Tag Archives: financial transaction tax

Democrats Finally Found a Smart Way to Stop Wall Street’s Reckless Behavior

This piece was co-written with Lenore Palladino.

For too long, it appeared that many Democrats were trying to fight economic inequality with policies like the minimum wage while ignoring the 800-pound gorilla, Wall Street. But Rep. Chris Van Hollen on Monday unveiled legislation to cut taxes for those earning less than $200,000, while partially paying for the proposal with a financial transaction tax (FTT), projected to raise $1.2 trillion over the next decade. With this proposal, Van Hollen is recognizing that without reducing financial speculation, it’s impossible to address inequality or to leave Wall Street’s risky practices in the past.

The small FTT in this billwhich also includes provisions to boost stagnant wages and close lucrative tax loopholeswouldn’t burden longer-term investors. The tax is applied to every transactionthe sale and purchase of a stock, bond, or other financial instrumentso as long as the investor holds the investment for a decent period of time, the tax is a tiny percentage of their overall portfolio and won’t drastically alter their trading behavior. It’s the high-frequency traders who have fought this tax tooth and nail, and who will gear up to fight it now, because if you trade multiple times a millisecond then your tax burden will be higher.

High-frequency trading creates systemic risk. Taxing it would reduce the incentive for the financial sector to chase new bubbles, driving out “noise traders” who make markets more volatile without improving capital intermediation (the purpose of the financial system). This is the argument of economists including John Maynard Keynes, Lawrence Summers, Victoria P. Summers,  and Joseph Stiglitz: that reducing the “whirlpools of speculation” is one of the best method for risk reduction. We’ve seen the results of volatility among such traders in the flash crashes, where huge amounts of speculative trading can crash very, very quickly.

Given the recent experience of Dodd-Frank (not to mention the mounting attacks on it), and the failure of regulators in the lead-up to the crisis to accurately understand what was occurring and put the brakes on it, market-based approaches like a FTT are crucial to making sure Wall Street speculation doesn’t bring down the economy again. There’s also lots of evidence that all of this increased trading hasn’t actually made the financial sector more efficient, and that it has been a main driver of economic inequality. Because stock ownership is concentrated at the top (the bottom 90 percent own only 9 percent of stocks and mutual funds), the benefits of finance have accrued to the one percent. A 2011 studyfinds that “financialization accounts for more than half of the decline in labor’s share of income, 10 percent of the growth in officers’ share of compensation, and 15 percent of the growth in earnings dispersion between 1970 and 2008.” Thomas Philiponestimates that inefficiencies in the financial sector cost the U.S. economy $280 billion every year. Other studies support the conclusion that much of the sector subsists on rent-seeking.

Financial transaction taxes are nothing new. New York State, for example, had one in place from 1906 to 1981 (and one remainslegally on the books, but it is refunded to the trader). Out of favor in the 1980’s and 1990s as Wall Street dominated the political and economic agenda, they have gained increasing interest amongpolicymakers. And they’re not just on Occupy Wall Street’s agenda: Nobel laureates like Stiglitz and Larry Summers have called for modest transaction taxes to promote stability and raise revenue, and even the International Monetary Fund has cautiously supported a financial transaction tax. From 1914 to 1966, the United States levied a 0.02 percent tax on sales and transfers of stock. To this day, the SEC is funded by an incredibly small FTT. More recently, Senator Tom Harkin and Representative Peter DeFazioproposed the “Wall Street Trading and Speculators Tax Act,” which would assess a tax of 0.03 percent on trades of stocks, bonds, futures, options, swaps and credit-default swaps, and would generate $352 billion over 10 years. Europe is moving forward with their own FTT.

For the last two decades, taking on Wall Street hasn’t always been a focus for the Democrats. President Ronald Reagan initiated the rise of finance, but President Bill Clinton certainly helped with the passage of Gramm-Leach-Bliley Act, which dismantled key New Deal regulations (including large swaths of Glass-Steagall). The massive amounts of money finance sprinkled on both parties made them virtually immune to regulation. Finance, Insurance and Real Estate (FIRE) companies have dramatically increased their spending on lobbying in recent years, from $609,523,625 inflation-adjusted in the 2000 cycle to $996,406,725 in the 2012 cycle. Recently, IMF researchers linked lobbying to the rise of subprime mortgages and the opaque securitization schemes that left the financial crisis on a precipice.

As Nomi Prins has documented, financial power players have been deeply intertwined with the political process for a long time. However, finance’s political heft has never been greater, to the extent that a recent deregulation amendment was essentially written by financial industry lobbyists. In the wake of Dodd-Frank,bankers were granted 14 times more meetings with the Commodities Futures Trading Commission, the Treasury, and the Federal Reserve Board than pro-reform groups. Political scientist Christopher Wiko notes, “as the Democratic Party coalition began to include more professionals and managers, and as unions declined, the negative relationship between Democratic control of government and financialization weakened.” That is, many Democrats stopped worrying and learned to love the financial sector.

Van Hollen’s proposal is an attempt to reverse this pattern. It’s well past time to get out of these whirlpools of speculation and onto stable, dry land.

This piece originally appeared on The New Republic

Why is the financial industry so afraid of Joseph Stiglitz?

Co-written with Palladino.

If the government were creating a new panel to advise on financial regulation, it would make sense to include a Nobel Laureate considered one of the most influential living economists. Yet Joseph Stiglitz has been barred from such a panel, telling Bloomberg he was out because “they may not have felt comfortable with somebody who was not in one way or another owned by the industry.”

The fight to keep Stiglitz off the panel is indicative of a much deeper problem — how the financial industry manipulates the regulatory system. The financial industry does not want Stiglitz on the panel for a simple reason: he has committed the crime of advocating for a modest financial transaction tax. Stiglitz argues that while financial markets normally serve the important function of capital intermediation, some forms of trading, like high-frequency trading, make markets less stable and amount to making money by moving money around. To reduce the incentives for such trading while raising revenue, he has put forward the possibility of a tax on some forms of short-term trading. Such a proposal has gained traction within academia and is already being implemented in Europe. (And it actually used to exist in various forms in the United States.)

Instead of preeminent financial reform experts like Stiglitz, many key regulatory and advisory positions are taken by those who loosen the leash on the financial industry. A perfect example is the recent nomination of Antonio Weiss to be the treasury undersecretary for domestic finance. Weiss has merger and acquisition experience, but as Simon Johnson notes, no domestic regulatory experience — illustrating in dramatic terms the revolving door between Wall Street and government. Research by Sophie Shive and Margaret Forster finds that this practice is pervasive and increasing. They write that, “the number of ex-regulators employed at financial firms increases by more than 55 percent” from 2001 to 2013. A 2010 CBS analysis finds more than four dozen former Goldman Sachs employees had high-level positions in government. This revolving door is part of what led us to the last financial crisis.

The influence of finance over policy goes deeper than simply revolving-door politics. Nicholas Carnes tells Salon that, “when members with finance backgrounds vote on roll calls, they seem to vote against labor more often than other members.” He finds that for every 100 bills related to labor issues, members of Congress who used to work in finance vote against workers on 3.5 more bills than their colleagues (a statistically significant difference). The rise of finance over politics has had important political consequences: Christopher Witko writes, “financial deregulation was one policy translating the political power of these actors into economic outcomes.” This political power was facilitated by the rise of money in politics, although research by Nomi Prins suggests that cozy relationships between powerful financiers and politicians have existed for decades.

A perfect example of this influence is the recent CRominbus bill (so named because it was both a continuing resolution and omnibus spending bill, making it a massive and high-stakes piece of legislation), which contained extensive deregulation measures. The original version of one of the bill’s key provisions was actually written by the finance industry. (Seventy-five of its 85 lines came from a Citibank proposal.) Lo and behold: The average member voting in favor of the bill received $322,00 from the FIRE (finance, insurance and real estate) industries, while the average member voting against the bill received only $162,000 from those industries. FIRE companies have dramatically increased their spending on lobbying in recent years, from $609,523,625 inflation-adjusted in the 2000 cycle to $996,406,725 in the 2012 cycle. Even IMF researcherslinked lobbying to the rise of subprime mortgages and the opaque securitization schemes that left the financial crisis on a precipice. These attacks haven’t abated: Last week a new bill was introduced to further water down Dodd-Frank and other key financial regulations.

Domestic financial regulators need to include advocates for financial sector regulation like Professor Stiglitz. There is some bright news, like the recent appointment of a fomer community banker to the Federal Reserve. But this is only a first step: Congress should listen to Stiglitz and pass some form of a financial transactions tax. A pilot project could take place in New York by simply lifting the 100% reimbursement rate on a tax already on the books. In Congress, Representatives Harkin and DeFazio have already proposed a bill that would have generated $350 billion between January 2013 and 2021. But changes to the industry won’t happen until the government pursues stricter lobbying regulations and appoints strong financial sector regulators.

This piece originally appeared on Salon

Why is Cuomo Leaving Wall Street Cash on the Table?

Co-Written with Lenore Palladino.

Governor Andrew Cuomo has claimed that he’s “a progressive Democrat who’s broke.” But in his most recent executive budget, he proposes ending a little-known tax that could make all the difference. For the last century, New York State has had a stock-transfer tax, which taxes nearly every stock trade. Since 1981, it’s been instantly rebated—no money is actually collected—leaving potential revenue on the table even as financial profits skyrocket. Cuomo suggests ending the tax, citing “unnecessary administrative work.” But New York’s stock-transfer tax can be easily re-implemented, instead putting that administrative work to good use.

Cuomo should work to end or reduce the tax rebate, rather than take the tax off the books. New York isn’t broke so much as unequal: one in every twenty-two people in New York City is a millionaire, while 56,987 New Yorkers live in homeless shelters. A tax like this could raise hundreds of millions of dollars.

The financial sector grew as a share of the economy by 175 percent from 1947 to 2013. This rapid growth has led many to observe that the financial sector increasingly relies on rent-seeking: making money from moving money around only to make more money. Financiers no longer need bother with productive investments.

Wall Street is flush with cash, but the state’s coffers continue to struggle. Public employment in New York dropped by 4.2 percent between December 2007 and June 2014. A modest 0.02 percent tax on stock transactions would raise hundreds of millions of dollars annually. New York City faces incredible risks from climate change. A recent report estimates that, without adaptation, the annual costs of climate change will be between $3.8 billion and $7.5 billion per year at mid-century. The stock-transfer tax could provide, on its own, a major head start toward protecting New York City from devastation.

Opponents of a tax on stock transactions claim that it would reduce trading and jobs and harm the economy, and it would certainly slow down short-term, highly speculative trading to some extent. The real question is: What are the costs that New Yorkers face right now from runaway speculation and insufficient public investment? Our research finds that New York would gain more from the revenue raised, which could be funneled toward job creation, even though falling trade may cause some job loss in the financial sector. Of course, some of those astronomical profits that Wall Street banks keep reporting could be put toward the tax as well.

Finance has increased inequality, pulled money out of the job-creating economy and largely sustained itself on grift. To reduce these negative effects, we should tax financial transactions as well. In the wake of the recent financial crisis, a tax could be a way to reduce systemic risk. Although the New York stock-transfer tax would cover only stock trades, it could provide a model for a more comprehensive national tax on a broader range of financial transactions, like derivatives.

Such a tax isn’t unprecedented. After all, New York had one in place from 1905 to 1981. From 1914 to 1966, the United States levied a modest tax on sales and transfers of stock. House Speaker Jim Wright pushed for a renewed federal tax in 1987, proposing a fee of 0.25 to 0.50 percent on the buyer and seller in each securities transaction, highlighting the tax’s progressive aspects. More recently, Senator Tom Harkin and Representative Peter DeFazio proposed the Wall Street Trading and Speculators Tax Act, which would assess a tax of 0.03 percent on trades of stocks, bonds, futures, options, swaps and credit-default swaps and would generate some $350 billion over nine years. Representative Keith Ellison proposed the Inclusive Prosperity Act, which would entail a 0.5 percent tax on stocks, a 0.1 percent tax on bond trades and 0.005 percent tax on derivatives; that bill was projected to raise similar amounts.

On May 6, 2014, ten European nations issued a joint statement that a financial tax would commence in 2016 as a means to reduce speculation and raise revenue. The initial tax will focus on the trading of stocks and some derivatives. The European Commission estimates that a broad tax could raise 31 billion euros ($39 billion) in annual revenue.

In New York, revenue is desperately needed. Governor Cuomo should support Assemblyman Phil Steck’s bill, which would begin collection for 40 percent of the tax and was supported by economist Jeffrey Sachs. Sachs has said that the “financial transactions tax is a solid idea that has been resisted by Wall Street for years.” Instead of repealing the tax, New York should restart collection and use the revenues to stimulate equitable economic growth.

This article originally appeared in the print version of The Nation and online.

New York already has a financial transaction tax on the books — it’s time to start collecting it

Co-Written with Lenore Palladino.

Recently re-elected Governor Andrew Cuomo likes to complain that he’s “a progressive Democrat who’s broke.” Here’s a simple way to raise millions of dollars and make the economy safer at the same time: a small tax on financial transactions. Politically impossible? Not in New York, where Governor Cuomo could lead the way to reinstate New York’s Stock Transfer Tax, which remains on the books but currently is not collected.

A modest tax on financial transactions would raise revenue while slowing down the frenetic short-term trading that could drive us straight into another financial crisis. Gridlock at the federal level will make congressional action tricky. New York State has had a financial transaction tax-specifically a stock transfer tax– on the books since 1906, but since 1981 has instantly rebates all of the money.  It’s time to start collecting.

The case for a Financial Transaction Tax

The idea for a financial transaction tax has been around for since John Maynard Keynes’sGeneral Theory. The basic argument is that a small fee would be trivial for long-term investors, and only deter the activities of socially useless high-turnover speculators. The idea began to gain traction in the late 70s and 80s with the rapid growth of the financial sector. In 1989, Lawrence Summers and Victoria Summers proposed a U.S. Securities Transfer Excise Tax, arguing that it could raise some $10 billion annually. Recently, the International Monetary Fund (IMF) has supported a financial transaction tax as well. A metastudy by Neil McCulloch and Grazia Pacillo finds that a Tobin Tax (a type of FTT) would be “feasible and, if appropriately designed, could make a significant contribution to revenue without causing major distortions.”

From 1914 to 1966, the United States levied a 0.02 percent tax on sales and transfers of stock. Federally, Speaker Jim Wright pushed for a renewed tax in 1987, proposing a fee of 0.25 percent to 0.5 percent on the buyer and seller of each securities transaction, highlighting the tax’s progressive aspects. More recently, the “Wall Street Trading and Speculators Tax Act” was proposed by Senators Harkin and DeFazio, which would assess a tax of 0.03 percent on trades of stocks, bonds, futures, options, swaps, and credit-default swaps, and would generate $352 billion over 10 years.

Such a tax would not be unprecedented. On May 6th, 2014, ten European nations issued a joint statement that a financial tax will begin in 2016 as a means to reduce speculation and raise revenue. The initial tax will focus on the trading of stocks and some derivatives, even though the initial proposal included taxing most financial products. The European Commissionestimates that a broad tax could raise $39 billion (31 billion EUR) in annual revenues.

New York’s Stock Transfer Tax

Capital intermetiation is an important and integral part of the modern economy. However, rapid deregulation has allowed it to become poisoned by rent-seeking and hyperactive trading while exacerbating rising inequality. A modest tax on financial transactions could reduce the propensity for systemic risk, while providing much-needed money to revenue-starved governments. However, it’s unlikely that such a tax can be passed at the federal level, given the partisan climate.  That’s why New York’s Stock Transfer Tax is such an important opportunity.

There was a Stock Transfer Tax in place in New York from 1905-1981. Revenue from the tax was split between the city and state (in the 1960s the full revenue reverted entirely to New York City). Beginning October 1, 1979, 30% of the tax was rebated to the investor, which was increased to 60% in 1980 and then the full value of the tax in 1981 Because of this quirk in its phase-out, the STT was never repealed. Instead, 100 percent of the revenue is rebated to the trader. Because the tax remains on the books, politically putting the tax in place would not require passage by the legislature of a new tax, but instead the reduction of the rebate, whether by 100% or some smaller percentile.

Governor Cuomo included a repeal of the tax in his Executive Budget (S. 6359), by calling for a full repeal of the tax due to its “unnecessary administrative work for the financial services industry as well as for the Department of Taxation and Finance,” (along with a separate proposal by the Governor to repeal the bank tax). This followed a recommendation by his Solomon/ McCall Commission to repeal ‘nuisance taxes’ like the STT. Assemblyman Phil Steck proposed a bill (A. 8410) to reduce the rebate and re-start collection of 40% of the nominally-collected tax. The threat of a final repeal of the tax prompted action from a variety of stakeholders, including a call by Jeffrey Sachs for a reinstatement of collection. The final enacted budget bill (S. 6359) did not include a repeal of the tax; it remains on the books as a fully-rebated tax.

New York could serve as a pilot program for an eventual national tax. A modest tax on stock transactions would raise millions annually, which could be used to offset any minimal job loss. If the revenue was directed toward creating public jobs and infrastructure, New York could reduce the twin risks of climate change and rampant economic inequality at the same time.

Instead of repealing the tax, Governor Cuomo should re-start collection and use the revenues to stimulate equitable economic growth.

This piece originally appeared on Vox.

The Case for a Financial Transaction Tax

The financial industry is a behemoth. Over the past 150 years, it has grown dramatically as a share of GDP. And entrance into its ranks has become a great way to enter into the top 1 percent of earners. (According to recent data, financial professionals have nearly doubled as a share of Americans in the top 1 percent.) At the same time, Wall Street is one of the most reviled institutions in the United States, with a recent study finding the lowest trust in finance recorded over 40 years.

Here are three good reasons to be distrustful of Wall Street, followed by one policy that would address all of them.

1. The Financial Industry Engages in Rent-Seeking

In economics, rent-seeking is the practice of making money simply by moving money around and collecting the resulting fees, rather than by facilitating profitable investment. The latter role is necessary for functioning markets; rent-seeking, however, is not.

There is now a strong literature suggesting that at some point, finance largely becomes extractive, while remaining at the same efficiency level. Thomas Philippon finds that the cost of financial intermediation has not fallen in 30 years. As Gautam Mukunda writes in a recent Harvard Business Review article, “Creative work increases a society’s wealth. Distributive work just moves wealth from one hand to another. Every industry contains both. But activity in the financial sector is primarily distributive.” Other studies come to the same conclusion:

  • Ozgur Orhangazi finds a negative relationship between real investment and financialization. The author proposes two channels to explain the relationship: “First, increased financial investment and increased financial profit opportunities may have crowded out real investment by changing the incentives of firm managers and directing funds away from real investment.”
  • Stephen Cecchetti and Enisse Kharroubi examine a sample of developed and emerging economies and find that financial development is good for emerging economies, but is detrimental to productivity growth for advanced economies.
  • Jean-Louis Arcand, Enrico Berkes and Ugo Panizza find that when private sector credit exceeds 110 percent of GDP finance begins to become a drag on growth, a situation the U.S. is currently in.

This rent-seeking has increasingly starved the public sector across the nation. The Financial Times reports that “public investment in the U.S. has hit its lowest level since demobilization” after World War II.

2. The Financial Industry Makes Inequality Worse

The International Labor Organization’s (ILO) Global Wage Report finds that the financialization of the economy has been the most important factor in the decline of income share accruing to labor in developed countries. This is because the financial industry primarily distributes wealth upward.

A 2011 study examining the U.S. finds that, “financialization accounts for more than half of the decline in labor’s share of income, 10 percent of the growth in officers’ share of compensation, and 15 percent of the growth in earnings dispersion between 1970 and 2008.” In a paper published this year in the British Journal of Political Science, Christopher Witko finds, “financial deregulation was one policy translating the political power of these actors into economic outcomes.” That is, the rise of finance was a money grab by the 1 percent.

Because relatively few low-income and middle-income families own financial assets, they largely haven’t benefited from the rise of finance. Instead, it’s enriched the wealthy while saddling the middle class with debt. A recent study by Emmanuel Saez and Gabriel Zucman finds,

The key driver of the declining bottom 90%  share is the fall of middle-class saving, a fall which itself may partly owe to the low growth of middle-class income, to financial deregulation leading to some forms of predatory lending, or to growing behavioral biases in the saving decisions of middle-class households.

The charts below show how finance has enriched the top, whose wealth came from equities, while sucking money from the middle, whose wealth consisted of housing and pensions:

 

Those who had no assets at all saw their incomes shrink while wages remained stagnant for decades. As Matt Yglesias notes, in 2013, 25 hedge fund managers took home more twice as much as every kindergarten teacher in the country combined. This while hedge funds have failed to perform better than the market.

3. The Financial Sector Is Increasingly Engaged on High-Frequency Trading

One particularly negative form of trading that the STT could reduce is High-Frequency Trading (HFT). HFT is a useless and distortionary practice that allows investors to make money off of millisecond-quick trades. (HFT recently attracted attention in Michael Lewis’ book “Flash Boys.”) The practice has been derided by Nobel laureate Joseph Stiglitz as a sophisticated version of front-running (buying a stock shortly before a pending order to take advantage of the price increase).

The problem is that instead of channeling money toward profitable investment, HFT is a prime example of making money off of moving money around. A recent study finds that a one millisecond advantage can increase a firm’s earnings by $100 million a year. Ironically, while bridges are vulnerable to collapse across the country and infrastructure in general is sorely undercapitalized, high-speed traders spent $2 billion on infrastructure in 2010 — for high-speed cables to NYSE. HFT does nothing to benefit markets, but instead makes them more volatile. 

The solution: A Financial Transaction Tax

When an industry has negative impacts on the broader public, economists call these effects “externalities.” It doesn’t mean we should destroy the industry, but rather, limit the harmful behavior. In much the same way that we should tax carbon dioxide — and do tax cigarettes and alcohol — we should also tax financial transactions.

The idea for a financial transaction tax has been around since John Maynard Keynes’ “General Theory.“ However, the idea began to gain traction in the late ’70s and ’80s with the rapid growth of the financial sector. In 1989, Lawrence Summers and Victoria Summers proposed a U.S. Securities Transfer Excise Tax, arguing that it could raise some $10 billion annually. Recently, the International Monetary Fund (IMF) hassupported a financial transaction tax as well. A metastudy by Neil McCulloch and Grazia Pacillo finds that a Tobin Tax (a type of FTT) would be “feasible and, if appropriately designed, could make a significant contribution to revenue without causing major distortions.”

From 1914 to 1966, the United States levied a 0.02 percent tax on sales and transfers of stock. Federally, Speaker Jim Wright pushed for a renewed tax in 1987, proposing a fee of 0.25 percent to 0.5 percent on the buyer and seller of each securities transaction, highlighting the tax’s progressive aspects. More recently, the “Wall Street Trading and Speculators Tax Act” was proposed by Sens. Harkin and DeFazio, which would assess a tax of 0.03 percent on trades of stocks, bonds, futures, options, swaps and credit-default swaps, and would generate $352 billion over 10 years.

Such a tax would not be unprecedented. On May 6, 2014, 10 European nations issued ajoint statement that a financial tax will begin in 2016 as a means to reduce speculation and raise revenue. The initial tax will focus on the trading of stocks and some derivatives, even though the initial proposal included taxing most financial products. The European Commission estimates that a broad tax could raise $39 billion (31 billion EUR) in annual revenues.

Further, there was a Stock Transfer Tax (a type of FTT) in place in New York from 1905 to 1981; revenue from the tax was split between the city and state (in the 1960s the full revenue reverted entirely to New York City). Because of a quirk in its phase-out, the STT remains technically legal in New York, though it is automatically rebated to the trader at a rate of 100 percent. Reducing this rebate would be a great way to boost revenues for New York and show the viability of a more expansive tax.

Finance is an important part of any economy. But the unprecedented rise of finance has harmed the real economy, propelled inequality and created opportunities for rent-seeking. To rein in Wall Street and prevent another financial crisis, and to give governments much needed money to invest, we should levy a modest tax on financial transactions. Right now, the financial industry subsists on monetizing privilege. It needs to shrink so we can grow.

This article originally appeared on Salon