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Kyle G. Brown

Kyle G. Brown

Posted: September 28, 2009 03:50 PM

Beyond the Tobin Tax: End the Free Ride for the Financial Sector and Impose Fees to Revive the Economy

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Michael Moore acted out a near-universal fantasy when, in his latest film, Capitalism: A Love Story, he pulled up to a bank in a Brinks truck, stepped out, and announced to security guards: "We're here to get the money back for the American people."

As effective as it must have seemed at the time, there are ways to get our money back that don't require moneybags and get-away cars. Taxing trades in financial markets is one of them. But it's been hastily dismissed thanks to a sketchy exaggeration of the difficulties to ensue, a reluctance to take on Wall Street, and a failure to appreciate just how broke the nation is.

Let's face it, America: the rest of the world is not going to forever finance your mountainous debt, as it reaches into the stratosphere. Your health care costs will continue to soar, whatever plan you decide on. Afghanistan, Iraq and other foreign adventures won't pay for themselves. Private capital flows, though thickening, are still in short supply, and invariably fail to filter to the rest of society.

The answer is to raise capital for the public sector. A lot of it.

Like a Tobin Tax, but Better
Just weeks ago Britain's financial regulator, Adair Turner, the Chairman of the Financial Services Authority, proposed a global tax on financial transactions to curb excessive speculation and executive pay. It would go beyond the Tobin Tax on foreign currency exchanges, which the late Nobel-prize-winning economist James Tobin had recommended in the 1970s to penalize short-term speculation. The resistance that met Lord Turner's -- and indeed every such proposal -- comes predictably from apologists of unfettered finance, for whom the idea of regulation and additional fees, are anathema.

This sector of society, largely untouched by the travails of a still struggling economy, prefers that the excesses of the financial sector go unnoticed, and untaxed. But as the world of finance returns to eye-watering profits, unemployment and poverty levels are on the rise, and the national budget teeters on unsustainably narrow tax revenues.

The most reliable way to expand those revenues would be to impose a modest fee on every stock, every bond -- in short, every financial transaction. According to one study, a fee of just 0.5% would raise more than $100 billion a year, in US markets alone. That would defray health care costs, and help struggling states restore social services that have been axed over the past two years.

Making it Work
Critics opine that such a tax would be unworkable. Not so. A stamp tax of 0.5% is currently imposed on stock trades in the United Kingdom. Far from suffering from subdued trade, it's the home of the London stock exchange, one of the largest in the world.

The claim that taxing finance would drive investment elsewhere is part of Corporate America's all-purpose Anti-Tax mantra. By its logic, we shouldn't really tax anything, should we? Why tax cars or clothes? Buyers will just go elsewhere!


But unlike other taxes, this levy could be periodically altered, in the same way the Federal Reserve adjusts interest rates: according to market activity.

Most individuals or small firms make medium or long term investments -- a pension fund of $10,000 on behalf of a retiree, for example. At a rate of 0.5%, the investor would pay only $50 in fees. The tax would bear more heavily on traders, who make countless infinitesimal trades per day. As their business is based on fine margins, a tax would indeed affect profits. But because of years of falling costs and productivity gains from cutting-edge software, the impact would be minimal.

The tax would discourage excessive speculation and casino-style trades, which do little to contribute to the wider economy, and in fact tend to undermine it. Traders may be unenthusiastic about these kinds of proposals, but they're not likely to pack up and go home. There is simply too much money to be made for a half-percent dent to scare them off.

Swedish Bonds
Critics point to Sweden which, for a short time, imposed taxes on stocks and bonds before abandoning the policy. Some investors avoided fees by trading in alternative financial products. But that is the point: taxes were not applied to all financial products, so investors could trade in some, and avoid others altogether. This is why for maximum effect, all of the major financial markets would have to impose a levy across the board.

Perhaps you're thinking, "We could never tax financial transactions here." You already do. The US government imposes a tax on new equity issues, the proceeds of which finance the operations of the Securities and Exchange Commission. It's a minuscule tax to be sure, but this, and the U.K. stamp tax show a levy is not only feasible, but potentially lucrative; it could help replenish desperately dwindling public coffers.

Tax is Not a Four-Letter Word
The key would be to raise the levy to an international scale. Several countries, including France and Belgium, have already proposed or passed legislation seeking to tax financial transactions worldwide. The German Finance Minister made a similar proposal earlier this month. And at the G20 Summit, a smaller, global tax for development assistance was discussed, but omitted from the final communiqué. Such timidity cannot continue. For any plan to take flight, it would need American support. President Obama must provide it, lest millions more be abandoned by the 'jobless recovery,' and be tempted to take matters into their own hands, with Brinks trucks and moneybags.

Kyle G. Brown is a writer and journalist based in Toronto, Canada.

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