|Shared Sacrifice: Where's Wall Street's Share?|
TPMCafé, December 19, 2010
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The theme in Washington these days is "shared sacrifice." Many of the country's most prominent political figures are insisting that the public must get used to sacrifice. This means giving up some of the benefits, like Social Security and Medicare, that they have come to rely upon.
The shared sacrifice might also mean that middle-income people have to pay higher taxes. Telling a country that is suffering from near double-digit unemployment that it must get used to sacrifice might seem a bit strange, but polite Washington circles have never had much connection to the lives of normal people.
Even more striking than this push to impose even more sacrifice on a middle class that has already paid an enormous cost for the economic policies of the last three decades is the fact that Wall Street is not expecting to share in these future sacrifices. This is peculiar since reckless Wall Street greed played a central role in inflating the housing bubble whose collapse gave us the current economic crisis.
The Wall Street banks also tapped taxpayers for trillions of dollars in below market loans at the peak of the crisis, allowing them to avoid bankruptcy. Thanks to the taxpayers' generosity, the Wall Street banks are now back on their feet again, as profitable as ever with the bonus pools slated to hit record highs.
This island of enormous prosperity in the midst of a suffering nation would seem to be crying out for a share of the sacrifice. The obvious mechanism to ensure that the banks contribute to whatever future budget problems the U.S. government faces is a financial speculation tax. Such a tax can raise more than $150 billion a year or more than $1.8 trillion over the next decade.
What is really great about a financial speculation tax is that the Wall Street banks would pay almost the entire tax. The economics on this is very simple. If a tax makes trading shares of stock, options or other assets more expensive then people will trade less. For example, if a tax doubles the price of trading shares of stock, research shows that people will trade roughly half as much.
This means that investors will spend roughly the same amount on their trading with the tax as they did without the tax. They will pay twice as much per trade, but since they trade half as frequently, they end up paying the same amount on their trading.
Instead the cost of the tax will be born by Wall Street. The banks will have to absorb pretty much the full cost of the tax. This explains why prominent people in Washington have so little interest in financial speculation tax. (The bills that been proposed in Congress to impose a tax also explicitly exempted the vast majority of trades by ordinary investors from the tax.)
It is worth briefly ridiculing the favorite objection of the prominent people in Washington to a FST. They claim that it will be impossible to collect since all the trading would just go overseas.
We know that economic policymakers in Washington don't have a very good understanding of the economy. That is why they couldn't see the $8 trillion housing bubble that wrecked the economy. So, maybe we can help them a bit with this one.
The United Kingdom has had a stock transfer tax for decades. It raises close to 0.3 percent of GDP, the equivalent of $40 billion in the United States, just by taxing stock trades, as opposed to trades of options, futures, credit default swaps and derivative instruments. Apparently the bureaucrats in the UK's Inland Revenue Service have figured out how to successfully impose the tax without all of London's trades going to the Frankfurt or New York exchanges.
Suppose we arranged to have the bureaucrats from the UK come to Washington to give a seminar to President Obama's Treasury Secretary, his National Economic Advisor and other top officials explaining to them how a relatively small country like the UK can raise so much revenue from an FST.
To make it worthwhile for the UK we can pay the bureaucrats the standard Wall Street honcho compensation package of $5,000 an hour. (The UK can decide what portion goes to the bureaucrats as opposed to the government.) It probably would be possible for 2 senior tax bureaucrats to explain the details of this tax to normal people in a day, but since there is so much resistance to the idea in Washington, let's assume it takes a full week.
The 80 hours will cost taxpayers $400,000. However, if the UK bureaucrats can successfully teach our economic policymakers we can easily pull in $1.8 trillion over the next decade from an FST. In that case, this training session will be money very well invested.
At the very least, once the top officials have been tutored by the UK tax bureaucrats, they will never again to be able to honestly say that the United States can't successfully impose an FST. Their only argument will be that the Wall Street boys don't want to share in the sacrifice and they have enough power so that they don't have to.