For Once, a Good New Tax Proposal: On Financial Transactions

When we consider the jobs crisis, it has implications for sources of tax revenue.  If fewer people are earning income, then income tax may not be as good a primary source of government income as it has been since its constitutional approval only 103 years ago.  A flat tax, as easy as it would be to implement, would be unacceptably regressive; although George Will wrote a fine December Washington Post opinion piece titled “The nonexistent case for progressive taxation,” in which he said there was no justification for that without “a moral assertion about equitable sacrifices,” it is still the least of evils.  While much in resources have trickled down from the wealthy over the centuries, such is at a low point now, with cash pooling up at historic levels in the largest corporations and richest individuals.  And most of all it is necessary for us, when considering new and existing taxation, to assess how it affects the number of jobs; for example, Social Security payments, along with high rates for employee-laden companies, clearly discourage employment.

With the presidential campaign, one taxation idea has popped up again, that of charging a percentage on financial trades.  That would call for a small fraction, possibly as low as 0.1 percent, to be levied on sales of stocks, bonds, derivatives, and related instruments.  A January 28^th Washington Post editorial cited a survey by what they called the “nonpartisan” Tax Policy Center concluding that that share could produce $66 billion in revenue each year, which would increase to $76 billion if it were 0.3% but be lower, as it would cause drops in trading, for higher rates. 

Why would this tax be one of the best ways we could obtain revenue?

First, it would be small enough to have little effect on all but the most frequent traders.  One part in a thousand for transactions initiated by investors who tend to buy and hold would have only a minuscule effect on their annual or decade-long capital accumulation.  The tax would hit high-volume buyers and sellers, who once had to pay much higher transaction fees to brokers than they do now, the hardest, and might also have the effect of moderating market swings, as people and organizations with heavy trading volumes would need better reasons than before to buy or sell.

Second, with the huge dollar volumes involved, it would be as close to a painless tax as about anything I, anyway, can think of.  It would be better than the proposed federal gasoline increase, which would cascade through the prices of many goods and services and have a large inflationary effect.  

Third, it would be progressive.  The Tax Policy Center study found that 40% of the tax would be paid by those with incomes in the top 1%, with another 35% from others in the top 20%.  Money saved on lower costs for refilling gas tanks is vastly more likely to be spent elsewhere than money saved on lower stock purchase charges.        

Fourth, it would have almost no negative effect on jobs.  Almost every tax you can think of, from customs duties to highway tolls, rakes in money that would go for products, as it comes from people who would otherwise, for the most part, spend it.  Financial transactions have almost no such effect, as they involve existing savings or investments likely to be held.  They are electronic, so there would be no loss of employment from lower demand for executing them.

One possible problem with a federal transactions charge, the possibility of avoiding it by executing trades in other countries, is not as bad as it may seem.  As the Post article points out, there are already such taxes, sometimes more than 0.1%, in Great Britain, Switzerland, South Korea, Hong Kong, and elsewhere, and 10 more European Union countries are expected to start one next year.  It is more likely that the United States will stand alone without such a levy than it would with one. 

Taxes are no fun.  As Americans, we culturally hate them.  However, that does not mean they are all equally fair.  A financial trading levy would be as reasonable, as trouble-free, and as effective as any revenue source our governments have now.  It would be well positioned for the continuing and hardly endangered trend of more and more of these transactions.  Implementing it would not necessarily mean higher taxes overall – it could replace, for example, some share of payroll assessments.  Its merit, though, as such necessary evils go, is clear-cut.