Goldman's Profits Come from Our Pockets: Why We Need a Tobin Tax

"The homeless in America have Goldman Sachs to thank for their homelessness and starvation right now. They took the money from their pockets, they put it in their bonuses for this year. . . . That's a financial terrorist crime."

-- Former stock trader Max Keiser in a France 24 interview

In the midst of the worst recession since the Great Depression, Goldman Sachs is having a banner year. According to an October 16 article by colin Barr on CNNMoney.com:

While Goldman churned out $3 billion in profits in the third quarter, the economy shed 768,000 jobs, and home foreclosures set a new record. More than a million Americans have filed for bankruptcy this year, according to the American Bankruptcy Institute.

Barr writes that Goldman's "eye-popping profit" resulted "as revenue from trading rose fourfold from a year ago." Really. Revenue from trading? Didn't we bail out Goldman and the other Wall Street banks so they could make loans, take deposits, and keep our money safe?

That is what banks used to do, but today the big Wall Street money comes from short-term speculation in currency transactions, commodities, stocks, and derivatives for the banks' own accounts. And here's the beauty of it: the Wall Street speculators have managed to trade in practically the only products left on the planet that are not subject to a sales tax. While parents in California are now paying 9% sales tax on their children's school bags and shoes, Goldman is paying zero tax to sustain its gambling habit. Race track winnings and other forms of gambling are taxed at up to 25%. But stock market trades get off scot free.

That helps explain Goldman's equally eye-popping tax bracket. What would you guess - 50%? 30%? Not even close. In 2008, Goldman Sachs paid a paltry 1% in taxes - less than clerks at WalMart.

Speeding Tickets to Slow Day Traders?

Wall Street bankers have been called today's "welfare queens," feeding at the public trough to the tune of trillions of dollars. The fact that their speculative trades remain untaxed suggests a tidy way that taxpayers could recover some of their bailout money. The idea of taxing speculative trades was first proposed by Nobel Prize winning economist James Tobin in the 1970s. But he acknowledged that the tax was unlikely to be implemented because of the massive accounting problems involved. Today, however, modern technology has caught up to the challenge, and proposals for a "Tobin tax" are gaining traction. The proposals are very modest, ranging from .005% to 1% per trade, far less than you would pay in sales tax on a pair of shoes. For ordinary investors, who buy and sell stock only occasionally, the tax would hardly be felt. But high-speed speculative trades could be slowed up considerably. Wall Street traders compete to design trading programs that can move many shares in microseconds, allowing them to beat ordinary investors to the "buy" button and to manipulate markets for private gain.

Goldman Sachs admitted to this sort of market manipulation in a notorious incident last summer, in which the bank sued an ex-Goldman computer programmer for stealing its proprietary trading software. Assistant U.S. Attorney Joseph Facciponti was quoted by Bloomberg as saying of the case:

The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.

The obvious implication was that Goldman has a program that allows it to manipulate markets in unfair ways. Bloomberg went on:

The proprietary code lets the firm do 'sophisticated, high-speed and high-volume trades on various stock and commodities markets,' prosecutors said in court papers. The trades generate 'many millions of dollars' each year.

Those many millions of dollars are coming from ordinary investors, who are being beaten to the punch by sophisticated computer programs. As one blogger mused:

Why do we have a financial system? I mean, much of its activity looks an awful lot like gambling, and gambling is not exactly a constructive endeavor. In fact, many people would call gambling destructive, which is why it is generally illegal....

What makes Goldman Sachs et. al. so evil is that they offer vast wealth to our society's best and brightest in exchange for spending their lives being non-productive. I want our geniuses to be proving theorems and curing cancer and developing fusion reactors, not designing algorithms to flip billions of shares in microseconds.

Gambling is an addiction, and the addicted need help. A tax on these microsecond trades could sober up Wall Street addicts and return them to productive labor. It could transform Wall Street from an out-of-control casino back into a place where investors pledge their capital for the development of useful products.

The Tobin Tax Gains Momentum

Various proposals for a Tobin tax have received renewed media attention in recent months. President Obama gave indirect support for the tax in a Press briefing on July 22, when he recommended that the government consider new fees on financial companies pursuing "far out transactions". Leaders from France, Germany, and the European Commission endorsed putting a speculation tax on the agenda at the G20 meeting in Pittsburgh in September. Brazil has now imposed what may be the first Tobin Tax on foreign investment inflows. A U.S. bill proposing to tax short-term speculation in certain securities, called "Let Wall Street Pay for Wall Street's Bailout Act of 2009", was introduced by Rep. Peter DeFazio (D-OR) last February. A different bill to regulate derivative trades was approved by the Financial Services Committee in October.

Derivatives are essentially bets on whether the value of currencies, commodities, stocks, government bonds or virtually any other product will go up or down. Derivative bets can cause shifts in overall market size reaching $40 trillion in a single day. Just how destabilizing short-term speculation can be - and just how lucrative a tax on it could be - is evident from the mind-boggling size of the market: $743 trillion globally in 2008. Another arresting fact is that just five super-rich commercial banks control 97% of the U.S. derivatives market: JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.

Pros and Cons

Promoters of international development have suggested that a mere .005% tax could raise between $30 billion and $60 billion per year, enough for the G7 countries to double international aid. But more than raising money, the tax could be an effective tool for slowing harmful speculative practices. According to a number of Nobel Prize economists, a downsized speculative market would go far towards creating a more sturdy financial system, helping to avoid the need for future bailouts. But if the tax is too small, it might not have the desired effect on speculation. The larger 1% tax originally proposed by James Tobin is therefore favored by some proponents. The much-needed income from a U.S. tax could be split between federal and state governments.

Opponents of the Tobin tax, led by the financial sector, argue that it would kill bank jobs, reduce liquidity, and drive business offshore. Supporters respond that Tobin tax profits could be used to create new jobs, and that the small size of the tax would hardly affect cash flows - although certainly the speculative market would shrink. Players in dice-rolling speculative operations have long claimed that their trades "stabilized" the system by enabling investors to hedge risk, but the recent financial crash has exposed that defense as being without clothes. Inflows of "hot money" are not good for a country. They create quick speculative bubbles that can collapse equally quickly when the money flows out again. Better for the country and its economy are the funds of prudent investors who intend to stick around for a while. A modest tax could even encourage these preferred investors, who will be more confident if their investments are not liable to collapse suddenly from hot money outflows.

Besides technical questions about how to implement the tax internationally, the offshore argument probably presents the most serious challenge. Should a Tobin tax pass in the U.S., investors would be likely to move to other markets beyond the reach of taxation. The U.S. could penalize traders for doing business abroad, but governments in major markets like Germany and London would no doubt need to endorse the tax for any meaningful shift to be seen. Some experts have argued that the Tobin tax would be best implemented by an international institution such as the United Nations, which would gain a large source of funding independent of donations from participating states.

That proposition sets off alarm bells for other observers, who see any international tax as a move toward further strengthening the power of the global financial oligarchs. However, the very fact that the United Nations, the G20, and the Bank for International Settlements are discussing this option suggests that we the people need to jump in and stake out our claim for national purposes, before we lose the tax money to international bodies controlled by the global bankers. We need to design the tax the way we want, before they design it the way they want. It needs to be collected by the U.S. Treasury and to go into the Treasury's coffers. It needs to bypass Wall Street and reach Main Street, where it can be used to stimulate local business and investment.

Officials from the International Monetary Fund insist that implementing a Tobin tax would be logistically impossible. But Joseph Stiglitz, a Nobel Prize winning economist and former World Bank leader, disagrees. In Istanbul in early October, he said that a Tobin tax was not only necessary but, thanks to modern technology, would be easier to implement than ever before. "The financial sector polluted the global economy with toxic assets," he said, "and now they ought to clean it out."

While Wall Street's welfare queens have been busy collecting generous government handouts, the 50 states have been left to fend for themselves. Some 48 states have faced budget crises in the past year, forcing them to cut libraries, schools, and police forces, and to raise taxes on income and sales. A sales tax on the exotic financial products responsible for precipitating the economic crisis is long overdue.

 

Follow Ellen Brown on Twitter: www.twitter.com/ellenhbrown

Comments

[sonofsamphm1c]

"You're ignoring the possibility of simply declaring those agreements null and void, on the grounds that both parties knew there was insufficient collateral to cover their derivative bets. This is still the case, as the US Comptroller of the Currency estimates there are 84 Trillion in derivative investments made by JP Morgan, for example, just about 84 times their asset value ..."

First, it would not have been simple. It probably would have been impossible. Second, the first person who proposed it admitted that as a result the American economy would have to grow out of the ashes, so it's a "there may be life after doomsday" scenario.

Under the same logic we would have void all house insurance policies as their notional value so far exceeds the puny reserves it's not even funny.

[schatsie]

Brazil beat us to it...a 2% tax, works for me.....and we all know that the states budgets are under water.

[Jason Ruspini]

Stock market winnings are taxed. It's called capital gains, and the rate for short term trading of stocks is the normal income rate for individuals.

Of course this tax will be felt for ordinary investors that hold mutual funds. If the average mutual fund has 100% annual turnover, a 1% tax becomes 2% in additional fees per year, or almost 50% over 20 years. You are arguing for making retirement more difficult.

Most fundamentally though, high frequency trading did not cause the crisis. If anything there was too little, not too much, pricing of mortgage securities. Think about it: even if high frequency trading increases daily volatility, that is not the kind of volatility people care about. People care about booms and busts in asset prices. They care about volatility at the monthly and annual level, which short term trading naturally has less to do with. Higher frequency traders buy AND sell.

Do not confuse flash trading with high frequency trading. Do not confuse problems related "short-termism" incentive effects with short term trading. Do not confuse volatility over short time frames with longer term volatility that actually affects peoples' lives.

A transaction tax might reduce volatility over short time frames, but it will probably increase the serial correlation of markets -- their momentum -- which may increase volatility at longer, more relevant, time frames. If trading is more expensive, booms and busts will be more prolonged.

[Ellen Brown - Huffpost Blogger]

True, tax is paid on the profits (at modest capital gains rates); but when you buy shoes, you pay a tax just for the trade. If you buy lumber and bricks and build a house that you then sell at a profit, you not only pay a tax on the profit but pay a tax on the purchase of the lumber and bricks. That's what a sales tax is, a tax on the trade. Tax on earnings or profits is something else. You pay the sales tax when you BUY the shoes, which COST you money rather than making you money. Why on shoes and not stocks? Shoes are essentials. Stock trading really is gambling, since the money goes to the last seller of the stock, NOT to the company the stock represents a share of. The only money the company gets is from the initial public offering, which is not traded on the stock market.

[Jason Ruspini]

Because of the reasons I began to outline. To address your specific example, investors will be willing to pay less in the primary market if it's more expensive to sell in the secondary market. If you are trying to improve the financial system and the functioning of the overall economy, this isn't the way to do it, and these sorts of moralizing arguments are similar to what people said about credit and insurance long ago.

[PropTrader]

Help me understand something. Are you saying that stock/bond trading activity is not currently taxed? So when Goldman executes a trade for its clients and earns a commission and pays taxes on that commission to our government, what would you call that?

Goldman and Morgan have been making record profits primarily on EXECUTING stock and bond trades on behalf of their clients---NOT on trading for their own accounts. When a trade takes place, Goldman brings the buyer and seller together and earns a commissions, which is taxed by our government. After Goldman pays its corporate taxes, it pays some of that remaining money to its shareholders as a dividend, which our government taxes again.

[PropTrader]

Ellen - I also don't understand your comment about how Goldman "took money from the taxpayers' pockets and put it into their bonuses." Money is fungible so I don't know how your assertion can be proven. But let's assume for a moment it were true that Goldman took $10 billion from the taxpayers, did not pay the money back, and then paid record bonuses (on record profits) to its employees. That would be inexcusable, in my opinion. But that is not the case here.

Goldman received $10 billion of TARP funds last fall, but repaid the full $10 billion in June 2009 and also repurchased the TARP equity warrants for $1.1B in July. Including dividends received by the government, the taxpayers received $12.3 billion in return for their $10 billion investment in Goldman-----a 23% return! So, the taxpayers MADE $2.3B off of Goldman. Are saying that it is not okay for Goldman to make money after it has paid off the taxpayers in full for thier generosity?

Contrast this with the bankrucpty of CIT Group ($2.1 billion taxpayer loss) or all of the small banks that are collapsing (100+ so far this year) and costing taxpayers billions of dollars-----these are ACTUAL losses, not performing bailout loans or bailout investments. I would be curious to hear your view on that.

[PropTrader]

Ellen - Can you clarify for me the logic behind your following comment:

"Revenue from trading? Didn't we bail out Goldman and the other Wall Street banks so they could make loans, take deposits, and keep our money safe?"

Goldman Sachs is not a depository institutions and does not make loans. Legal, Goldman became a Bank Holding Company last fall but that does not mean that it is the same as a commercial bank that takes in deposits and makes loans. So how is Goldman suppose to make loans when that is not its business and, even if it wanted to, it doesn't really have the capacity to do so because it doesn't have a bank branch network like Wells Fargo, JPMorgan, or Bank of America.

[RosanneofTennessee]

Hi, Ellen great article, as always.

That computer system sounds like an unfair advantage to me, akin to "insider trading."

If Martha Stewart could been imprisoned for months for having a theoretical conversation, this computer system that manipulates the market should result in lifetime imprisonment. for those at Goldman-Sachs.

This issue needs to be pursued by our media with a fervor. I'm all for the Tobin tax and allowing the big five on Wall Street the PRIVILEGE of paying their fair share.

[Ellen Brown - Huffpost Blogger]

Thanks! Yes there are questions about whether the Tobin tax would work and whether the big traders couldn't manage to get around it somehow, but my main interest was in exposing the outrageously unfair trading practices of Goldman and others in a position to manipulate markets. There really are no free markets anymore. It's a rigged game, and we small investors need to know what we're up against before we play.

[AnnT]

Keep 'em coming, Ellen! You're investigating and exposing greed and corruption where few else are!

[bkay]

The good part about this legal theft is more people are becoming aware of it. It is highly unlikely that the highest paid goldman people are nobel laureate material. Exposure will change things. My son, one of the best and the brightest, an economics major, who has been made increasingly aware of these economic thieves, is turning his trading floor into an art gallery. He had an artist, impoverished, taken advantage of my a well known large corporate business, for his talent, who had applied to be a trader, now bunking in his trading floor, and painting large canvases. These traders, who are the best and the brightest, have spent their talents trading money, just to keep up with the enormous cost of living, in which the parameters are set by thieves like goldman, who are controlled by "others" to stay on this neverending wheel of torture to stay even. Bravo to ellen, for her book for her clear explanation of debt created money, for her road map to who owns the government. Her writings need to be collated and taught in high school, college, and grade school economics to reverse the course to disaster these greed mongers have created. Everyone will be happier.
bravo, ellen...it takes courage and clear thinking to write as you do! I am very grateful!
bkay

[dadw5boys]

Speclators jack up the cost of Raw Materials by churning them into pools over and over then selling at 5 to 10 times the orginal cost.

Taxes stop them.

[sonomarc]

Let me see if I have this straight. We've given our state assets (pension funds, cash, etc.) to the Wall St. banks for safekeeping and management. They used them to capitalize risky bets, stumbled, and taxpayers bailed them out at 100 cents on the dollar. They turned around and said our assets were worth more like 60 cents on the dollar - so pension funds and the like took the haircut. Now they are trading that 60 cents like there is no tomorrow, making profits from their bets, which they don't share with the public. The government also does not tax them on these trades, so we, the public, are not benefiting at all from their managing our assets.

Time to set up a state bank where public assets are used for the public good and not for for the welfare of these self serving banks.

[dadw5boys]

They could not get Social Security into Wall Street so they STOLE IT WITH DEBT !

[Rule Of Law]

Excellent catch!

[Ellen Brown - Huffpost Blogger]

Totally! Goldman's CEO thinks he's doing "God's work" by putting businesses together with capital. The problem is that they're taking a $1billion/month cut. A publicly-owned bank could do it at cost and return a profit to the public.

[Mountainhawk]

A tax as a precentage of the value of the underlying transaction would make trading uneconomical for the small day trader, so the big guys would be exempt that the little guys would be priced out of trading. The Exchanges NasDAQ and the NYSE presently pay the investment banks a fraction of a cent per share to trade as SLPs (Supplemental Liquidity Providers). Let me say that again.
The Investment banks that have access to low cost government funds and have huge trading profits , Goldman, JPM, Morgan Stanley ect are PAID TO TRADE to provide liquidity. and they would be likely to be EXEMPTED from any tax, as they have historically also been effectively exempted from naked short selling restrictions under the Madoff Exemption.

Better that there should be a 1$ per transaction tax rather than a percentage, and apply it to all, not just the little guys.

[Ellen Brown - Huffpost Blogger]

Thanks, that's a great idea! I'll incorporate that into my article before posting it on my website at www.webofdebt.com/articles.

[dadw5boys]

Try and track one raw materail contract into the pools and see how many times it is churned to raise the price before selling into the market.