A robust tax on Wall Street transactions would raise far more revenue – as much as 17 times as much – than more limited proposals, even accounting for the worst case scenarios of reduced trading as a result of a tax. That’s the findings of an important new research brief from prominent University of Massachusetts Amherst economists Robert Pollin and James Heintz.
This study is the most recent serious effort to quantify current, actual costs and evaluate the impact of the trading costs on trading volume. It can be viewed at: http://www.peri.umass.edu/fileadmin/pdf/research_brief/PERI_FTT_Research_Brief.pdf
The data in the study come from three sets of sources: the most recent academic and financial market research; a 2011 survey study by the International Monetary Fund; and the most up-to-date and comprehensive data on market trading from specialized firms that obtain these figures directly from the financial market trading businesses themselves.
One of the stories of the past year has been the growing international and U.S. movement for a financial transaction tax (FTT) on the trading of stocks, bonds, and other financial instruments.
An international coalition of labor, environmental, and non-governmental organizations have prodded the European Union to adopt a continent wide FTT, also referred to as the “Robin Hood tax.” Several European governments, including conservative leaders in France and Germany support the FTT and the EU which is predicted to adopt the tax by the end of this year.
In the U.S., a renewed push for an FTT has also mushroomed, encouraged by a campaign led by National Nurses United as a vehicle to raise badly needed revenue for healthcare, jobs, and other basic needs. NNU last year sponsored protests advocating for the FTT on Wall Street, the White House and Treasury Department, outside Congressional offices, and while participating in Occupy Wall Street protests throughout the fall.
Titled “Transaction Costs, Trading Elasticities and the Revenue Potential of Financial Transaction Taxes for the U.S,” the paper by Pollin and Heintz analyzes potential revenue from three different FTT proposals.
The three are a new bill in Congress introduced by Sen. Tom Harkin and Rep. Peter DeFazio, which would levy a miniscule .03 tax on stock and bond trades, or 3 cents on every $100 of trades, the main proposal in the EU for a .1 tax or 10 cents per $100, and a .5 tax, or 50 cents on a $100 transaction, favored by NNU and other activists.
The U.S. had a FTT from 1914 until 1966, and following a market crash in 1987, former House Speaker Jim Wright proposed reinstating a fee of .5, which was endorsed by leading Republicans as well, including top economic advisors to President George H.W. Bush.
Opponents of an FTT have claimed that any tax on Wall Street activity, which, unlike virtually all consumer sales is presently untaxed, would so discourage trading that it would substantially reduce any potential revenue – thus the reason given by proponents of the Harkin-DeFazio bill for introducing such a small tax.
However, examining existing FTTs currently in place in other countries and reviewing data on current U.S. private transactional fees on market activity from two firms private business firms, Pollin and Heinz reach a far different conclusion. They find:
A tax of .5, such as favored by NNU and presently in place on stock trades in the U.K., would generate as much as 17 times more revenue as the .03 tax included in the Harkin-DeFazio bill.
Additionally, Pollin and Heintz cite little evidence that a FTT would substantially reduce trading activity, as claimed by its opponents.
Pollin and Heintz note the work of one researcher cited in a paper from the International Monetary Fund which found no decrease in trading with the introduction of a transaction tax in some Asian markets. “Elasticity,” the term of art referring to the responsiveness of trading to a change in the transaction costs of the, “was zero in these markets when transactional costs rose as a result of an FTT,” the authors write.
Additionally, the UK market remains the fourth largest in the world, and transactional costs of .5 have “not prevented the City of London from operating as one of the world’s leading stock markets.”
Overall, Pollin and Heintz survey a number of potential scenarios that could occur from introduction of an FTT in the U.S. Even in the worse case scenario, a highly unlikely event, a .5 percent tax would still raise more than three times as much as the minute .03 tax, they conclude.
“There is no scenario in which a 3-basis point FTT (.03) [as proposed by the Harkin/DeFazio bill] will generate more tax revenue than a 50-basis point (.5) FTT,” write Pollin and Heinz.
Focusing on stocks alone as taxable entities, Pollin and Heintz conclude the Harkin/DeFazio proposal of .03 would raise just $8.1 to $9 billion a year, compared to from $24.6 billion to $150 billion every year with a .5 tax.
NNU and many other activists favor applying the FTT to currency trades, derivatives, swaps of all kinds including credit default swaps, and other Wall Street activity, which could produce revenue as high as $350 billion a year in critically needed revenue, says NNU.
“With so many Americans struggling with lack of healthcare, high unemployment, foreclosure, and other family crises, we need a meaningful way to heal our nation,” says NNU co-president Karen Higgins. “It’s time for the Wall Street banks and investment firms to pay to rebuild the economy they did so much to run. The small tax on major trading that we propose is a critical first step.”
Contact: Charles Idelson, 510-273-2246 or Carl Ginsburg, 917-405-1060
For Profs. Pollin or Heintz, contact Debbie Zeidenberg, at PERI, dzeiden@peri.umass.edu or 413.577.3147
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