Financial Transactions Taxes Must Come Before a National Sales Tax

Print
Dean Baker
The Guardian Unlimited, November 9, 2009

See article on original website

The deficit hawk crew, famous for missing the $8 trillion housing bubble that wrecked the economy, is now on the warpath pressing the case for a big new national sales tax. They claim that the country badly needs additional revenue to address projected budget shortfalls.

While we may need additional revenue at some point, it makes far more sense to impose a financial transactions tax (FTT), which would primarily hit the Wall Street banks that gave us this disaster, than to tax the consumption of ordinary working families. We can raise large amounts of money by taxing the speculation of the Wall Street high-flyers while barely affecting the sort of financial dealings that most of us do in our daily lives.

The logic of an FTT is simple. It would impose a modest fee on trades of stocks, futures, credit default swaps, and other financial instruments. The United Kingdom currently puts a 0.25 percent tax on the sale or purchase of shares of stock. This has very little impact on people who buy stock with the intent of holding it for a long period of time.

For example, if someone buys $10,000 of stock, they will pay $25 in tax at the time of purchase. If they sell the stock ten years later for $20,000 then they will have to pay $50 in tax. The total tax would be equivalent to an increase of 0.8 percentage points in the capital gains tax.

By contrast, if someone is interested in buying stock at 1:00 to sell at 2:00, this tax is likely to take a bit hit out of their expected profits. The same applies to people who are speculating in futures, credit default swaps, and other financial instruments.

We can raise more than $140 billion a year taxing financial transactions, an amount equal to 1 percent of GDP. Before we look to impose a national sales tax, or value-added tax, as the deficit hawk crew would like, we should insist that we first put in place a set of financial transactions taxes.

A national sales tax will primarily hit the consumption of ordinary workers. People will pay for it in all of their everyday purchases – food, clothing, medicine – everything will cost a bit more as a result of a sales tax. Poor and middle-income people will end up paying a larger share of their income in this tax. This is both because they spend a larger share of their income than the wealthy and also because they spend a larger share in the United States. While the wealthy may have the opportunity to travel extensively in Europe or in countries not affected by the national sales tax, few low or middle-income people will have this option. They live and spend their money in the United States.

Since the financial sector is the source of the country’s current economic and budget problems, it also makes sense to have this sector bear the brunt of any new taxes that may be needed. The economic collapse caused by Wall Street’s irrational exuberance has led to a huge increase in the country's debt burden. It seems only fair that Wall Street bear the brunt of the clean-up costs. An FTT is the way to make sure that this happens.

In short, we have to tell the deficit hawk crew, many of whom earned their fortune on Wall Street, to slow down. The country does face serious budget problems, even if they may not be as bad as this crew claims. However, if we need taxes to address a budget shortfall, then Wall Street is the place to start. After we have put in place a tax on Wall Street speculation, if we still need additional money, we can talk about a tax that will primarily affect the middle class.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.