Is Your Presidential Candidate Owned by Wall Street?

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Dean Baker
Truthout, June 11, 2007

See article on original website.

That's a reasonable question, given how much money the Wall Street gang is coughing up this year in campaign contributions. Fortunately, there is a quick and easy test that you can administer to your favorite candidate to determine the answer.

Just call or email your favorite presidential candidate, and ask their staff whether he or she supports a securities transactions tax (STET). You will probably have to explain to the candidate's staffer what a STET is. You can tell them that a STET is a small tax placed on a trade of a share of stock or other financial asset (e.g. bonds, options, futures, etc.).

The tax would typically be set at a very low level so that it would have almost no impact on anyone who is not trading stocks on a daily basis. A rate of 0.50 percent on a stock trade would be reasonable; this is the tax rate that the United Kingdom currently imposes on trades on the London Exchange. However, even a small STET can raise vast amounts of revenue because of the enormous volume of trading in financial markets. In Japan, a system of STETs raised an amount equal to four percent of the country's tax revenue, the equivalent of $120 billion a year in the United States, at present. This would be almost enough money to eliminate the deficit, and more than enough to extend health insurance coverage to the uninsured under some proposals.

While no one ever likes to pay more money in taxes, the great thing about a STET is that it would have almost no impact on anyone who is not wealthy or actively speculating on stocks. While close to half the country owns some stock at present, a STET would be almost invisible to anyone who buys and holds shares to save for their retirement or their kids' education. A worker buying $10,000 of stock would pay an additional $25 because of a 0.25 percent STET. They would pay the same fee on the sale.

Even with this tax, most stockholders would still pay far less for their stock trades than they did 15 or 20 years ago. The reason is that brokerage fees and commissions have plummeted due to the advances in computers. At the beginning of the 80s, these fees averaged well over one percent of the purchase price. Now, even small investors may pay fees that are less than 0.50 percent of the share price. A modest STET will push the fees part of the way back to their early-80s' level, but no one claimed that high transactions costs were strangling financial markets 25 years ago.

People who actively trade stocks will feel more of a pinch from this tax. If you buy a stock at 2:00 and hope to profitably sell at 3:00, a 0.25 percent STET may crimp your style, but it's not clear why anyone should feel bad about this.

This sort of speculation is really a form of gambling, and most gambling is taxed at very heavy rates. For example, casinos in Nevada and Atlantic City pay tax rates of close to six percent on their gross revenue. Lottery players pay an effective tax rate of 20 to 30 percent on their bets, and this is before the income tax that the winners pay on their gains. Given the tax rates on other forms of gambling, there is no obvious reason why we should let more affluent people gamble tax-free on Wall Street.

There are other people who will be hurt. Some of the most highly-paid hedge-fund managers specialize in complex trading strategies that arbitrage tiny differences in asset prices. These managers could take a huge hit from even a small STET. Similarly, many of the Wall Street brokerage houses will feel the pinch of such a tax, some of which will undoubtedly come out of their commissions. These folks will be whining prominently in the media and the halls of Congress about how the STET is making them uncompetitive and causing them to lose business to foreign competition.

The reality is that the revenue from a STET can make the whole country more competitive. We can fix our health care system, improve our infrastructure or even reduce taxes on middle income workers, all of which will make our auto industry, steel industry, and just about every other sector more competitive internationally.

As far as the securities industry goes, if it wants to remain competitive, the simplest way would be to cut back on some of those $40 million dollar bonuses for the partners at Goldman Sachs and other exorbitant salaries earned by the top brass on Wall Street. But, this is why they make those big donations to presidential candidates. So, don't expect to hear much talk about STETs in this campaign, sucker.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.