BUSINESS
02/28/2013 05:14 pm ET

Senators Propose Transaction Tax Bill To Raise Cash, Slow High-Speed Trading

Democratic lawmakers have proposed a plan to solve two pesky, unrelated problems at once: The budget deficit and high-speed trading robots run amok. That plan? Taxing Wall Street's trades.

It's doubtful their plan will become law any time soon, and there are questions about how effective it would be. Still, it may be the best way available to restore investors' faith in markets after a series of bubbles, busts and bizarre glitches.

Democratic Sens. Tom Harkin (D-Iowa) and Rep. Peter DeFazio (D-Ore.) on Thursday introduced a bill to slap a 0.03 percent tax on financial transactions in the U.S. They have introduced this same bill repeatedly in the past. But this time, against the backdrop of endless budget battles between the White House and Congress, the lawmakers framed it primarily as a revenue-raiser, noting that the Joint Committee on Taxation says the tax would raise $352 billion over the next 10 years.

"We need the new revenue that would be generated by this tax in order to reduce deficits and maintain critical investments in education, infrastructure, and job creation," Harkin said in a statement. "And there is no question that Wall Street can easily bear this modest tax. This Wall Street tax is a simple matter of fairness and fiscal sanity."

But the other goal of such a tax would be to curb market speculation, particularly the high-speed trading that has come to dominate the U.S. stock market. Though supporters of high-speed trading say it makes trading cheaper for everybody, it also contributes to terrifying market blowups, including the Flash Crash of 2010 and Facebook's disastrous initial public offering last spring. Such debacles have reduced investor confidence in markets to record lows.

Detractors of the tax point to studies suggesting it may not help curb speculation very much and might even make market prices more volatile by reducing the amount of stocks, derivatives and other securities traded.

But almost everybody agrees that there's a limit to just how beneficial extra trading volume can be. Where that limit is, exactly, is hard to say. But a recent letter signed by several finance executives in support of a transaction tax pointed out that the world's trading volume has grown to 70 times the size of the global economy. How much of that trading is actually beneficial?

Not much, according to science, and common sense. Much of it involves churning up markets to make small profits on each trade. At a certain point, all excess trading does is line the pockets of the speculators and the banks that make their trades for them.

In any event, hopes for the bill are slim, but potentially improved from last fall, the last time it was introduced. The Obama administration has never been behind a transaction tax, but The Nation's George Zornick reports that new Treasury Secretary Jacob Lew has not outright rejected the idea, as his predecessor, Timothy Geithner did. So that's something.

Meanwhile, the European Union has recently proposed its own aggressive transaction tax, giving opponents one less reason to worry about a similar tax in the U.S.: There will be fewer places for traders to run and hide.

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