How Come Ordinary People Need to Pay Sales Taxes but Wall Street Speculators Don't?
Stay up to date with the latest headlines via email.
Sales tax on a pair of shoes: 6 percent. Sales tax on a credit default swap: 0 percent
That's right. Speculators don't pay a penny in taxes for financial purchases, including the high-risk derivatives and credit default swaps that nearly wrecked our economy.
Throughout the country state governments are cutting school budgets, services for the poor, police departments, and funding for food pantries and homeless shelters and elderly assistance. And they're raising sales taxes and property taxes and local taxes and fees.
Meanwhile, from 1980 to the present, almost all of the total increase in American incomes went to the richest 1 percent. That's an extra trillion dollars a year. Most of their money came from tax cuts, financial system de-regulation, ownership of 50 percent of the stock market, and a 15 percent capital gains tax on their stock market profits. For families making $10 million or more per year, only 19 percent of their income came from wages and salaries.
So they have billions of dollars to invest. But while the American public pays up to a 10 percent tax to buy essential household items for their families, wealthy investors and speculators pay a zero tax on the purchase of stocks and bonds and derivatives and swaps.
How much money could be generated through a financial transaction tax (FTT)? Economists Dean Baker and Robert Pollin estimated that a small FTT could generate $353 billion annually in the United States. In 2008 consumer advocate Ralph Nader said a tenth of a percent tax on all derivative transactions would raise $500 billion a year.
That's more than three times the budget deficits of all 50 states combined.
And the revenue estimates are probably understated. The Bank for International Settlements reported that annual trading in derivatives had surpassed $1.14 quadrillion (a thousand trillion dollars!), with about half the trades occurring in the United States. That doesn't include the multi-trillion dollar stock and bond markets.
The financial transaction tax is not a new idea. We had a "stock transfer tax" in the U.S. until 1966. Economist James Tobin suggested a "currency transaction tax" in 1972. Many U.S. Democrats, like Oregon's Peter DeFazio and Iowa's Tom Harkin and California's Peter Stark, support the idea, as do hundreds of economists.
England has had a successful FTT for many years, as has Japan and a number of other countries. Brazil is considering such a fee to help fund national health care. Not all attempts ended in success. Sweden's 7-year experiment failed due to overestimated revenues and reduced trading volumes. But optimism remains high -- last year a group of 60 countries proposed a "Global Solidarity Levy" on currency transactions.
So why isn't an FTT in place in the United States? Financial industry influence on government, for one thing. Remarkably, the state of New York, with a $9 billion deficit, does have a state stock transfer tax that takes in about $16 billion a year, but all of the money has been rebated since 1979 to the stock brokerage firms.
Detractors also claim, vaguely, that an FTT will kill jobs and stifle capital markets. Odd arguments, when one considers how much job-creating revenue would be pumped into the economy for consumer spending and deficit reduction, and the number of foreign exchanges that have prospered with the tax.
Besides the obvious benefit of generating public funds, there are other reasons to institute such a tax. It would help guard against the reckless speculation that contributed to the financial meltdown. As demonstrated in England, it is easier to administer than federal income taxes. And, appropriately, it would give the financial industry the opportunity to pay back America for their bailout.
Paul Buchheit is a professor with City Colleges of Chicago, founder of fightingpoverty.org and co-founder of Global Initiative Chicago. He is the editor and main contributor to the forthcoming book, "American Wars: Illusions and Realities" (Clarity Press).