Taxing Wall Street: Are Greed Reparations A Way to Fund The Future?

Sources: WSJ.com: Democrats Weigh Tax on Financial Transactions; thehill.com: AFL-CIO, Dems Push New Wall Street Tax; Huffingtonpost.com: Beyond the Tobin Tax: End the Free Ride for the Financial Sector and Impose Fees to Revive the Economy; Telegraph.co.uk: Joseph Stiglitz Calls for Tobin Tax on all Financial Trading Transactions.

This week, the Economic Policy Institute (EPI) joined a growing number of organizations in support of a levy on Wall Street financial transactions as a way to fund economic recovery. EPI President, Lawrence Mishel, testified before the House Ways and Means subcommittee on October 8, 2009, pointing to the finance sector as the cause of the recession and calling the financial transaction tax “entirely sensible” as a result.

The EPI is not the first to propose such a tax. In fact, the idea of taxing stock market transactions has been floating on the global stage for some time. The proposal to tax financial transactions or “Tobin Tax” was first introduced in the 1970s to penalize short-term speculation, (buying something on the basis of its potential selling price rather than on the basis of its actual value) thereby reducing financial sector volatility (the amount of risk in the value of a security). The concept, while never implemented, has been revisited as of late by the likes of Professor Joseph Stiglitz, former chief economist of the World Bank and Dominique Strauss-Kahn, IMF managing director. Some countries have, in recent times, begun to take the idea to the next level. In the United Kingdom, there is a levy of .05 percent on all stock trades. At one point, Sweden also imposed taxes on stocks and bonds, but has since abandoned the policy.

Talks of actual implementation of the tax on Wall Street are preliminary at this point; however, the concept is backed by a provision included in last year’s financial bailout bill. The provision requires the president to make efforts to hold the financial-services industry responsible if the bailout investment produced large losses.

The EPI’s proposed tax would come at a rate in the range of .1 to .25 percent of the value of each trade and would be collectable on all financial transactions (like stock trades), but not on consumer transactions (such as credit card purchases). Critics of a financial transactions tax claim that such a tax would drive investors elsewhere with their money, contributing to the further devastation of Wall Street by funding the competitor markets. According to the chairman of the House Financial Services Committee, Rep. Barney Frank, a one-time fee could satisfy the provision of the bailout bill and might also be a way to bypass the evils of a continuous tax.

Discussion Questions:
1) Critics suggest a tax would most certainly send frequent investors elsewhere and would have a devastating effect on Wall Street. Would traders sacrifice lucrative stock options to avoid a trivial .1 percent tax?
2) Do you think taxing financial transactions is a proper way to finance economic recovery? What if the funds were to instead go to an unrelated area of reform, like healthcare?
3) If it is true that in order for a tax on financial transactions to be sustainable, the tax would have to be implemented on a global level, is that a feasible option? What kind of collaboration would be required to implement such a policy?