Recently, I’ve noticed more buzz about a potential tax on trades involving stocks, bonds and other financial instruments – AKA, the speculation tax. From the stories I’ve seen, such as this one by Dean Baker, co-director of the Center for Economic and Policy Research, such a tax would run about .25 percent on a transaction. That works out to about $2.50 on a $1,000 trade.
Like most people, I’m not particularly thrilled with taxes. However, this tax seems less onerous than others that we currently pay, for several reasons.
First, it’s progressive, and would hit wealthier people more than middle-class working stiffs. That seems fair, given that the wealthiest 10 percent of households in the U.S. hold about 80 percent of stocks and mutual funds, according to “Who Rules America,” a paper by William Domhoff, a professor of sociology at the University of California at Santa Cruz. And, the amounts on the level of investments most middle-class people make – again, about $2.50 on a $1,000 trade – are not going to force anyone to have to delay retirement or skip college.
In addition, even a small tax on transactions should help to moderate the speculation that currently occurs in the financial markets. Say a trader purchases masses of a security in the morning, and then sells it later that day. If the volume is large enough, the trader can make a profit on even a minute fluctuation in the price. The problem with speculating is that when it’s carried out in large quantities, it can lead to asset bubbles, notes Anniki Lane with Citizen Works. The prices of assets go up not because the assets themselves are inherently more valuable, but because investors’ activity pushes the prices higher. One prime example: the recent housing bubble. Moreover, speculation does little to help the non-financial sectors of the economy. It doesn’t, for instance, result in financing for a new manufacturing plant or a promising tech start-up.
Enforcing such a tax would be relatively straightforward. After all, financial transactions already are reported to the IRS, Lane notes.
And, while some opponents say that a tax on financial transactions would drive financial business outside the U.S., that doesn’t seem to have been the case for those countries that have implemented such a tax, such as the U.K. What’s more, the U.S. has had such a tax in the past, during the Civil War, the Spanish-American War and again starting in 1914, according to this paper from TaxAnalysts. In fact, the 1914 tax remained on the books until the 1960s.
Finally, while the hit to any individual from a speculation tax would probably go unnoticed, the tax could raise substantial dollars – more than $170 billion annually, according to this paper by the Center for Economic and Policy Research. And, that’s assuming that trading fell 50 percent due to the slightly higher trading costs.
To be sure, the proper level and type of taxation is always fair game for debate. But a speculation tax seems like a more equitable, straightforward choice than many others.