Report suggests financial speculation tax to lower budget deficit

With the federal budget and the economy expected to lead President Obama's address on Tuesday night, one group is suggesting that  a financial speculation tax (FST) should be part of the discussion to increase growth and lower the deficit. 

A report released Monday by the Center for Economic and Policy Research (CEPR), finds that a financial speculation tax would be a substantial source of money for the government and would impose very little burden on the average taxpayer.

"This is not hypothetical,” said Dean Baker, a co-director at CEPR and author of the report said on the eve of the president's State of the Union address. "The UK has used an FST to collect large amounts of revenue and the IMF is currently advocating the tax in recognition of the enormous amount of waste and rents in the financial sector."

Revenue from an proposed speculation tax could annually exceed 1.0 percent or $150 billion of U.S. gross domestic product, the report said. This would more than cover the costs of many government programs and budget items, such as the extension of unemployment insurance, the 2011 payroll tax cut and the projected gaps in state budgets this year.

As designed, this tax would almost exclusively hit the financial sector, not individual investors, "because investors would respond to any increase in transactions costs by cutting back their trading, leaving the total amount they spend on trades little changed."

The tax would help rein in "economic rents" earned by the financial sector by taxing the turnover of credit-default swaps, options, stocks and other financial instruments.

"In terms of potential revenue when deficit reduction is now playing a central role in Washington debates, it is surprising that an FST is not given more attention as a policy-tool," Baker said. "Few other options are as attractive or generate as much money with as little pain as an FST."