Taxing stock trades to pay for jobs
Supporters say a financial transactions tax could fund new government stimulus aimed at creating more jobs. But the idea will face a tough battle in Congress.
NEW YORK (CNNMoney.com) -- A growing chorus of Democratic lawmakers and liberal economists are pushing hard for a tax on stock trades to pay for job creation.
By levying a small fee when stocks, futures, swaps, options and other securities are bought and sold, supporters of the tax believe the government can take in between $120 billion and $240 billion annually. That money could be used to fund additional government stimulus to help put the nearly 16 million unemployed Americans to work.
"Financial transactions number in the many trillions of dollars every year, so if you take a small fraction of that, you are going to be raising a lot of money," said Ann Lee, economics professor at New York University. "That can be used for things like paying down debt or creating jobs."
But the idea faces staunch opposition among Republicans and even from some Democratic lawmakers. Treasury Secretary Tim Geithner has also voiced his disapproval of the idea.
There are handful of different proposals in play, and the first bill surfaced in mid-November from a group of seven House Democrats, led by Rep. Peter DeFazio, D-Ore. The legislation is called "Let Wall Street Pay for the Restoration of Main Street Act."
The bill, which is still in the draft stages, would tax each stock transaction at 0.25% and futures, swaps and credit-default swaps at 0.02%. The bill's sponsors estimate that it can raise about $150 billion per year, half of which could be set aside in a "job creation reserve" for Congress to allocate in the future.
"We know Main Street is suffering and a restored Wall Street should now share in its recovery with everyone else," Rep. DeFazio said in a letter to colleagues.
To ensure that the law targets speculators and not pension funds or retirement investors, the tax would be refunded for tax-favored retirement accounts such as 401(k) plans and education and health savings accounts. Additionally, the tax would not apply to the first $100,000 of a trader's annual transactions.
House Speaker Nancy Pelosi, D-Calif., and Majority Leader Steny Hoyer, D-Md., have both said they are open to discussing such a plan, though neither said whether they support the DeFazio bill.
Such a tax is not unprecedented. The United States used to tax all stock sales and transfers at 0.2% to 0.4% from 1914 to 1966.
England currently levies a tax on stock sales and transfers at 0.5%, which brings in about $40 billion a year. But the U.K.'s top financial services regulator Adair Turner said in September that Britain should also tax "socially useless" transactions like derivatives and swaps. Prime Minister Gordon Brown supports Turner's proposal and presented it at last month's G-20 meeting.
In the United States, a financial transactions tax has also gained support in recent weeks from Nobel Prize-winning economists Paul Krugman and Joseph Stiglitz. Krugman, who is attending Thursday's "jobs summit" at the White House, argued in a recent New York Times op-ed that the tax would curb the excessive market speculation that led to last fall's credit crisis, and the fees would not have any noticeable effect on long-term investors.
The left-leaning Economic Policy Institute on Monday announced its own plan to create 4.6 million jobs in a year by levying a tax on stocks and other financial items. The EPI said the government should spend an additional $400 billion on stimulus aimed at job creation, and estimated that those funds could be repaid within 10 years from the proceeds of a financial transactions tax.
"The tax has serious revenue potential," said Josh Bivens, economist at EPI. "No one likes taxes, but on the menu of taxes, this one makes the most sense."
Unlike Krugman, Bivens argued that the tax would have very little impact on trading because the proposed fee is so negligible. But if it does have an impact, Bivens said it would be beneficial, reducing short-term speculative trades that lead to excess market volatility.
If the DeFazio bill advances to a vote, it will face an uphill battle. A letter to colleagues by Democratic Representatives Michael McMahon, D-N.Y., Carolyn Maloney, D-N.Y., and Debbie Halvorson, D-Ill., urged Congress to oppose the legislation. They argued the tax would raise credit costs, depress stock prices and force investors to flock to overseas markets. It would ultimately hurt the middle class as well "by punishing more than 90 million American investors."
Republicans and conservative economists agree with the assessment that the bill would inadvertently tax everyday Americans, arguing that banks would simply transfer the transaction fees to their customers. They also say targeting stock transactions means targeting the middle class, especially if a proposal is adopted that does not exclude retirement funds from the tax.
"People who support it see this as a way to hit evil banks and rich people, but the problem is that most stocks and bonds are not bought by rich people but by pension funds," said David John, senior research fellow at the right-leaning Heritage Fund. "To say the tax would be counterproductive would be putting it mildly."
Even some of those that support the tax conceded that it could put a stranglehold on the financial sector.
"Part of the reason why Geithner isn't supporting it is that it will hurt folks in the financial industry in the short-term," said NYU's Lee. "Anyone engaged in heavy trading isn't going to like this proposal, and it could mean more job losses in that sector."
As a result, supporters like Lee and Bivens say the tax won't likely pass through Congress while the economy is still struggling to rebound.