If you've been listening to Democratic Presidential candidates, you'll hear a vision of America that has almost utopian ideals: universal healthcare, higher middle class incomes, college at no charge for all citizens. To pay for these lofty ideas, both contenders want to turn to a tax on Wall Street in the form of a financial transaction tax.
A financial transaction tax (FTT) is exactly what it sounds like: tax imposed on a financial transaction. The transactions subject to the tax are usually the purchase or sale of securities, such as stocks, bonds, or derivatives. Under an FTT, the tax may be assessed on the buyer, the seller, or both, and is typically a percentage of the market value of the security that is traded. In countries where they're installed, rates typically range from 0.1 to 0.5 percent.
FTTs have long been popular in less developed countries because they can raise significant revenue from a small number of relatively sophisticated financial entities. That is, they help the mass populace by only impacting the very wealthy. The most common form of this tax around the world is a tax on secondary market stock sales at a rate of 0.10 to 0.50 percent. China, France, India, Indonesia, Italy, South Africa, South Korea, and the United Kingdom impose such taxes.
Imposing a form of an FTT isn't without precedent here in the United States either. A minuscule securities transfer tax, which amounts to a percentage of a percentage, currently packs a powerful punch, as it provides the funds in full for the Securities and Exchange Commission.
So what could a full blown FTT do here in the States? I recently spoke to Steve Rosenthal, a senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute. Rosenthal researches, speaks, and writes on a range of Federal income tax issues, with a particular focus on business taxes. He told me that the tax has the potential to be a huge money-maker for the state, provided it is set at the right threshold.
"If a FTT is enacted, and the threshold for the tax is too high, the amount of trading could collapse, and the amount of revenue collected would be minuscule as a result," Rosenthal explained. "Our research has found that the optimal tax rate is something around .34 percent, and it would raise around $800 billion over 10 years. And a .34 percent rate would not decimate the revenue base."
That would potentially have huge impact on the American economy, and could indeed fund plenty of new state-sponsored initiatives from college tuitions to new healthcare solutions. But where there's a tax, there's usually a way to get around it. We've seen corporate tax inversions, where American-based companies will move their headquarters overseas to havens with lower corporate tax rates, set off a global tax conflict. What's to say an FTT would be any different in terms of avoidance?
"I think an FTT would be easier to administer than the corporate income tax, which is subject to base erosion," Rosenthal theorizes. "Base erosion issues often are about where a corporation's income should be allocated. You don't have the same kind of challenges with the FTT. We can tell where the trade occurs, and the jurisdiction is pretty straightforward. I suppose you would see some tax avoidance, but you wouldn't see the same type of avoidance you see from things like unreported income. Trading of stocks is transparent and done through a central clearing house. It's very difficult to hide."
Sound like a relatively simple solution, doesn't it? A small tax on Wall Street, generating hundreds of billions to help society. That shouldn't have many opponents, right? Not so fast.
"I think if we added a transaction fee, consumers and investors would notice. While most individual investors are not trading in volumes that would trigger a significant tax, the pension funds and mutual funds making those investments on their behalf would certainly be affected. It's hard to say how this plays out. I would say because there's so much money at stake, there will be some taxpayers and constituents that will be very troubled by the tax and will lobby against it," Rosenthal concludes.