(MoneyWatch) With the spigot on government spending shutting off as the sequester takes effect today, two lawmakers are reviving an idea that they say would help curb the nation's deficit and protect financial markets.
Sen. Tom Harkin, D.-Iowa, and Rep. Peter DeFazio, D.-Ore., are sponsoring a bill that would impose a tax on securities trades involving stocks, bonds, derivatives, options and other investments. Under the measure, every $100 in trades would be taxed 3 cents. For example, a trader buying $100,000 of stock would pay $30 to purchase the shares.
"Here we are struggling with sequestration -- indiscriminate, across-the-board budget cuts because some believe that our debt crisis is so overwhelming and so imminent that we have to do things that don't make much sense to deal with it," DeFazio said in introducing the legislation on Thursday. "Well, here's something that would make a lot more sense. We have here a proposal that would both raise revenue and bring more stability to the financial markets, favoring long-term, value investors -- those who want to build an economy."
A so-called "financial transactions tax" would raise an estimated $352 billion over 10 years, Harkin said, citing a Joint Tax Committee analysis of a related proposal. That money could be used to reduce the government's budget gap and reduce the need for spending cuts. The tax would exempt the initial issuance of such instruments and apply only on secondary trading of the debt by securities dealers and other investors.
Harkin and DeFazio have been down this road before, proposing similar measures in 2009 and 2011. On both occasions they met opposition not only from Republicans resistant to any kind of tax increase, but also from then U.S. Treasury Secretary Tim Geithner and other Obama administration officials.
Asked why they are re-introducing the bill, dubbed the "Wall Street speculator tax," Harkin suggested that White House resistance to such an approach for raising revenue has softened, although he stopped short of saying that new Treasury chief Jack Lew has expressed support for a trading tax.
The timing of the legislation is also unlikely to be coincidental. It came the day before Friday's mandated cut in federal spending, or "sequestration," amid efforts by Democrats and Republicans to pin blame on their peers across the aisle for a policy that economists say will hurt the recovery.
"As we move toward a more balanced approach to reducing our deficits, I think this will become a very viable option," said Harkin, adding that he is "very optimistic" about the bill's prospects in Congress. "What other options are there for raising $350 billion with such a negligible impact on middle-class Americans and Main Street businesses?"
Other countries are moving ahead to levy a tax on trading. In February, 11 European Union members states agreed to implement an even heavier tax -- 10 cents on every $100 in trades -- including France, Germany and Italy, the three-largest economies in the region. According to estimates, the tax would raise roughly $78 billion a year. The U.K. has long charged a 0.5 percent fee, or "stamp duty," for both buying and selling stock. Other world financial hubs, including Hong Kong, Singapore and Switzerland, also tax stock transactions.
Advocates say a small financial transaction would have little effect on the kind of 401(k) and mutual fund trading affecting retail investors, which emphasizes holding securities for longer periods of time. Rather, the greatest impact would be on Wall Street and other investment firms that engage in high-frequency trading. Such "algorithmic" trading has surged in recent years, as professional investors rely on ever more powerful computers to profit from minute fluctuations in stock prices. Critics contend that has caused financial markets to become more volatile.
"This Wall Street transaction tax makes all the sense in the world" said Lisa Donner, executive director of Americans for Financial Reform, in a statement. "It would help level the playing field so that finance pays something closer to its fair share of taxes, discourage excessive Wall Street speculation and dangerous high-frequency trading, and raise hundreds of billions of dollars in revenue."}
Opponents of a financial transactions tax say it would raise the cost of capital for companies, hurt smaller investors and investors and drive trading to tax-free trading meccas around the world. After Harkin and DeFazio introduced trading tax legislation in 2011, the Securities Industry and Financial Markets Association, an industry trade group, decried the bill as a "sales tax on investors" and claimed that it would hurt financial markets by raising costs.
The debate is an old one. Economist John Maynard Keynes proposed the idea of a trading tax in 1936 in his seminal "The General Theory of Employment, Interest and Money," arguing that it could reduce dangerous speculation in equities. From 1914 to 1966, the U.S. imposed a "transfer" tax for issuing and trading both equities and debt. And in the 1970s, economist James Tobin suggested levying a tax on currency trading as a way to stabilize exchange rates and reduce volatility in these markets.
"On a gut level, such a tax makes sense," said Stanford University economist Anat Admati, noting that the lightning pace of computerized trading carries risks without an obvious benefit to society. "As James Tobin said, by taxing financial transactions you put some sand in the excesses of financial markets."
But Admati added although a trading tax would raise funds for the government, the broader impact is less clear. Such a tax would affect not only the kind of high-speed trading associated with sudden market swings, but all securities trades, including the kind of routine buying and selling the financial markets require to function.