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The Real Reason to Support a Financial Transaction Tax

  • November 19, 2009
  • Lee Drutman

Thanks to Gordon Brown’s support, the idea of a financial transaction tax has been gaining a bit of attention over the last couple of weeks. The idea is simple: place a small tax (say, 0.25 percent or less) on all financial transactions.

Partially, it’s a way to raise a little revenue from those who can most afford to pay to create an insurance fund against future bailouts, which is how it is being billed. And just yesterday, it was reported that House Democrats have discussed using it to fund a jobs bill. (Dean Baker has estimated that the tax could bring in $100 billion.)

But mostly, it’s a good idea because it throws a little sand in the gears of the giant financial speculation casino.

Wall Street banks make a good deal of money by running very sophisticated computer programs, looking for tiny (and supposedly risk-free) arbitraging opportunities, and then making those opportunities pay off by investing with incredibly high volume. These trades are something like the equivalent of buying a bunch of dollars for 99.75 cents each. It’s a great deal if you can do it en masse, and an even better deal if you can also borrow almost all of the money you are investing.

But if banks had to pay a 0.25 percent tax on every dollar they sold, then it suddenly wouldn’t seem like such a good deal to buy dollars for 99.75 cents each. This is what a transaction tax would do.

This would mean that Wall Street banks would spend less time looking for short-term opportunities to buy dollar bills for 99.75 cents. This a good thing, because it’s hard to see how having some of the smartest people and most sophisticated computer programs dedicated to this kind activity helps the economy. Something is wrong when 40 percent of all U.S. corporate profits are coming from the financial sector, as they were for much of the 2000s.

A transaction tax would mean that banks would instead devote more time to investing their capital in good, long-term investments. This seems to me what a banking sector is supposed to do — allocate capital to the most promising business ventures, which then sometimes actually spur innovation and improve the standard of living for everyone, not just those who happen to be clever enough to take part in the big casino.

Unfortunately, Treasury Secretary Tim Geithner is against such a tax, and his support is pretty important, since any transaction tax would require an international agreement. This is not surprising, since Geithner is and always will be a creature of Wall Street.

Still, it’s hard not to marvel at the latest round of bonuses on Wall Street and wonder how it is that these guys are making $30 billion while the economy continues to stumble. Slowing down the Wall Street speculation machine might help channel some energy elsewhere — maybe into actual productive recovery.

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