Reckless speculation on Wall Street -- which helped cause the financial crisis and Great Recession -- is a big reason why budget deficits have spiralled skyward since 2008, so it's only fair that Wall Street do its share to reduce these deficits.
That's where a financial transactions tax comes in. I wrote here a few days ago about the virtues of an FTT, which has recently been pushed by the leaders of France and Germany, and pegged the potential revenue of such a tax at up around $75 billion a year. As it turns out, though, the potential revenue is much higher. According to a 2009 study by economists Dean Baker, Robert Pollin, Travis McArthur, and Matt Sherman, an FTT could actually raise $177 to $265 billion a year. The lower figure assumes that a tax would push down trading volumes by 50 percent from their 2008 levels; the higher figure, which seems quite plausible, assumes that trading levels would fall 25 percent.
In case you're no great quant yourself, $265 billion a year over a decade is $2.6 trillion. That's serious money given that most deficit reduction plans aim to find $4 trillion in spending cuts or revenue during the next decade.If Washington enacted an FTT and also rolled back the Bush tax cuts for households earning over $250,000, that would raise about $3.3 trillion. Throw in $700 billion in defense cuts, a figure below that advocated by the bipartisan Gang of Six, and -- presto -- you're at $4 trillion. That sure sounds easier to me -- and I'd expect to many politicians with ordinary constituents -- than slashing every discretionary domestic program in sight for years to come, from agricultural subsidies to zoology research.
My last post mentioned the many pluses of an FTT, beyond being a revenue powerhouse -- most notably that it'd rein in the Wall Street casino by raising the costs of trading back to levels that prevailed a few decades ago, before computerization eliminated most of the costs of trading. John Fullerton, a managing director at JP Morgan and now president of the Capital Institute, recently noted that "A financial transactions tax will make certain asymmetric information based, proprietary trading strategies unprofitable since they rely on nearly non-existent transactions costs."
Fullerton goes further, though, noting that the result of an FTT might not just be less speculation, but more brain power freed up for more useful purposes.
Right now, the financial industry employs legions of "quants" -- math and science whizzes -- many of whom now spend their careers developing ways to eke out tiny profits on trades that are undertaken at a huge volume. "How about more 'quant' geniuses working on carbon sequestration, cancer research, and global access to safe drinking water? How about teaching math again?" Fullerton asks. An exciting thought.
Fullerton also notes that losses in revenue from taxing the bonuses of quants today "will be more than offset by the redeployment of this talent and capital into more socially productive purposes."
Three years ago, many observers believed -- rightly -- that bold steps were needed to downsize the financial sector. Not for punitive reasons, but because the sector had become too large and unproductive, and was destabilizing to the economy as a whole.
That didn't happen, obviously. But the long-term fiscal imperatives offer policymakers another bite at the apple through an FTT. Let's hope they take it.