Securities Trading Tax Could Raise Big Bucks

Last Updated Dec 21, 2009 1:40 PM EST

A 0.5 percent federal tax on securities trading in the U.S. could raise upwards of $353 billion per year, according to a new analysis.

Economists at the Center for Economic and Policy Research and the University of Massachusetts-Amherst say a financial transaction tax, sometimes known as a Tobin Tax, offers two important benefits. It would raise revenue, money which the government could pour into a jobs program or to pare debt. It would also make the American economy less dependent on financial trading.

"A financial transaction tax is a proven policy tool for both raising large amounts of revenue and counteracting the types of speculative excesses that produced the economic crisis of 2008-09," said Robert Pollin, an author the study and co-director of U. of M.'S Political Economy Research Institute, in a statement.

Pollin and co-author Dean Baker acknowledge that imposing a tax on buying and selling stocks, bonds and other instruments could reduce trade volumes. Under their scenario, if market activity decreased 25 percent, potential annual revenue from the tax would fall to $265 billion; with a 50 percent decrease, revenue comes in at $177 billion, (click on chart above to expand).

There are serious arguments against a transaction tax. One is that it would put many small traders out of business. Another is that unless a tax were applied more broadly around the world, the rising trading costs stateside could reduce liquidity and drive investment overseas.

The U.K. accepts those risks. It already charges a tax, called a "stamp duty," on stock trading. Britain's top financial regulator, Adair Turner, also has endorsed the idea of a transaction tax, as has Prime Minister Gordon Brown.

In the U.S., Rep. Peter DeFazio, D-Ore., has proposed transaction tax legislation, while other lawmakers back variations on the theme. By contrast, Obama Administration officials have sought to shoot down the idea, arguing that it's no substitute for stringent regulation.

That's right. Nor should it be. But a tax may be an effective way of raising money from an industry that has plenty to spare.
  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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