transaction tax, which would take a small percentage from every stock, futures, and credit trade. The tax is expected to raise $150 billion dollars annually, half of which will go to job creation and transportation issues while the other half will go directly to paying down the deficit.
In response to this proposal, the Center for American Progress (CAP) opened a snow-bound forum last Tuesday morning titled “Taxing Wall Street.” Moderated by Greg Ip of The Economist, the forum focused on the possible economic impacts of the Democrats’ proposal.
Mr. Ip, the U.S Economics Editor for The Economist, started off the discussion by filling in the history of a transactions tax. Beginning in 1934, the SEC has applied an extremely small tax upon every transaction to help offset its operating costs. Louder discussions of a transactions tax began in 1972, and have become especially potent over the past several years. Both Great Britain and the International Monetary Fund are considering similar taxes, although the Obama administration currently appears cold to the idea.
Michael Ettlinger, Vice President for Economic Policy at CAP, emphasized the necessity of a transactions tax. Even with a complete freeze on discretionary spending, the country is still running a chronic deficit. Taxes must be raised or entitlement programs must be cut, and the latter is extremely unlikely. For Ettlinger, the core question isn’t whether or not there should be a tax, but would the tax cripple the financial services industry? The answer is no. The tax is light, would have a negligible effect on long-term investments, and would only take a small amount of money out of a huge industry.
Dean Baker, Co-Director of the Center for Economic and Policy Research (and featured speaker at our recent Green Bank briefing), focused on the behavioral implications of the tax. The last 30 years of technological development have not skipped over the financial industry, and has become significantly cheaper to make trades. If the Democrats’ proposed tax increase were to be instituted, it would put costs back into the levels of the early 90’s. Dr. Baker argues that such costs would not only leave the financial system in perfect health, but improve behavior. Higher transaction costs will discourage highly risky trades but leave safe transactions untouched, and encouraging long-term behavior in the stock market is key to avoiding another collapse.
The last speaker was Ellen McCarthy, Managing Director of Government Affairs at the Securities Industry and Financial Markets Association (essentially the Wall Street trade association). McCarthy argued as “the other bookend” of the debate by attacking the proposal. She argued that instead of punishing Wall Street, the tax would be passed along to the American household by the traders. While the tax will change short-term behavior, it will also reduce the liquidity of stocks and make the market less flexible in response to crises. And, of course, such a tax would hurt employment in the financial sector.
During the Q&A session, the discussion focused on whether or not Wall Street deserved to be taxed. Dean Baker, while defending the tax, acknowledged that taxes can’t just be applied on the basis of being deserved – the government wouldn’t make any money. Michael Ettlinger argued that the tax wasn’t specifically directed to punish Wall Street – that was just the language of the bill. The real danger in Wall Street isn’t derivative trading, but speculative and destructive behavior. The forum concluded with Ettlinger arguing that any legislation that imposes a transaction tax without additional reforms would be innocuous. Wall Street needs to be transparent before it can be taxed.
Taking $150 billion out of an industry worth hundreds of trillions of a dollars isn’t likely to cripple it, and it’s pretty likely that the American people can get behind this small fee. But this is a small battle in a much wider war over financial system reform. The final success or failure of this tax will likely depend on the resolution of issues entirely separate from a transactions tax, issues like much-need regulation reforms designed to bring hedge fund and derivatives transactions out of the shadows (a weak version of such a measure has passed the House). At least we can be somewhat assured that if everything works out, and the tax does get imposed, our society will not be brought to its knees by a quarter of a percent tax.
To watch the video from the forum, visit the Center for American Progress website.