Nancy Folbre is an economics professor at the University of Massachusetts Amherst.
Most of us pay state and local sales taxes on most things we buy, and most casino gambling is subject to state taxes ranging from up to 6.75 percent in Nevada to 55 percent on slot machines in Pennsylvania.
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But speculative purchases of stocks, bonds and other financial instruments in the United States go untaxed but for a tiny fee (less than a half-cent) on stock trades that helps finance the Securities and Exchange Commission.
In Britain, by contrast, a 0.5 percent tax on stock transactions raises about $40 billion a year. President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany recently announced plans to introduce a similar tax in the 27 nations of the European Community.
It is variously called a “transactions tax,” a “financial transactions tax,” a “security transaction excise tax” or a Tobin tax (after the Nobel Prize-winning economist James Tobin, who famously argued for its application to foreign exchange purchases in the late 1970s).
By any name, Wall Street hates it, because it would cut into trading profits. But proponents like Dean Baker, co-director of the Center for Economic and Policy Research assert that it would primarily affect short-term “noise traders” and discourage speculation rather than productive investment.
Less speculation could lead to less volatility in prices, encouraging long-term investors.
Further, a sales tax on Wall Street of 0.5 percent could raise up to $175 billion in tax revenue a year, even if, by discouraging frequent trades, it cuts the total number of transactions in half.
A small financial transaction tax proposed by Representative Peter DiFazio, Democrat of Oregon, and supported by Senator Tom Harkin, Democrat of Iowa, the Let Wall Street Pay for the Restoration of Main Street Act (with specific details of a co-sponsored bill still being negotiated) is likely to raise less revenue.
Plenty of highly respected economists support the basic concept, and plenty disagree. In a recent review of the literature, Neil McCulloch and Grazia Pacillo of the Institute of Development Studies in Britain conclude that it is unlikely to reduce speculation but nonetheless represents a relatively good source of tax revenue. A recent report by Thornton Matheson, published by the International Monetary Fund, expresses negative views.
An engaging summary of the pros and cons can be found in a videotaped debate sponsored by the Center for the Study of Responsive Law on July 8 as part of its “Debating Taboos” series.
My University of Massachusetts colleague Robert Pollin argues in favor, while James Angel of Georgetown argues against.
Professor Angel insists that short-term traders are not primarily speculators and describes them as a healthy part of the financial ecosystem that might be killed off. Professor Pollin’s view, with which I agree, is that short-term trading has increased enormously in recent years, with no positive impacts on economic efficiency. In any case, I don’t think a 0.5 percent tax on transactions will cause serious fatalities.
Professor Angel also points out that a tax on financial transactions will be passed on, at least in part, to all investors, with negative consequences for retirement savings. But all taxes are passed on, at least in part, to consumers. I agree with Professor Pollin when he argues that the effect of a financial transactions tax on most people would be very small compared with other sales taxes.
Economists point out that sales taxes discourage consumption, which is better than discouraging investments that can pay off in the future. But many consumption decisions that ordinary people make have important consequences for future productivity.
As Professor Pollin points out, current sales taxes bite those who buy materials to increase energy conservation in their homes or purchase a more fuel-efficient car.
My own research emphasizes that parental expenditures on children, as well as public spending on health and education, represent a form of investment in human capital.
Most state and local sales taxes are very regressive, with low-income families paying more as a percentage of their income. A proposed national sales tax, or a value-added tax, would have an even more negative impact on families at the bottom.
Our current tax policies favor speculative investment in financial instruments over productive investments in human capabilities. This imbalance helps explain why nurses’ unions in the United States have been particularly outspoken advocates of a financial transactions tax.
As they put it: “Heal America. Tax Wall Street.”
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