Contrary to What You Read in the WaPo, Financial Transactions Taxes Will Save Most Investors Money

Dean Baker

Dean Baker Co-Director, Author, Center for Economic and Policy Research

In an article that reports on plans by a new coalition to challenge the financial industry, the Washington Post implied that the financial transaction tax (FTT) supported by the coalition would hurt ordinary investors. The piece told readers:

"The proposed so-called transaction tax has already raised concerns among some on Wall Street. Such a tax would also effect pension funds or other large investors who sometimes trade thousands of stocks a day, they say.

"'While some politicians claim this tax is directed at high frequency trading, the truth is that it would directly hit the pension funds of hard-working teachers, nurses and teamsters,' said Bill Harts, chief executive of Modern Markets Initiative, which represents high frequency trading firms.

"'We don’t understand why unions would support something that would so clearly hurt their membership’s pension funds.'"

It's interesting that the Washington Post chose to turn to a representative of the financial industry as its major source on this proposal. This would be comparable to relying on a spokesperson from the tobacco industry as the main source on tobacco taxes.

If the Post had turned to a more neutral source, like the Tax Policy Center of the Brookings Institution and the Urban Institute, it would have discovered that Mr. Harts is completely wrong. According to the Tax Policy Center's analysis of a FTT, the volume of trading would actually decline by a larger percentage than the increase in trading costs due to a FTT. (In other words, the demand for trading is elastic.)

This means that on average the pension funds of hard-working teachers, nurses, and teamsters would be paying less money on trading costs after the tax was put in place than they do now. The tax would be more than fully offset by lower trading fees paid to the people that Mr. Harts represents.

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This has been reposted from the Center for Economic Policy and Research.

Dean Baker is author of the new book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy,” PoliPoint Press, LLC. This piece was first published on the Center for Economic and Policy Research’s Jobs Byte. CEPR’s Jobs Byte is published each month upon release of the Bureau of Labor Statistics’ employment report. For more information or to subscribe by fax or email contact CEPR at 202-293-5380 ext. 102 or chinku@CEPR.net.

Posted In: Allied Approaches, From CEPR Co-Director Dean Baker

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