Financial transaction tax

The Financial Transaction Tax (FTT), also known as the "Stock Transfer Tax" or "Financial Speculation Tax," is a proposed tax that would impose a small fee on the sale or transfer of stocks, bonds and other financial assets. The tax would raise a large amount of money while discouraging the kind of speculation that helped lead to the economic collapse. The idea originated with economist Nobel Laureate economist James Tobin.

Proposals for an FTT rate are modest -- for instance 0.25 percent on a stock purchase or sale and 0.02 percent on the sale or purchase of a future, option, or credit default swap. These rates are proportional to the actual transaction costs in the industry.

The FTT is sometimes called a "Financial Speculation Tax," as it would have the greatest impact on high-volume, high-speed speculative traders.

A Nightmare on Wall Street

History

Financial Transaction Taxes have been around for hundreds of years. In 1694 an early implementation of a financial transaction tax was released in the form of a stamp duty at the London Stock Exchange. The tax was payable by the buyer of shares for the official stamp on the legal document needed to ratify the purchase. It is the oldest tax still in existence in Great Britain.

John Maynard Keynes proposed a Financial Transaction Tax in 1936 and advocated the wider use of financial transaction taxes in the wake of the Great Depression.

Between 1914 and 1966, a securities transfer tax did exist in the United States, with different effective rates for equities and debt, as well as for original issuance and subsequent trading.

In 1972, Nobel Laureate economist James Tobin, influenced by the work of Keynes, proposed a small tax on international currency transactions to curb excessive speculation, after the Bretton Woods System for stabilizing currencies came to an end. Tobin was concerned with how to bring more stability to flnancial markets so that governments could pursue full employment policies. Tobin wanted to counteract the ability of financiers to undermine full employment policies by moving large amounts of money quickly around the globe in search of short-term profits.

In 1987, Jim Wright, the Speaker of the House and a Texas Democrat, proposed a fee of 0.25% to 1% on both the buyer and the seller of each securities transaction. He favored the transaction tax because the financial burden would fall on the wealthy who trade in stocks and was quoted in The New York Times as saying, “My philosophy is that taxes should be based on ability to pay.”

In 1994 Paul Bern Spahn opposed the Tobin Tax in it's original form. He proposed his own version on June 16, 1995. He argued: “Most of the difficulties of the Tobin tax could be resolved, possibly with a two-tier rate structure consisting of a low-rate financial transactions tax and an exchange surcharge at prohibitive rates." In 2002, Paul Bernd Spahn, then a professor of public finance at the University of Frankfurt, assessed the feasibility of the Tobin Tax at the behest of the Federal Ministry for Economic Co-operation and Development. Spahn's conclusion was that it would be possible to introduce such a tax. Politicians did manage to agree on its implementation. This new form of tax – the “Spahn tax” – was later approved by the Belgian Federal Parliament in 2004.

In November, 2011 The Center for Economic and Policy Research issued a report that found there was increasing support for a Financial Transaction Tax by political leaders, Business Leaders, Opinion Leaders, and Economists from all over the world.

Currently at least 29 countries – including Australia, Brazil, China, France, Hong Kong, India, Ireland, Japan, Russia, South Korea, Switzerland, Taiwan and the United Kingdom – have some form of financial transactions tax.

2011 Developments

In 2011, the idea of a financial transaction tax started gaining ground. France and Germany renewed their rigorous support for the idea and continued to raise the issue in meetings of the G-20.

In September 2011, the EU proposed an EU-wide transaction tax. “It’s a question of fairness,” Mr Barroso said. “It is time for the financial sector to make a contribution back to society”. Under the plan, stock and bond trades would be taxed at the rate of 0.1 percent, with derivatives at 0.01 percent.

Bill Gates came out in support of the tax as a means for raising revenue for economic development in the 3rd world.

New York Times commenter Nicholas Kristoff suggested to anti-Wall Street protesters that they back the tax. "So for those who want to channel their amorphous frustration into practical demands, here are several specific suggestions: Impose a financial transactions tax. This would be a modest tax on financial trades, modeled on the suggestions of James Tobin, an American economist who won a Nobel Prize. The aim is in part to dampen speculative trading that creates dangerous volatility. Europe is moving toward a financial transactions tax, but the Obama administration is resisting — a reflection of its deference to Wall Street."

A conservative columnist for the Washington Post, Steven Pearlstein, discussed how Obama economic advisor Larry Summers supported the tax as an academic, but crushed the idea in the Obama White House. This issue was first reported by Ron Suskind in his 2011 book Confidence Men. "Unfortunately, Summers was right the first time, economically as well as politically. The fact that the administration can’t join a global effort to rein in excessive speculation while raising tens of billions of dollars a year from banks to help pay for the mess they created — that’s precisely the sort of signal that lets everyone knows what side you are on.

Bills in Congress

There have been a number of bills in Congress that contain a financial transaction tax.

House Bills

1) In 2010, Rep. Pete DeFazio (D-Oregon) introduced HR 4191, the "Let Wall Street Pay for the Restoration of Main Street Act." Senator Tom Harkin (D-Iowa) has introduced S 2927, the "Wall Street Fair Share Act." Under these companion bills, half the funds would be deposited in a job creation reserve fund and half would be designated to reduce the deficit. A new version of this bill is expected in 2011.

2) In 2011 and in 2010, Rep. John Conyers (D-Michigan) introduced HR 870 - 21st Century Full Employment and Training Act. This bill is designed to ensure full employment (4% unemployment rate) after 10 years. It sets a series of unemployment targets that, if not met, would trigger the disbursement of funds from a "National Full Employment Trust Fund," which would be made up of revenue from a new financial transactions tax on financial corporations. The funds would be used for a direct jobs program that would immediately place unemployed people in public, non-profit and small business jobs in areas hardest hit by unemployment.

3) In 2011 and in 2010, Rep. Pete Stark (D-California) introduced H.R. 755, the Investing in Our Future Act. “My legislation would simply impose a small tax — of 0.005 percent — on these currency transactions. The money raised would be put toward investments in children, global health and climate change mitigation."

4) HARKIN/DEFAZIO BILL: In 2011, Rep. Pete DeFazio (D-Oregon) and Senator Tom Harkin (D-Iowa) introduced HR 3313, to which will apply a tax of .03 percent on financial transactions. The companion bills would apply the tax to stocks, bonds and all derivatives contracts and would exempt initial issuance and debt with an original term of less than 100 days. Harkin said at a press conference in Washington that Wall Street can “easily bear this modest tax.” Cosponsors include: Earl Blumenauer [D-OR3] Bruce Braley [D-IA1] John Conyers [D-MI14] Donna Edwards [D-MD4] Bob Filner [D-CA51] Maurice Hinchey [D-NY22] Mazie Hirono [D-HI2] Henry Johnson [D-GA4] John Sarbanes [D-MD3] Louise Slaughter [D-NY28] Betty Sutton [D-OH13] Peter Welch [D-VT]

5) On February 11 2011, Rep. John Conyers (D-Michigan) introduced HR 676, the Expand & Improve Medicare For All Act. The bill will create a publicly financed, privatley delivered healthcare system that expands and improves the Medicare system with the aim of covering 51 million Americans currently without healthcare coverage. This bill would be partly funded by a small tax on stock and bond transactions, and in addition it would seek to Establish a 5% health tax on the top 5% of income earners, 10% tax on top 1% of wage earners.

6) On May 26 2011, Rep. Peter DeFazio (D-Oregon) introduced HR 2003, the Taxing Speculators out of the Oil Market Act. The purpose of the bill is to To amend the Internal Revenue Code of 1986, the domestic portion of the Federal statutory tax law, to impose a tax 0.01% on transactions in oil futures, options, and swaps, with the aim of reducing volatility in the oil market.

7) On December 13 2011, Rep. Raul Grijalva (D-Arizona) introduced HR 3638, Act for the 99%. The bill is aimed at creating American Jobs, reducing debt, and 'other purposes' including grants for the renovation and modernization of public school facilities, student jobs corps, neighborhood heroes corps, and other work programs through the use of state revenue generated by a 0.03% tax on stocks, bonds, treasuries, and derivatives.

8) On June 4th 2012, Rep. Rosa DeLauro (D-Connecticut) introduced HR 5727, the Rebuild America Act. Similar to H.R. 3313 'Act for the 99%,' the 'Rebuild America Act,' plans to modernize and renovate public school facilities, renovate energy systems, and rebuild infrastructure through the use of a 0.03% tax on stocks, bonds, treasuries, and derivatives.

9) On June 7th 2012, Rep. Elijah Cummings (D-Maryland) introduced HR 5909, the Comprehensive Dental Reform Act. The bills purpose is to improve access of Dental health care to under served populations. It would be partially funded by a 0.025% tax on stocks, bonds, and treasuries.

10) On September 14th 2012, Rep. Keith Ellison (D-Minnesota) introduced HR 6411, the Inclusive Prosperity Act also known as the Robin Hood Tax. The purpose of the bill is to impose taxes on trading transactions such as a 0.5% tax on stocks, a 0.1% tax on bonds, and a 0.005% tax on derivatives.

Senate Bills

1) On May 9 2011, Bernie Sanders (I-Vermont) introduced S. 915, the American Health Security Act of 2011. The bill would establish the state-based American Health Security Program to provide every U.S. resident who is a U.S. citizen, national, or lawful resident alien with health care service. The bill would be partly financed by a 0.25% tax on stock and 0.02% on credit default swaps. On options, taxes would be placed at the rate of the underlying transaction.

2) On November 2 2011, Tom Harkin (D-Iowa) introduced S. 1787, the Wall Street Trading and Speculators Tax. This bill would amend the Internal Revenue Code of 1987, the domestic portion of the Federal statutory tax law, to impose a tax 0.03% on trading transactions including stocks, bonds, treasuries, and derivatives.

3) On March 29 2012, Tom Harkin (D-Iowa) introduced S. 2252, the Rebuild America Act. Similar to H.R. 3313 'Act for the 99%,' the 'Rebuild America Act,' plans to modernize and renovate public school facilities, renovate energy systems, and rebuild infrastructure through the use of a 0.03% tax on stocks, bonds, treasuries, and derivatives.

4) On June 7 2012, Bernie Sanders (I-Vermont) introduced S. 3272, the Comprehensive Dental Reform Act. The bill is intended to improve access to oral health care for undeserved populations by Medicaid and Medicare coverage, improving Oral Health education, placing dental clinics into public schools, and providing research funding. The bill proposes a 0.025% tax on stocks, bonds, and treasuries.

Support for financial transaction tax

Individuals: Micro-soft founder Bill Gates gave a presentation at the November 2011 G-20 meeting in France in support of an FTT. John Fullerton, former managing director at JP Morgan, gave a hill briefing in October 2011 in support of the idea. Financiers George Soros and John Bogle (founder of the Vanguard Group) support the idea along with Warren Buffett, who signed onto an Aspen Institute report recommending a Financial Transaction Tax. Overseas prominent leaders including French Prime Minister Nicolas Sarkozy and German’s Angela Merkle support a global FTT. The New York Times highlighted the FTT as a top idea of 2008, and a long list of prominent economists have supported it including John Maynard Keynes, Nobelists Paul Krugman, James Tobin and Joseph Stiglitz, Jamie Galbraith, Dean Baker, Robert Pollin and Larry Summers. After the 1987 Wall Street crash, an FTT was endorsed by Bob Dole and President George H.W. Bush. Prominent journalists like New York Times columnist Nicholas Kristof and Washington Post columnist Steven Pearlstein have also supported FTT.

Growing grassroots support: Hundreds of groups in the Americans for Financial Reform coalition, including the AFL-CIO, AFSCME, Alliance for a Just Society, Alliance for Retired Americans, Americans for Democratic Action, Americans for Financial Reform,Arizona Interfaith Alliance for Worker Justice, Arkansas Interfaith Committee for Worker Justice, Building and Construction Trade Dep't., AFL-CIO, Campaign for America's Future, Campaign for Community Change, Center for Biological Diversity, Center for Media and Democracy, Chicago Political Economy Group, Citizen Action of New York, Citizen Action of Wisconsin, Citizen Action/Illinois, Clergy and Laity United for Economic Justice, Communications Workers of America, Community Organizations in Action, Community Reinvestment Association of North Carolina, Community Voices Hear, Connecticut Citizen Action Group, Consumer Action, Consumer Watchdog, Courage Campaign, CtW Investment Group, Demos, Essential Information, Floria Consumer Action Network, Foreclosurehamlet.org, Friends of the Earth US, Georgia Rural Urban Summit, Good Old Lower East Side, Grass Roots Organizing (Missouri), Greater New York Labor-Religion Coalition, Health Alliance International, Health GAP, Illinois People's Action, Institute for Agriculture and Trade Policy, Institute for Policy Studies, Interfaith Worker Justice, Interfaith Worker Justice Committee of Colorado, International Forum on Globalization, Iowa Citizen Action Network, Iowa Citizens for Community Improvement, Its Our Economy, Jobs with Justice, Keystone Progress, Koreatown Immigrant Workers Alliance, KyotoUSA, Lakeview Action Coalition, Liberty Tree Foundation, Main Street Alliance, Maine People's Alliance, Maryknowll Office for Global Concerns, Michigan Citizne Action, Michigan Organizing Project, Missouri Progressive Vote Coalition, MoveOn.org, National Alliance of Latin American and Carribean Communities, National Council of Women's Organizations, National Education Association, National Employment Law Project, National Nurses Union, National Organization of Women, National People's Action, National Priorities Project, National Women's Law Center, NEDAP, NETWORK, New Bottom Line Campaign, New Hampshire Citizens Alliance for Action, New Jersey Citizen Action, New New Deal Project, NH Citizen Alliance, NJ Citizen Action, Ocean State Action, OMB Watch, Oregon Action, Pennsylvania Association of Staff Nurses and Allied Partners, Penn Action, PICO National Network, Progressive Democrats of America, Progressive Maryland, ProgressOhio, Public Citizen, Rebuild the American Dream, Responsible Wealth, SEIU, SOUL, Sugar Law Center for Economic and Social Justice, Sunflower Community Action, Syracuse United Neighbors, TakeAction Minnesota, Tax Justice Network USA, Tennessee Citizen Action, The Chicago Political Economy Group, The International Brotherhood of Teamsters, U.S. PIRG, United for a Fair Economy, United Action for Idaho, USAction, Virginia Organizing, Voices of Community Activists and Leaders, Washington CAN, Washington Community Action Network, West Virginia Citizen Action Group. The letter of support signed by these groups can be found here: http://ourfinancialsecurity.org/2011/10/afr-letter-support-financial-transaction-tax/

Public Support: Taxes on Wall Street speculation appear to be popular with the public. For instance, a January 2010 poll showed that 81% of Americans agree with the following statement: “We need to rein in the greedy, reckless behavior of the big banks on Wall Street that cost millions of jobs and led to huge bailouts on our dime. This tax will put a limit on the casino culture of Wall Street that provides no real value and only exists to line the banker’s pockets. This reform will strengthen our financial system to help prevent another crisis and reduce the deficit.” Strongly agree 51% Somewhat agree 30% Agree 81% Disagree 15%.

Arguments for the Tax

The Center for Media and Democracy cites the following benefits of an FTT:

• A FTT would raise over $100 billion per year in badly needed revenue or one trillion over the course of a decade that could be used to create jobs, help our states weather the financial crisis and support critical public services.

• A FTT would reduce dangerous financial market speculation. Since the tax would hit high-volume, high-speed trading the hardest, it would serve to discourage short-term speculation in financial markets as well as the proliferation of ever more complex derivative instruments. More complex derivatives could be subject to the tax many times over, substantially reducing the potential profits from complexity.

• A FTT would encourage longer-term productive investment. By reducing the volume and profitability of short-term trading that serves no productive purpose, the tax would encourage Wall Street to find new ways to make money off of longer-term productive investments.

Myths and Facts about the FTT

The Center for Economic and Policy Research developed the following list of Myths and Facts about the FTT.

MYTH: This has never been tried before.

TRUTH: The FST is not a new idea. The U.S. had a transfer tax from 1914 to 1966 which levied a 0.2% tax on all sales or transfers of stock. In 1932, Congress more than doubled the tax to help financial recovery and job creation during the Great Depression. Transactions taxes were imposed in most financial markets until the last two decades, and there still is a 0.5% stamp tax imposed on each trade on the London Stock Exchange. The U.S. already has a very modest FST, which is used to finance the Securities and Exchange Commission and the Commodity Futures Trading Commission.

MYTH: Transactions are so internationally mobile that an FTT in one country is unenforceable and will simply result in trading moving overseas.

TRUTH: The U.K. has had a tax on stock trades for decades, and the U.K.’s volume of trading has grown robustly. The revenue it raises each year would be the equivalent of $30 billion in the U.S. Economy. This real-world example indicates that a unilateral financial transaction tax would be both successful and enforceable.

MYTH: The costs will be passed on to average investors.

TRUTH: A tax of 0.25 percent would make little difference to a person who intends to hold onto stocks as a long-term investment. The FTT would cost a day trader buying $100,000 of stock only $125 when they purchase their shares. Also, research shows that most investors will respond to a tax by reducing the frequency of their trades. This means that they will spend roughly the same amount on trades, but will just buy and sell shares of stock less often. But to protect small investors further, the DeFazio-Harkin bill specifically exempt 401Ks, college savings accounts, health savings accounts and the first $100,000 in trades.

Reports

A report released January 24, 2011 by the Center for Economic and Policy Research (CEPR), found that a financial speculation tax would be a substantial source of money for the government while imposing very little burden on the average taxpayer. The report found that revenue from the proposed speculation tax could annually exceed 1.0 percent or $150 billion of U.S. GDP, which would more than cover the costs of many government programs and budget items, such as the extension of unemployment insurance, the 2011 payroll tax cut and the projected gaps in state budgets in 2011.

Response to Obama's concerns about FTT

In an article written for the Center for Economic policy Research on November 10, 2011, economist Dean Baker addressed concerns that the Obama administration has had about the FTT. The article can be found here: Quick Thoughts on the Obama Administration's Opposition to a Financial Speculation Tax Here's what he had to say:

The Obama administration has staked out grounds in opposition to the financial speculation tax which is being considered by the European Union and was recently proposed in Congress by Senator Tom Harkin and Representative Peter Defazio. There are three main arguments that have been given:

It is not enforceable;

That it will be passed on to ordinary investors; and

That is will raise the cost of capital, thereby reducing output and employment.

Each of these can be quickly dismissed.

On the first point, financial transactions taxes actually exist in the world and raise considerable revenue. The U.K. has a 0.5 percent tax on stock trades and raised between 0.2-0.3 percent of GDP annually ($30 billion to $40 billion a year in the United States). There will be some flight to tax havens, but the extent of this flight will largely depend on the willingness of the United States government to counter it. There have been many questions raised by the competency of the Obama administration, but surely it could limit this route to evasion, if it chose. People are not running guns for Al Queda from the Cayman Islands.

As far as the second point, since most investors trade infrequently, the amount of the tax would be trivial -- considerably less than brokerage commissions and other fees charged by the financial institutions that manage 401(k)s and similar accounts. Furthermore, the response to a tax would be a decline in trading. Most research indicates that the decline in trading volume should roughly offset the increase in the cost per trade due to the tax. This means that for the typical investor they will be spending no more on their trades after the tax than before.

Finally the claims, based on dubious models, that the tax will lead to a substantial decline in GDP and jobs are just silly. The implication is that financial transactions costs have a large impact on productivity. The model implied that the 0.1 percent increase in the transactions costs for stock trades from the tax being considered by the EU would lead to a 1.76 percent decline in output.

Since transactions costs have fallen by around 5 times this amount over the last 30 years, this would mean that declining transactions account for about 8 percentage points of the increase in productivity growth over this period. This would be around 15 percent of the productivity growth over this period. If this was true then it is remarkable that none of the standard growth models includes financial transactions costs as an important contributing cost.

If this is true, then the U.S. should anticipate slower productivity growth in the years ahead, since there is little room for transactions costs to decline further, now that they getting close to zero. This claim would also mean that the U.K. could quickly see a a jump in its GDP of close to 9 percent if it got rid of its tax. (There was no notable jump when it reduced the tax from 1.0 to 0.5 back in 1986.)

Campaigns

• AFL-CIO Make Wall Street Pay

• Center for Media and Democracy, BanksterUSA.org

• Rebuild the Dream

• National Nurses United

• National People's Action

• New Bottom Line Campaign

• Wealth for the Common Good

• HealthGAP

• Robin Hood Tax UK

• United Front Against Austerity

Sourcewatch resources

• Key Points Regarding Financial Transaction Tax, CMD

External resources

• Robert Pollin and James Heintz, Transaction Costs, Trading Elasticities and the Revenue Potential of Financial Transaction Taxes for the United States (pdf), research brief, Political Economy Research Institute University of Massachusetts, Amherst, December, 2011
• AFR Letter: Support DeFazio and Harkin Financial Transaction Tax Legislation Americans for Financial Reform, November 2, 2011
• AFR Letter: Support Financial Transaction Tax Americans for Financial Reform, October 21, 2011
• The Deficit-Reducing Potential of a Financial Speculation Tax, a report by the Center for Economic and Policy Research, released January 24, 2011.
• Americans for Financial Reform, Letter to the Deficit Commission on financial transaction tax, November 24, 2011
• Americans for Financial Reform short paper on financial transaction tax
• Economists' Letter in Support of a Financial Transactions Tax, (A letter from over 200 economists in support of a financial transactions tax), Center for Economic and Policy Research, December, 2009.
• The Benefits of a Financial Transactions Tax, Center for Economic and Policy Research, December, 2009.
• The Potential Revenue from Financial Transactions Taxes, December 2009, Dean Baker, Robert Pollin, Travis McArthur, and Matt Sherman
• Responses to Criticisms of Taxes on Financial Speculation, January 2010, Dean Baker

External articles

• Lesley Wroughton, Bill Gates backs financial transaction tax to aid poor, Reuters, September 23, 2011
• Van Jones, Tax the One Percent -- Make Wall Street Fund America, Common Dreams, November 2, 2011
• Nicholas Kristof, The Bankers and the Revolutionaries, New York Times, October 1, 2011
• Paul Krugman, Taxing the Speculators, New York Times, November 26, 2009.
• Bob Herbert, Where the Money Is, New York Times, January 12, 2009
• When Financial Markets Work Too Well: A Cautious Case For A Securities Transaction Tax, Larry Summers, Journal of Financial Services Research, 1989.