Let’s get one thing straight: The United States doesn’t have a public debt problem. Net interest payments on the federal public debt are less than 1 percent of GDP, which is about as low as they have been in the post-World War II era. In the long run, projected debt problems are a result of rising health care costs - driven by the private sector — and would disappear if we were to reduce these costs to the level of other high-income countries.
Unfortunately, the lavishly financed debt-scare crowd has the upper hand for now and is threatening to cut vital programs such as Social Security and Medicare. For that reason, and because in the long run our government will need more revenue for long-underfunded spending such as education and infrastructure, it is worth considering progressive measures to increase federal revenue.
One great idea is a very small tax on financial transactions, otherwise known as a financial speculation tax. Senator Tom Harkin and Congressman Peter DeFazio have introduced a bill in both chambers of Congress, “The Wall Street Trading and Speculation Tax Act of 2013.” It would levy a tiny tax - just 3 cents per $100 - on trading of stocks and bonds as well as futures, options, and other derivatives. According to the non-partisan congressional Joint Tax Committee, based on a very similar bill, this would raise about $352 billion over the next decade.
The tax is nothing very new or different - we had a higher tax on stock trades until the 1960s. There is no obvious down side. It wouldn’t apply to new issues of stocks or bonds, but just trades. Most investors would barely notice it. Ordinary savers might actually gain because the tax would reduce the volume of trading, which ends up being a cost to savers holding mutual funds.
Of course the tax wouldn’t affect any goods or services like checking accounts or credit cards. It would hit big financial firms who are collectively trading trillions of dollars a day, often to the detriment of the general public - as the world learned painfully in the financial crisis of 2008. High-speed computer trading of the kind that caused the “flash crash” of May 2010 - - in which the stock market plummeted nearly 10 percent in one day - might become less popular. If the tax had any effect on financial markets, it would likely be a stabilizing one, by reducing speculative trading.
A bigger tax would be better: Eleven European countries are about to approve a similar tax that is more than three times as large as that proposed by the Harkin-Defazio bill. But their bill would be a good start.
Despite widespread support from economists, there is one powerful force that is blocking this tax: you guessed it, Wall Street. The financial sector has doubled as a share of our economy since the mid-1970s, and it took 40 percent of domestic profits at its peak before the Great Recession. It has become bloated far beyond any recognition of its ostensible purpose, which is to channel private savings into productive investment. And even worse, it has become an enormous corrupting influence that further hollows out our democracy, not only blocking reform of the financial sector, but intervening against the public interest in fiscal and other policies.
Still, Europe has a banking sector much larger than ours, and they are moving forward on this tax. Americans have defeated other powerful lobbies in the past, such as tobacco. This tax on financial speculation would be a very nice step forward not only in raising revenue and reducing speculation; it would also advance the process of bringing the dangerous Wall Street beast under control.
Mark Weisbrot is Director of the Center for Economy and Policy Research (CEPR)