Financial Transactions Taxes: Job Killing Robots for the Wall Street Hedge Fund Crew

Dean Baker

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

Last week, Representative Peter DeFazio reintroduced his financial transactions tax (FTT) proposal. The bill would impose a tax 0.03 percent on trades of stock, bonds, options, and other derivative instruments. (That's 3 cents on $100 of trades.) This can be thought of as the equivalent of a sales tax imposed on financial transactions, which are now largely untaxed.

According to the Joint Tax Committee, this tax would raise roughly $400 billion over a 10-year budget horizon. This translates into 0.2 percent of GDP. That would cover about 60 percent of the annual food stamp budget.

The tax would also dampen speculative trading on Wall Street. Many trades that involve flipping assets in a matter of minutes or even seconds would become unprofitable with even this small tax. This could make financial markets more stable.

But the really neat aspect of this tax is that it all comes out of the hide of Wall Street, rather than ordinary investors. Considerable research shows that trading volume declines roughly in proportion to the increase in trading costs.

This means that if the DeFazio proposal would raise trading costs by one-third, then trading volume would fall by roughly one-third. Investors will pay one third more on each trade, but they will carry out one-third fewer trades. This means their total cost of trading with the tax will be no larger than it was without the tax. (The Tax Policy Center of the Urban Institute and the Brooking Institution actually assumed that trading volume fall by 25 percent more than the percentage increase in trading costs, meaning that total trading costs would fall as a result of the tax.)

With most items, we would consider it a bad thing if we consumed less due to a tax. For example, if we got less health care or education because we taxed these items, it would be a serious loss. But this is not the casewith trading financial assets.

Trading is on net a wash for the economy. If I sell my stock at a high price, then I won on the trade. On the other hand, someone paid a high price for the stock and will thereby end up a loser. On average, the winners and losers even out, so if we can just spend less money on trading, we are better off.

The big exception is the folks in the financial industry who make money on the trades. They are losers in this story.

There is an argument that we need liquid markets to make it easier for companies to get money for investment. No one would ever buy shares of GE stock if they weren't pretty confident they would be able to sell them if they needed. But current trading volumes are way beyond what is needed to maintain a liquid market. If volumes were cut in half we would still be looking at trading volumes equal to what we had in the late 1990s. By any measure, the U.S. already had very deep capital markets in 1998.

The way we should think about a FTT is that it will radically reduce the opportunities for people to make millions, or even tens or hundreds of millions, annually by flipping stock and other assets. These people might have to instead work developing software or go into biotech or other areas for their paychecks. This is a great way to make the economy more efficient by reducing pay at the top.

That's a real win-win.

***

This was reposted from CEPR.

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 Campaign for America's Future

Union Matters

Freight can’t wait

From the USW

From tumbledown bridges to decrepit roads and failing water systems, crumbling infrastructure undermines America’s safety and prosperity. In coming weeks, Union Matters will delve into this neglect and the urgent need for a rebuilding campaign that creates jobs, fuels economic growth and revitalizes communities.

A freight train hauling lumber and nylon manufacturing chemicals derailed, caught fire and caused a 108-year-old bridge to collapse in Tempe, Ariz., this week, in the second accident on the same bridge within a month.

The bridge was damaged after the first incident, according to Union Pacific railroad that owns the rail bridge, and re-opened two days later. 

The official cause of the derailments is still under investigation, but it remains clear that the failure to modernize and maintain America’s railroad infrastructure is dangerous. 

In 2019, 499 trains that derailed were found to have defective or broken track, roadbed or structures, according to the Federal Railroad Administration’s database of safety analysis.

While railroad workers’ unions have called for increased safety improvements, rail companies have also used technology and automation as an excuse to downsize their work forces.

For example, rail companies have implemented a cost-saving measure known as Precision Scheduled Railroading (PSR), which has resulted in mass layoffs and shoddy safety protocols. 

Though privately-owned railroads have spent significantly to upgrade large, Class I trains, regional Class II trains and local, short-line Class III trains that carry important goods for farmers and businesses still rely on state and local funds for improvements. 

But cash-strapped states struggle to adequately inspect new technologies and fund safety improvements, and repairing or replacing the aging track and rail bridges will require significant public investment.

A true infrastructure commitment will not only strengthen the country’s railroad networks and increase U.S. global economic competitiveness. It will also create millions of family-sustaining jobs needed to inspect, repair and manufacture new parts for mass transit systems, all while helping to prevent future disasters.

More ...

There is Dignity in All Work

There is Dignity in All Work