Could we please get a few European-style economic conservatives over here?
German Chancellor Angela Merkel and French President Nicolas Sarkozy are considered right-wingers in their countries. This week the leaders of the two largest European economies held a joint press conference to reiterate their pledge to make the financial industry pay for the costs of the crisis. They’re pushing two types of taxes — by definition anathema to the Tea Party conservatism we have on this side of the pond. And one of them might prevent a repeat of the Great Recession that’s caused so much economic pain around the world.
The first is a fairly timid levy on top banks similar to an Obama administration proposal that is aimed at recouping the direct costs of the bailouts.
The other is way more exciting – a tax on each trade of stock, derivatives, currency, and other financial instruments. Such “financial speculation taxes” (aka financial transactions taxes) would discourage the short-term speculation that can lead to dangerous bubbles, while generating massive revenues that could be used for urgent needs, like jobs programs.
Merkel and Sarkozy want the major economies to agree to adopt such taxes at the upcoming G-20 summit in Toronto on June 26-27. As Merkel said in the press conference, “We have agreed to jointly promote an international financial markets transaction tax. We will demand this.”
Tough talk — especially in light of the U.S. Treasury Secretary’s obvious aversion to the proposal. Timothy Geithner has been promoting the modest bank levy as an alternative, rather than a complement to the speculation tax.
There are members of Congress, though, who don’t take their marching orders from the Treasury. Bills to create financial speculation taxes have been introduced in both the Senate and the House. And a growing U.S. campaign is gearing up to make this part of round two of financial reform. As Dan Pedrotty, director of the AFL-CIO’s office of investment, put it in a recent interview, “This is the next phase of the battle to rein in Wall Street.”
Speculation Taxes and Recent Financial Fiascos
A new report by my organization, the Institute for Policy Studies, spells out concrete examples of how financial speculation taxes might have changed the outcome of several recent financial fiascos:
- Flash Crash: Remember when the Dow plummeted nearly 1,000 points in less than a half hour on May 6? If a tax of 0.25 percent on securities trades had been in place for just the 20 minutes of wildest trading that day, it could have generated $142 million in revenue. That’s more than $7 million per minute. Ideally, the tax would encourage big-time investors to think before placing their bets, instead of relying on the computer-driven high-frequency trading that now makes up 50-75 percent of daily stock trades.
- AIG Collapse: A financial speculation tax probably wouldn’t have changed the behavior of the insurance giant’s greed-crazed executives. But if it had applied to the insurance giant’s $440 billion worth of exceptionally risky credit default swaps, it would have amounted to as much as $1.1 billion, enough to cover the annual salaries of more than 20,000 elementary school teachers.
- Greek Tragedy: When Greece cut a $10 billion derivatives deal with Goldman Sachs that was designed to conceal their oversized debts, a financial speculation tax would have raised the cost of the shady maneuver by $25 million.
Top Revenue Raiser
Without a financial speculation tax, it’s hard to imagine how the Obama administration expects to find the money to address urgent needs, such as the trillions needed to shore up our crumbling infrastructure or create good jobs. According to the Center for Economic and Policy Research, a financial speculation tax would be expected to generate about $177 billion per year in the United States. That’s 20 times as much as could be expected from Geithner’s preferred bank levy. It’s also more than three times as much as other key revenue proposals, such as allowing the Bush-era tax breaks for the rich to expire ($45 billion) or restoring estate taxes on large fortunes ($40 billion).
Of course the financial industry is apoplectic about the idea of a tax on their activities – even one as minuscule as the 0.25 percent max proposed in the pending bills. Their favorite argument is that it will hurt the little guys. In reality, a financial speculation tax would target the hedge fund investors and other high fliers in the global casino who make most of their money through high-frequency betting on short-term market movements that often have little to do with what’s going on in the real economy. Since the tax would apply to each of these transactions, it would make this type of speculative gambling much less profitable and encourage more long-term, patient investment.
For ordinary investors whose portfolios turn over relatively infrequently, the tax would hardly be noticeable. Moreover, the pending House and Senate bills include exemptions for pension and individual retirement accounts and the first $100,000 of trades made by an individual each year.
No one claims that taxing speculation will solve all our problems. It won’t single-handedly prevent another financial crisis. It won’t create all the jobs we need or solve all our other economic problems. But combined with other sensible financial regulations, it could take us a long way toward reining in Wall Street and meeting urgent social and environmental needs.
So let’s hope the Europeans continue to stand tough on this. We need all the help we can get to move this in the U.S. political landscape. And let’s also work toward a day when pro-tax, bank-bashing politicians are standing on the right wing of our own political spectrum.