Financial speculation tax could cut deficit

NEW YORK (CNNMoney.com) -- As the deficit debate in Washington grows increasingly noisy, a research group said Monday that a tax on financial "speculation" could help resolve some of the nation's thorniest fiscal problems.

The Center for Economic and Policy Research, a left leaning group, said that a tax on trades of stocks, options, futures and other financial instruments could generate $150 billion this year, or over 1% of U.S. gross domestic product.

While the idea of taxing financial transactions is not new, it has gained some traction overseas in the wake of the global financial crisis.

French President Nicolas Sarkozy, in comments Monday, said a financial transaction tax is one of his top priorities as leader of the Group of 20 nations this year, according to press reports.

The CEPR study looks at a 0.25% tax on stock trades in the United Kingdom and estimates that an equivalent tax in the United States could raise $40 billion a year for the Treasury.

"This is not hypothetical," said Dean Baker, co-director at CEPR and author of the report, in a statement. "The UK has used an FST to collect large amounts of revenue," he said, adding that the International Monetary fund "is currently advocating the tax in recognition of the enormous amount of waste and rents in the financial sector."

Baker argues that taxing speculation will put more of the burden on more sophisticated investors such as hedge funds, and will not hurt individual investors, who will simply make fewer trades.

He says the money generated from the tax could be used to cover the cost of extending benefits for the unemployed, the projected Social Security shortfall and provide much needed aid for cash-strapped U.S. states.

The CEPR also argues that big institutional investors, which use trading algorithms to gain an advantage in the market, do not contribute any "obvious benefit to the economy."

The financial services industry, of course, disagrees.

Scott Talbott, spokesman for the Financial Services Roundtable, said taxing stock trades would hurt individual investors by driving up fees on their 401(k), college fund or pension plans.

"The fund managers would simply pass the tax down to the average Americans who are trying to save," he said.

Kent Smetters, a professor at the University of Pennsylvania's Wharton School of Business, said he understands why some are calling for the tax.

Some think big investment funds that use sophisticated trading software are middlemen gaming a flawed system. But others argue that a tax would be unfair because traders provide a benefit in the form of efficient pricing and liquidity in the market.

Smetters added that a "small tax" would probably not hurt individual investors, though he said 0.25% "seems steep."

The proposal is one of many being discussed in Washington as the nation's swelling deficit and growing demand for social services from a rapidly aging population loom large.

Republicans in Congress have been calling for drastic spending cuts across a range of government programs. President Obama is widely expected to emphasize "investments" in key areas when he delivers the State of the Union address Tuesday.