At this point everyone knows about Fix the Debt. It is a collection of corporate CEOs put together by Peter Peterson, the Wall Street private equity mogul. Ostensibly they want to reduce budget deficits and the national debt, but for some reason their attention always seems focused on cutting Social Security and Medicare. While some in this group will allow for minor tax increases, budget cuts are explicitly a priority, with these two programs firmly in their crosshairs.
Given that the stated goal of this group is to reduce budget deficits, it is worth asking why taxes don't figure more prominently on their agenda. After all, the United States ranks near the bottom of wealthy countries in its tax take as a share of GDP. It is also worth asking why one tax in particular, a financial transactions tax, never seems to get mentioned in anything the group or its members do.
This omission is striking because so many others in budget debates in the United States and around the world regularly suggest such a tax. There is a long list of highly respected economists who have advocated such taxes, starting with John Maynard Keynes. The list includes many Nobel Prize winners, most notably James Tobin, who wrote several papers arguing for such a tax as a way to both raise revenue and slow speculative trading.
Financial transactions taxes are hardly new. The United Kingdom has had a tax on stock trades in place since 1694. It still imposes a tax of 0.5 percent on trades. Relative to the size of its economy the tax raises the equivalent of $30-40 billion a year in the United States. Many other countries, including India and China, have financial transactions taxes. The United States used to have a tax of 0.04 percent on stock trades until 1966 and still has a very small tax which is used to finance the Securities and Exchange Commission.
In the wake of the financial crisis there has been renewed interest in a financial speculation tax. The European Union recently decided to move ahead with implementing a tax which will first be imposed in 2015 or 2016. There is also considerable interest in the United States. While financial speculation taxes have been included as a funding mechanism in many bills there were two standalone bills introduced in Congress last year.
A bill introduced by Tom Harkin in the Senate and Peter DeFazio in the house would apply a tax rate of 0.03 percent (that is 3 cents on $100 dollars) on trades of stocks, bonds and derivatives. The Congressional Joint Tax Committee projected that the tax would raise close to $40 billion a year. That would come to $400 billion over a decade. Minnesota Representative Keith Ellison introduced a bill that would scale the tax rate by asset, starting with the same 0.5 percent rate the U.K. imposes stock trades. This bill could raise as much as $180 billion a year.
The concept of a transactions tax has received considerable support from grassroots groups around the country. It has also been endorsed by many unions, including the National Nurses United, SEIU, and the AFL-CIO.
Given all the interest in a financial speculation tax it is striking that the Fix the Debt crew never even mention it when discussing their efforts at deficit reduction. That seems to cry out for an explanation.
One possibility is that they haven't heard of it. That one is too out in space to take seriously. Even the IMF has written on financial transactions taxes and in fact advocated increasing taxes on the financial sector. How could the Debt Fixers not know about the proposals for financial transactions taxes?
It is possible that they have a slam-dunk argument that a financial speculation tax would just be bad news for the economy or really wouldn't raise any revenue. If so, it would be nice if they could share it with the rest of us so that we didn't waste our time giving FSTs further consideration. After all, in addition to all the politicians and policy types to who have been devoting time to the issue, most of the European Union is about to put a tax into law in two to three years. If the Debt Fixers know of some horrible problem that all the researchers, including the IMF, have missed they would do us an enormous favor by setting us straight.
Then there is possibility number three. Many of the debt fixers, such as Morgan Stanley director Erskine Bowles and Peter Peterson, the master debt fixer himself, have longstanding ties to the financial industry. They may not be interested in a financial speculation tax for the simple reason that it could eat into their bread and butter. We should no more expect the Debt Fixers to support a FST than we would expect a farmers' lobby to support an end to farm subsidies.
On the plausibility scale, explanation number three would seem to be the most credible. We have a group of rich finance types using their wealth to advance their agenda. There's nothing new in this story, that's the way Washington politics has always worked. The question we should then ask is, why do the Washington Post, National Public Radio, and the Sunday morning talk shows take these people seriously?