Making Wall Street Pay

The deficit hawk crew, famous for
missing the $8tn 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 United States 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, 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 a financial
transactions tax is simple. It would impose a modest fee on trades of
stocks, futures, credit default swaps and other financial instruments.
For example, the UK puts a 0.25% 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 10
years later for $20,000, 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 1.00pm to sell at 2.00pm, this tax is likely to take a
bit hit out of their expected profits. The same applies people who are
speculating in futures, credit default swaps and other financial
instruments.

We can raise more than $140bn a year taxing financial transactions,
an amount equal to 1% 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-class 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.

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 debt burden. It seems only fair that Wall Street bear the brunt
of the clean-up costs. A financial transactions tax 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.