Tax Stock Trades to End Speculation : The revenue generated could be used for a variety of social and jobs programs.
News from the financial markets over the past few weeks makes it clear that Wall Street is terrified by the prospect of improved economic conditions for the majority of Americans. The front page of the March 31 Wall Street Journal conveyed it precisely: on the left side, a headline announcing “Job Market Picks Up;” on the right side, more sobering news, “The Bull Stumbles.”
Indications that three years of recession and jobless recovery are finally ending sent the stock and bond markets into a frenzy of bearish trading. If job creation is sustained and wages start rising, the reasoning on Wall Street goes, inflation is sure to follow, and with it declining returns on bonds and a likely squeeze on corporate profits. Just such reasoning is what prompted Federal Reserve Chairman Alan Greenspan to raise short-term interest rates three times in the past 10 weeks.
How can the public exert control over the financial markets? Ultimately, this will require overhauling financial regulation and bringing the Federal Reserve under greater democratic control. But as an important first step, we offer a simple proposal that has received surprisingly wide political support: a small tax on the sale of every financial instrument.
A securities-trading tax of this kind would yield a substantial social benefit--either by discouraging speculation or, failing that, creating a formidable new revenue source. At various times, this or similar measures have been endorsed by former House Speaker Jim Wright, Senate Minority Leader Bob Dole and even former President Bush. The Clinton Administration’s two most distinguished economists, Joseph Stiglitz of the Council of Economic Advisers and Lawrence Summers of the Treasury Department, have written persuasively in behalf of such a tax.
The technical features of a trading tax are straightforward. For stocks, the seller would be charged 0.5% of the sale price, the amount suggested by Wright when he began floating the idea is 1987. The tax would then be adjusted on a sliding scale for bonds of various maturities and options, futures and swap contracts, including those for commodities. A tax of this size would have virtually no impact on anyone who bought and held an asset for a period of time. But it would seriously reduce the profit prospects for short-term speculators.
The potential benefits of this tax can be appreciated only in terms of the magnitude of the U.S. financial markets. For 1992, $3.1 trillion was traded in the stock market, $8.2 trillion in the corporate bond market and $44.4 trillion in the government securities market. Relative to this trading volume, new funds raised on these markets were minuscule. Considering just the stock market, $114 in share trading took place for every dollar raised to finance new corporate investments.
Such vast trading creates serious distortions on the productive side of the economy. For one, corporate managers are forced to hew to the short-term performance standards as defined by the financial markets or place their careers in jeopardy.
Wall Street also distorts the formation of economic policy. The priorities of the financial markets--against low unemployment, wage gains and inflation--are deeply entrenched among policy-makers. Bill Clinton fashioned a winning political campaign around the theme of “good jobs at good wages.” But his economic spokespersons now offer a positive spin on the news that wages haven’t risen during the recovery and aren’t expected to over the next year.
The tax is certainly no panacea. But if it succeeds in significantly reducing speculation, it will promote financial stability and productive investment. Even if it fails to dampen speculation, revenues generated from the tax would be highlybeneficial. We estimate that, at the levels proposed, the tax would raise about $60 billion annually if trading did not decline after it was implemented.
If trading fell by 50%, the government would still raise $30 billion, 10 times the cost of extending Head Start to the entire eligible population. Alternatively, the $30 billion could fully finance the type of public-investment program that, as candidate Clinton maintained repeatedly in 1992, also creates high-wage jobs.
Though the case for the tax is compelling, Wall Street will oppose it vehemently. The issue is clear: How long can we allow Wall Street to decide what’s best for everyone else?
