In A financial transaction tax would help ensure Wall Street works for Main Street, EPI Research and Policy Director Josh Bivens and EPI Budget Analyst Hunter Blair find that a financial transaction tax (FTT) would result in a combination of increased tax revenue and decreased waste from a bloated financial sector. The authors estimate that an FTT could generate gross revenues of $110 billion to $403 billion, while curbing financial transactions that do not provide positive value for the economy.
Bivens and Blair argue that some recent estimates of the revenue potential of FTTs are excessively pessimistic. Previous studies base their revenue estimates on FTTs currently in existence, which are less effective because they exempt certain financial products and asset classes. Revenue from a well-designed FTT could be substantially higher than previous estimates, because there will be less scope for tax avoidance than exists with currently-existing FTTs.
“If an FTT is designed to prevent tax avoidance among asset classes, there is greater potential to boost revenue and reduce the number of inefficient or unnecessary transactions,” said Bivens.
Bivens and Blair argue that the marginal value of many financial transactions in the U.S. economy are near zero, or even negative. Every dollar from near-zero financial transactions redirected by an FTT would boost American households’ incomes one-for-one, as they will no longer be paying for extraneous financial services that do not result in higher returns, but just in higher incomes in the financial sector. Because of this, reduced incomes in the financial sector that would result from an FTT would not lead to tax revenue losses, as these losses would be matched by gains for non-financial businesses and households that would pay reduced fees.
“Essentially, households and non-financial businesses would no longer be paying for financial transactions that add no value to the economy,” said Blair. “This is as good as a tax cut for them, and boosts their disposable income.”
The authors highlight the progressivity of the FTT, as the additional tax burden would be essentially proportional to the existing distribution of wealth in the U.S. economy.
“With the extraordinary rise in income inequality in recent decades, we need to look for progressive revenue sources to protect and expand public investment and social insurance programs,” said Bivens.
This report coincides with a report by Dean Baker, co-director of the Center for Economic and Policy Research (CEPR), published by The Century Foundation’s Bernard L. Schwartz Rediscovering Government Initiative, finds that a financial transaction tax (FTT) can rein in the financial sector and also raise a large amount of revenue.
There is growing support for an FTT in Congress and among policymakers. The Democratic National Committee’s party platform includes language endorsing a financial transaction tax on excessive speculation. Secretary Hillary Clinton’s campaign has stated support for a tax on high-frequency trading, and Rep. Peter DeFazio recently introduced legislation that would levy a 0.03 percent tax on transactions of stocks, bonds and derivatives.