From xxxxxx <[email protected]>
Subject The Case for the Financial Transaction Tax in 2021
Date February 19, 2021 1:05 AM
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[ Congress should immediately pass the Wall Street Tax Act,(A
Financial Transaction Tax - FTT), which would tax the sort of
high-speed trading that has turned the financial sector into a casino
at the expense of our communities.] [[link removed]]

THE CASE FOR THE FINANCIAL TRANSACTION TAX IN 2021  
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Lenore Palladino
February 10, 2021
The Appeal
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_ Congress should immediately pass the Wall Street Tax Act,(A
Financial Transaction Tax - FTT), which would tax the sort of
high-speed trading that has turned the financial sector into a casino
at the expense of our communities. _

,

 

For most Americans, what threatens health also threatens wealth. The
COVID-19 pandemic triggered the worst economic crisis in nearly a
century
[[link removed]],
with millions suddenly facing hunger, unemployment, or eviction. But
Wall Street doesn’t represent most Americans. In the parallel
universe of the financial industry, stock indices soared to historic
peaks
[[link removed]] as
Americans wished good riddance to the deadliest year
[[link removed]] in
our history. Detached from the daily lives of most Americans, the
stock market surge almost exclusively benefited the disproportionately
wealthy, and the pandemic once again lived up to its distinction as
“the great clarifier [[link removed]].”

For years, Wall Street has been increasingly out of touch with the
underlying economy of workers, jobs, and wages, and the fortunes
reaped by hedge funds and billionaires have not helped the millions of
Americans in dire need. It is a fundamental imbalance that can change
only with a suite of corrective actions. To start, Congress should
immediately pass the Wall Street Tax Act
[[link removed]],
which would tax the sort of high-speed trading that has turned the
financial sector into a casino at the expense of our communities.

This type of tax, known as a Financial Transaction Tax (FTT), is
designed to discourage economically useless speculation, progressively
raise hundreds of billions of dollars for social and economic
investments, and help transition to a more equitable tax system in the
United States. An FTT would ensure that high-volume stock market
transactions would curb, rather than reinforce inequality, and return
needed resources to support vulnerable families.

BACKGROUND

A Financial Transaction Tax is a small tax applied every time a
financial asset is sold, the same way that we all pay a small tax when
we buy a t-shirt or a haircut. These assets might include stocks,
bonds, or derivatives, but the type of asset is only one factor in
determining when the tax applies. Today, the FTT targets a practice
known as High Frequency Trading (HFT), which relies on complex
algorithms to execute a slew of transactions in milliseconds, turning
tiny changes in price into huge profits. As Andrew Ross Sorkin pointed
out in a recent column
[[link removed]],
this type of trading makes “a mockery of the idea of actual
investing” while giving Wall Street firms unique advantages over
retail investors. Rather than channel funds for investment back to
American corporations, HFT further enriches the wealthy while creating
risks of market volatility.

FTTs are common around the globe and even have a long history in the
United States. There was an FTT in place for much of the twentieth
century, from 1914 to 1965, during a period of great expansion of
capital markets. New York imposed a similar tax as recently as the
1980s. Several of the world’s other advanced capital markets have
an FTT
[[link removed]],
including France, Italy, the UK, and Hong Kong. Even today, the
Securities and Exchange Commission (SEC) continues to fund its own
operations through a small tax on transactions, thus providing a
successful model on which to build.

A few proposals on FTTs have been put forward recently. The Wall
Street Tax Act
[[link removed]] was
introduced in the House of Representatives last month by Rep. Peter
Defazio, and would place a tax of 0.1 percent on sales of stocks,
bonds, and derivatives—the equivalent of ten cents per $100 sold.
Other proposals vary the specific rates paid on different financial
instruments, though all contemporary proposals would apply the tax
across all financial instruments. In the Senate, Bernie
Sanders’s Inclusive Prosperity Act
[[link removed]] would
place a 50 basis points tax on securities, 10 basis points on bonds,
and five on derivatives (equal to $5 for a $1,000 stock; $1 per $1,000
bond and five cents for derivatives where the underlying value is
$1,000). Another proposal
[[link removed]] by
former Treasury Department official Antonio Weiss and Emily Kawano in
a Brookings Institute paper
[[link removed]] calls
for a 10 basis point tax on all financial instruments, phased in over
time.

A FINANCIAL TRANSACTION TAX IS PROGRESSIVE

A cornerstone of modern tax policy is the principle of progressive
taxation, which is concerned not only with how to raise revenue, but
how to raise revenue _equitably_. A progressive tax structures the
burden according to ability to pay. For example, the income tax in the
U.S. is progressive because those with higher incomes pay a higher tax
rate. Some excise taxes, however, like the tax on cigarettes, are
technically regressive because low-income individuals smoke at nearly
twice the rate
[[link removed]] of
others and therefore bear more of the cost in proportion to their
income. FTTs are progressive for the opposite reason. The overwhelming
majority of equities in the U.S. are held by wealthy families.

According to the Federal Reserve Board, the top 10% of households in
terms of net worth own over 80%
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overall equities, a broad measure that includes the value of pension
holdings. By contrast, the bottom 50% own only 7% of overall equities.
The distribution is even more lopsided when looking at directly-held
stocks, which are more likely to be traded at the volume and frequency
that FTTs are designed to address. Any debate around an FTT should
begin with this fundamental imbalance in what the stock market means
to the vast majority of families.

The most common critique of the FTT is that it would hurt the
retirement security of the middle class. But the top 10% of households
also own 54%
[[link removed]] of
pension entitlements. If we define “middle-class” as households in
the 20 to 60 percentile range by income, they own just 15% of pension
entitlements and 4% of corporate equity and mutual funds.

Importantly, the majority of such assets are owned by white
households. Only a third
[[link removed]] of
Black households own any stocks at all, whereas the ownership rate for
white households is over 60%. This divide compounds the racial gap in
nearly every other measure of economic stability—wage income, debt,
residential home and business equity, cash accounts, etc.—with Black
households largely locked out of the roughly 260% returns
[[link removed]] over
the last decade for S&P 500 funds. In terms of overall value, Black
and Latinx households own only 1% and 0.4% in corporate equity,
respectively.
 

For middle-class households holding financial assets for the
long-term, the tax would have a negligible effect, as it only applies
as trades take place. Given the concentration of financial assets in
the hands of the wealthiest households, it is clear that the FTT is
progressive in its impact. It would also make up some of the lost
revenue from the declining taxation
[[link removed]] of
capital gains.

USELESS SPECULATION VS. THE REAL ECONOMY

This concentration of assets has implications for how frequently
different groups trade their holdings, which matters in terms of who
would pay the tax. There are important distinctions between the
high-frequency traders (HFTs), who would be most impacted by the FTT,
and middle-class investors whose retirement security is held for
decades in mutual funds.

HFTs are now estimated to make up half of market trading volumes
[[link removed]],
executed by algorithms seeking to exploit miniscule differences in
prices. Because the FTT would be applied per transaction, it would
decrease the frequency of HFT and thus its profitability. However,
this may be a desirable result, as excess volatility and speculative
activity do not serve the actual function of the financial system,
which is to provide support for innovation in the goods and services
sectors of the economy.

An FTT could play an important role in restricting the excessive
trading that is designed to manipulate the markets instead of
benefiting the overall economy. Over the past forty years, the U.S.
economy has transitioned towards a financialized economy, meaning that
the financial sector has grown, and non-financial corporations have
come to rely more on financial activities rather than productive
innovation. This has reversed the traditional understanding that the
financial sector serves the needs of the goods and services economy,
providing credit to businesses and households, facilitating savings
and intermediation, and supporting equity issuances for
publicly-traded corporations. As the financial sector was deregulated
in the 1990s, it grew both as a percentage of GDP and as a locus of
increased speculative activity. This transition resulted not only in
the 2007 Great Recession, but more deeply in the ongoing focus by
large non-financial companies—the major employers in the United
States—on maximizing shareholder value and on secondary market
trading that seeks to create wealth through speculation rather than
through share price increases tied to actual productive improvements
in certain companies.

Reducing speculation can redirect the financial markets toward sound
investments in the real economy and even the transition to
decarbonization. Economists Pollin, Heintz, and Herndon show
[[link removed]] that
the ratio between stock market trading and productive investment by
non-financial corporations has increased 18-fold, which strongly
suggests that reducing the volume of high-frequency trading on the
stock markets would have negligible impact on actual productivity in
the goods and services-producing economy.

A FINANCIAL TRANSACTION TAX WOULD RAISE REVENUE FOR REAL PRIORITIES

Exactly how much revenue the FTT could raise is a challenge to
estimate, because it depends both on the impact of trading volume from
the tax (known to economists as the elasticity response), as well as
the changing overall transaction costs per trade. Even though an FTT
would increase transaction costs, these costs have been falling in
recent years, and an FTT would only restore total transaction costs to
the level they were a few decades back, when financial market trading
was still robust.

Given the uncertainty, economists have proposed a wide range of how an
FTT would impact overall market transactions and thus the amount of
revenue that the FTT would produce. Recent estimates range from
approximately $500 billion over ten years to $2 trillion
[[link removed]].
According to the Congressional Budget Office, a tax of 0.1% on
financial transactions, as proposed by the Wall Street Tax Act, would
generate $777 billion in new revenue
[[link removed]] over the next decade.

Pollin, Heintz, and Herndon analyzed the 2015 version
[[link removed]] of
Sanders’s Inclusive Prosperity Act and “concluded
conservatively” that an FTT would raise an additional $220 billion
annually, even accounting for a projected 50% decline in trading
volume and some tax avoidance. To put that estimate in context, $220
billion annually is enough to effectively end homelessness
[[link removed]] in
the U.S. ($20 billion), wipe out all outstanding medical debt ($81
billion
[[link removed]]),
and create a universal child care program ($70 billion
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that would ensure 12 million children receive affordable care—and
still have well over $100 billion left over.

CONCLUSION

The ultimate value of a tax is not only in the revenue it raises, but
also in the incentives it creates. The FTT is urgently needed because
of this dual impact: it will equitably raise revenue that can be used
to support economic recovery and social goods while discouraging
financial roulette that rewards speculation rather than jobs and
wages.

Our economy needs a well-functioning financial sector. As the
Nobel-prize winning economist Joseph Stiglitz has noted
[[link removed]],
our current financial system has failed at fundamental tasks such as
managing risk, efficiently allocating capital, and providing funds for
productive investments and job creation. Our tax system is one of many
tools that can be used to disincentivize the pursuit of short-term
profits over long-term stability and equity, and better align our
financial sector to support the public good. Congress should not
hesitate to use it.

_[Lenore Palladino is an assistant professor of public policy and
economics at the University of Massachusetts at Amherst.]_

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