Financial Speculation Tax Serious Tool for Long-Term Deficit Reduction

A discussion of the budget and future deficits will likely play a
prominent role in President Obama's State of the Union Address tomorrow.
One policy that should be included in any serious discussion of the
long-term deficit problem is a financial speculation tax (FST). As
demonstrated in a new report by the Center for Economic and Policy Research (CEPR),
an FST would be a substantial source of money for the government. The
tax would also impose very little burden on the average taxpayer.

The report, "The Deficit-Reducing Potential of a Financial Speculation Tax," compares the potential revenue from an FST-- 1.0 percent of GDP or $150 billion in 2011-- with other budget items.

"This is not hypothetical," said Dean Baker,
a co-director at CEPR and author of the report. "The UK has used an FST
to collect large amounts of revenue and the IMF is currently advocating
the tax in recognition of the enormous amount of waste and rents in the
financial sector."

This tax would almost exclusively hit
the financial sector, not individual investors, because investors would
respond to any increase in transactions costs by cutting back their
trading, leaving the total amount they spend on trades little changed.
An FST would help rein in the economic rents earned by the financial
sector by taxing the turnover of credit-default swaps, options, stocks,
and other financial instruments.

Revenue from an FST could annually
exceed 1.0 percent of U.S. GDP. This would more than cover the costs of
many government programs and budget items, such as the extension of
unemployment insurance, the 2011 pay-roll tax cut, projected Social
Security shortfall, and the projected gaps in state budgets for fiscal
year 2011.

In terms of potential revenue when
deficit reduction is now playing a central role in Washington debates,
it is surprising that an FST is not given more attention as a
policy-tool. Few other options are as attractive or generate as much
money with as little pain as an FST.

The full analysis can be found here.