Report from DC: Can A Financial Transaction Tax Fix The Deficit?

A financial transaction tax (FTT) is one proposal being debated by economists as a solution to the national budget deficits both in the US and in Europe.  The FTT would place a small tax on stock and commodity trade, and a version of it has been introduced in the Congress by Representative Peter DeFazio (D-Oregon) and Senator Tom Harkin (D-Iowa).  A similar proposal is being considered by the European as well.

Supporters maintain that an FTT would push badly needed revenues into the deficit-strapped coffers of national governments, and shore up efforts to provide needed stimulus to our economies.  The tax would target the sector of the economy that caused the problem in the first place while having the salutary effect of placing a curb on risky speculation.  And there would be an important secondary benefit:  the financial sector might just be forced to put their cash into economically productive investments like small businesses or manufacturing or other job creating enterprises instead of just shuffling around paper transactions.

According to the economists at the Center for Economic and Policy Research, even at very small rates per transaction this tax would raise considerable sums for the US Treasury – at a rate of .01% it would bring about $ 176.9 billion a year into the nation’s coffers. This number assumes that trading volumes would be reduced by 50%, an extremely unlikely scenario.  However, even at these improbably reduced rates, this revenue source would produce $1.7 trillion over ten years, way beyond the deficit reduction targets being pursued in the Congress.

Opponents suggest that the tax would inhibit investment and place a curb on growth at a critical time and will simply be passed on by the banks to investors.  There also is a concern that investors would simply move their business elsewhere, like India or the Cayman Islands, making the tax uncollectible.

A financial transaction tax is not a new idea–it first was proposed by John Maynard Keynes in 1936. Types of transaction taxes are currently in use in theUK,Peru,Brazil, andSweden.  The governments ofFranceandGermanycurrently are campaigning for the imposition of such a tax inEurope.  Luminaries such as Bill Gates and Warren Buffett have endorsed such a tax, as has the Pope.

Whether the U.S. Congress will take up this tax as a help with its current deficit problems remains to be seen, but those interested in an equitable solution to revenue problems and wealth inequity need to keep this important proposal in our tool kit.

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