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The Antidote to Deficit Hysteria – the Financial Transactions Tax

We’re headed into the deficit debate, and one attractive idea has been left on the sidelines – the notion of a financial transactions tax. Most of our stock transactions these days come out of a computer. They offer nothing of value to the public, enhance risk and feed a desire for more dangerous bets that could (and often do) cause financial crashes. As a society, even if we had no need for more revenue, we would do well to limit this growing financialization in the economy, and that goes hand-in-hand with limiting stock transactions. And one great way to use market forces to reach that goal is through a small tax on each transaction. CNN Money explains.

The Center for Economic and Policy Research, a left leaning group, said Monday that a tax on trades of stocks, options, futures and other financial instruments could generate $150 billion this year, or over 1% of U.S. gross domestic product.

While the idea of taxing financial transactions is not new, it has gained some traction overseas in the wake of the global financial crisis.

French President Nicolas Sarkozy, in comments Monday, said a financial transaction tax is one of his top priorities as leader of the Group of 20 nations this year, according to press reports.

The CEPR study looks at a 0.25% tax on stock trades in the United Kingdom and estimates that an equivalent tax in the United States could raise $40 billion a year for the Treasury.

“This is not hypothetical,” said Dean Baker, co-director at CEPR and author of the report, in a statement. “The UK has used an FST to collect large amounts of revenue,” he said, adding that the International Monetary fund “is currently advocating the tax in recognition of the enormous amount of waste and rents in the financial sector.”

As Baker says, this is already in place in Britain, and as a result, the City of London still stands, and mass exodus from the stock markets in the UK has not transpired. The common rebuttal from the business community to a proposed financial transactions tax is that business will fly away to other countries. First of all, given the harm which the financial industry has caused the US economy, my first response would be “Do you need help finding a ticket?” But second, Baker shows here that the non-hypothetical example shows that a financial transaction tax does not lead to business flight.

As a result, individual investors who make a handful of trades a year will not even feel a tax like this, but hedge funds and investment banks who use algorithms and the like will feel it enough to potentially limit their risky trades. And if not, they’ll provide the government with a healthy source of revenue to cover the damage to individuals in the event their risk leads to another crash.

If you want a rejoinder to this constant talk of cutting spending and fixing the deficit, you could do worse than a financial transaction tax – something that raises a lot of revenue and discourages behavior that society should reject anyway.

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David Dayen

David Dayen