Economists argue for taxing trades

Economists argue for taxing trades
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Two reports published Thursday by progressive think tanks back a financial transactions tax (FTT), arguing that such a tax on trades could make the financial sector more helpful to all Americans.

“If the tax is dedicated to funding higher education, as some have suggested, this would amount to transferring resources from the financial sector to the education sector,” Dean Baker, co-director of the Center for Economic and Policy Research, wrote in a report published by The Century Foundation. “This is likely to be a far more productive use of those resources.”

Similarly, a report from the Economic Policy Institute (EPI) argues that “through generating tax revenues, decreasing the fees Americans pay on their investments, and shrinking unproductive parts of the financial sector, an FTT would help Wall Street work for Main Street.”

The papers were released after the Democratic Party adopted a platform endorsing a FTT “to curb excessive speculation and high-frequency trading.” The platform also states that there is room for Democrats to have varying views on a broader FTT.

During the Democratic primary, Bernie SandersBernard (Bernie) SandersWarren, Klobuchar call on FTC to curtail use of non-compete clauses RNC says it raised .6 million in February Pollster says 'it's certainly not looking good' for Trump ahead of 2020 MORE supported a broad FTT to pay for free tuition at public colleges, and Hillary ClintonHillary Diane Rodham ClintonTrump mocks wind power: 'When the wind doesn't blow, just turn off the television' Trump's approval rating stable at 45 percent Kellyanne Conway: 'I think my gender helps me with the president' MORE backed a tax on high-frequency trading. And earlier this month, Rep. Peter DeFazio (D-Ore.) introduced legislation that would tax most trades at a rate of 0.03 percent.

Baker said that an FTT could raise more than $105 billion a year and said that the full amount of the tax would be borne by the financial industry rather than individual stock holders.

“It is reasonable to believe that the industry would be no less effective in serving its productive use (allocating capital) after the tax is in place,” Baker said in his report. “This means that one of the primary effects of the tax would be to reduce waste in the financial sector, reducing costs while having little or no effect on its principal purpose: to allocate capital effectively.”

Baker also said that an FTT could pay for free college tuition in the near term, though at some point the revenue would be inadequate unless mechanisms were instituted to curb the growth in college attendance and the growth in college costs.

EPI estimated that a well-designed FTT could produce gross revenues of $110 billion to $403 billion, depending on the extent to which the volume of financial transactions is responsive to changes in transaction costs. This estimate is significantly greater than recent revenue estimates from the Urban-Brookings Tax Policy Center.

EPI also said that an FTT would be a progressive revenue source. Additionally, the group said it would be a good idea to implement an FTT regardless of the amount of revenue it raises.

“Higher revenues would result in more funds for social insurance programs and much-needed public investments,” the group’s paper said. “Lower revenues would be the result of the FTT crowding out financial transactions of little value to the U.S. economy. This would boost Americans’ incomes through lowering fees on financial services, such as the management of 401(k)s and other accounts.”