Why Not A Financial Transactions Tax?

Above Photo: World Financial Review.

As Senator Sinema gets Biden to drop his proposed tax increases on corporations and wealthy investors earning more than $400K income a year, no consideration is being given at all within Democrat party circles about introducing a financial transactions tax to pay for the Infrastructure bill ($.55T) or the Build Back Better Bill ($1.9T).  5 years ago I wrote and proposed a minimal financial transaction tax that would generate $2.4T in revenue. That would pay for both the new spending proposals in the Infrastructure bill ($.55T) as well as the Build Back Better bill proposal still on the negotiating table ($1.9T)–the latter which, by the way, is about to be reduced further by Democrat Senator Krysten Sinema’s ‘no taxes on corporations or the rich’.

Senators Warren and Sanders have also been talking for months about a ‘wealth tax’. That idea has been rejected outright by nearly all Democrats in Congress and Biden. The latest effort to come up with some wealth tax to pay for the Build Back Better bill is in current discussion in the tax committees in Congress. It proposes to tax just the 745 US billionaires whose wealth increased by $2.1T and 70% just since the Covid crisis began 18 months ago. The problem with this proposal is it taxes the level of wealth attained in stocks and bonds by the billionaires when the prices of those stocks and bonds rise. However, it leaves open the prospect of massive tax cuts on billionaires wealth when prices of stocks and bonds decline. Better is to tax the transactions that lead to that wealth accumulation instead of the level of the wealth. A financial transactions tax does just that. And prevents a subsequent massive tax cut later that a wealth tax on levels of wealth makes possible.

All the phony positioning in Congress (Biden’s proposals, Warren’s, billionaire tax discussions, etc.) over the attempt to ‘claw back’ just some of Trump’s $4.5T 2017 tax cuts totally ignores the real solution to all of the financing of the fiscal stimulus bills: A Financial Transactions Tax.  The total cost of the $.55t new spending in the Infrastructure bill and the current $1.9T in the Build Back Better (human infrastructure) bill could be completely PAID FOR WITH A FINANCIAL TRANSACTION TAX!

Here’s what this writer proposed five years ago as a workable Financial Transaction Tax that would raise $2.41 Trillion by a 2.5% tax on stock and bond trades plus a 0.25% on derivatives trades plus another mere 1% tax on $ currency trading–i.e. a simple single tax that’s more than enough to pay for both bills in Congress (in order to outflank Sinema’s ‘no tax cuts’ on income for the rich and their corporations):

The Financial Transaction Tax

Let’s take four major financial securities: stocks, bonds, derivatives, and foreign currency purchases (forex).

A European study a few years ago involving just 11 countries, whose collective economies are about two-thirds the size of the US economy, concluded that a miniscule financial tax of 0.1% on stocks and bonds plus a virtually negligible 0.01% tax on derivatives results in an annual tax revenue of $47 billion. In an equivalent size US economy one third larger that would be abouit $70 billion in revenue a year.

Wealthy investors’ buying of stocks and bonds is essentially no different than average folks buying food, clothing or other real ‘goods and services’. Why shouldn’t investors pay a sales tax on financial securities purchases? In the US, average households pay a sales tax of 5% to 10% for retail purchases of goods and many services. So why shouldn’t wealthy investors pay a similar sales tax rate for their retail financial securities’ purchases?

A 10% ‘sales tax’ on stock and bond buying and a 1% tax on derivatives amounts to a 100x larger tax revenue take than estimated by the European study. The $70 billion estimated based on the European study’s 0.1% stock-bond tax and 0.01% derivatives tax yields $7 trillion in tax revenue with a 10% and 1% tax on stocks and bonds and derivatives.

Too high, Krugman and the Gang of Four would no doubt argue. Wealthy stock and bond buyers should not have to pay that much. It would stifle raising capital for companies. OK. So let’s lower it to half, to 5% tax on stocks and bonds and 0.5% on derivatives. That reduces the $7 trillion tax revenue to a still huge $3.5 trillion annually.

Still too high? Ok, half it again, to a 2.5% tax on stocks and bonds and a 0.25% on derivative trades. That certainly won’t discourage stock and bond trading by the rich (not that that is an all bad idea either). That 2.5% and 1% tax still produces $1.75 trillion a year in revenue.

But what about an additional financial tax on currency trading, like China is about to propose? Currency, or forex, trades amount to an astounding $400 billion each day! Not all that is US currency trading, of course. However, the US dollar is involved in 87% of the trading. A 1% tax on US currency trades conservatively yields approximately $3 billion a day. Assuming a conservative 220 trading days in a year, $3 billion a day produces $660 billion in financial tax revenue from US currency financial transactions in a year.

$1.75 trillion in revenue from stock, bonds, and derivatives trades, plus another $660 billion in forex trade tax revenue, amounts to $2.41 trillion in total revenue raised from a financial transaction tax of 2.5% on stocks and bonds, 0.25% on derivatives, and 1% on US dollar to other currency conversions.