Tobin Tax: Making Wall Street
Pay Its Fair Share
by Ellen Brown
"Regular people know that they got
done in by excesses on Wall Street, and they see a Democratic
administration shoveling trillions of dollars to the same Wall
Street banks that caused the mess. . . . What is overdue is a
little bit of populist retribution against the people who brought
down the system - and will bring it down again if the hegemony
of the traders is not constrained." --Economist Robert Kuttner
arguing for a "Tobin tax"
In the midst of the worst recession since
the Great Depression, Goldman Sachs is having a banner year. According
to an October 16 article by Colin Barr on CNNMoney.com:
"While Goldman churned out $3 billion
in profits in the third quarter, the economy shed 768,000 jobs,
and home foreclosures set a new record. More than a million Americans
have filed for bankruptcy this year, according to the American
Bankruptcy Institute. A September survey of state finances by
the Center on Budget and Policy Priorities think tank found that
state governments faced a collective $168 billion budget shortfall
for fiscal 2010. Goldman, by contrast, is sitting on $167 billion
in cash . . . ."
Barr writes that Goldman's "eye-popping
profit" resulted "as revenue from trading rose fourfold
from a year ago." Really. Revenue from trading? Didn't we
bail out Goldman and the other Wall Street banks so they could
make loans, take deposits, and keep our money safe?
That is what banks used to do, but today
the big Wall Street money comes from short-term speculation in
currency transactions, commodities, stocks, and derivatives for
the banks' own accounts. And here's the beauty of it: the Wall
Street speculators have managed to trade in practically the only
products left on the planet that are not subject to a sales tax.
While parents in California are now paying 9% sales tax on their
children's school bags and shoes, Goldman is paying zero tax to
sustain its gambling habit.
That helps explain Goldman's equally eye-popping
tax bracket. What would you guess - 50%? 30%? Not even close.
In 2008, Goldman Sachs paid a paltry 1% in taxes - less than clerks
Speeding Tickets to Slow Day Traders?
The fact that Wall Street's speculative
trades remain untaxed suggests a tidy way taxpayers could recover
some of their billions in bailout money. The idea of taxing speculative
trades was first proposed by Nobel Prize winning economist James
Tobin in the 1970s. But he acknowledged that the tax was unlikely
to be implemented, because of the massive accounting problems
involved. Today, however, modern technology has caught up to the
challenge, and proposals for a "Tobin tax" are gaining
traction. The proposals are very modest, ranging from .005% to
1% per trade, far less than you would pay in sales tax on a pair
of shoes. For ordinary investors, who buy and sell stock only
occasionally, the tax would hardly be felt. But high-speed speculative
trades could be slowed up considerably. Wall Street traders compete
to design trading programs that can move many shares in microseconds,
allowing them to beat ordinary investors to the "buy"
button and to manipulate markets for private gain.
Goldman Sachs admitted to this sort of
market manipulation in a notorious incident last summer, in which
the bank sued an ex-Goldman computer programmer for stealing its
proprietary trading software. Assistant U.S. Attorney Joseph Facciponti
was quoted by Bloomberg as saying of the case:
"The bank has raised the possibility
that there is a danger that somebody who knew how to use this
program could use it to manipulate markets in unfair ways."
The obvious implication was that Goldman
has a program that allows it to manipulate markets in unfair ways.
Bloomberg went on:
"The proprietary code lets the firm
do 'sophisticated, high-speed and high-volume trades on various
stock and commodities markets,' prosecutors said in court papers.
The trades generate 'many millions of dollars' each year."
Those many millions of dollars are coming
out of the pockets of ordinary investors, who are being beaten
to the punch by sophisticated computer programs. As one blogger
"Why do we have a financial system?
I mean, much of its activity looks an awful lot like gambling,
and gambling is not exactly a constructive endeavor. In fact,
many people would call gambling destructive, which is why it is
generally illegal. . . .
"What makes Goldman Sachs et. al.
so evil is that they offer vast wealth to our society's best and
brightest in exchange for spending their lives being non-productive.
I want our geniuses to be proving theorems and curing cancer and
developing fusion reactors, not designing algorithms to flip billions
of shares in microseconds."
Gambling is an addiction, and the addicted
need help. A tax on these microsecond trades could sober up Wall
Street addicts and return them to productive labor, and transform
Wall Street from an out-of-control casino back into a place where
investors pledge their capital for the development of useful products.
The Tobin Tax Gains Momentum
Various proposals for a Tobin tax have
received renewed media attention in recent months. President Obama
gave indirect support for the tax in a Press briefing on July
22, when he recommended that the government consider new fees
on financial companies pursuing "far out transactions".
UK Prime Minister Gordon Brown, who has resisted pushes for a
Tobin tax in the past, said at the G20 meeting in Scotland on
November 7 that a tax on financial trading could prevent excessive
risk-taking and fund future bank rescues. It "cannot be acceptable,"
he said, that banks enjoy the rewards of their successful trades
yet leave taxpayers to pick up the cost of their failures. Governments
spent more than $500 billion in the past year bailing out banks.
U.S. Treasury Secretary Tim Geithner opposed the tax, but the
fact that it was being seriously considered was a major development.
The French finance minister said, "It's not so exotic and
it even seems reasonable."__In the U.S., a bill called "Let
Wall Street Pay for Wall Street's Bailout Act of 2009", proposing
to tax short-term speculation in certain securities, was introduced
by Rep. Peter DeFazio (D-OR) last February; and a different bill
to regulate derivative trades was approved by the Financial Services
Committee in October. Derivatives are essentially bets on whether
the value of currencies, commodities, stocks, government bonds
or virtually any other product will go up or down. Derivative
bets can cause shifts in overall market size reaching $40 trillion
in a single day. Just how destabilizing short-term speculation
can be -- and just how lucrative a tax on it could be -- is evident
from the mind-boggling size of the market. The Bank for International
Settlements estimates that in 2008, annual trading in over-the-counter
derivatives amounted to $743 trillion globally - more than ten
times the gross domestic product of all the nations of the world
combined. Another arresting fact is that just five super-rich
commercial banks control 97% of the U.S. derivatives market: JPMorgan
Chase & Co., Goldman Sachs Group Inc., Bank of America Corp.,
Citigroup Inc. and Wells Fargo & Co.
Promoters of international development
have suggested that a mere .005% tax could raise between $30 billion
and $60 billion per year, enough for the G7 countries to double
international aid. Other proponents favor the larger 1% tax originally
proposed by James Tobin. The much-needed income from a U.S. tax
could be split between federal and state governments.
Pros and Cons
Opponents of the tax, led by the financial
sector, argue that it would kill bank jobs, reduce liquidity,
and drive business offshore. Supporters respond that Tobin tax
profits could be used to create new jobs, and that while the speculative
market would shrink, the small size of the tax would hardly affect
overall cash flows. More than raising money, the tax could be
an effective tool for discouraging short-term traders, who often
make money on very small margins. Dani Rodrik, Professor of Political
Science at Harvard, writes:
"The beauty of a Tobin tax is that
it would discourage short-term speculation without having much
adverse effect on long-term international investment decisions.
Consider, for example, a tax of 0.25% applied to all cross-border
financial transactions. Such a tax would instantaneously kill
the intra-day trading that takes place in pursuit of profit margins
much smaller than this, as well as the longer-term trades designed
to exploit minute differentials across markets. . . . Meanwhile,
investors with longer time horizons going after significant returns
would not be much deterred by the tax." _
Besides technical questions about how
to implement the tax internationally, the offshore argument probably
presents the most serious challenge. Should a Tobin tax pass in
the U.S., investors would be likely to move to other markets beyond
the reach of taxation. The U.S. could penalize traders for doing
business abroad, but governments in major markets like Germany
and London would no doubt need to endorse the tax for any meaningful
shift to be seen. Some experts have argued that the Tobin tax
would be best implemented by an international institution such
as the United Nations. But other observers see any international
tax as a move toward further strengthening the power of the global
financial oligarchs. Just the fact that the United Nations, the
G20, and the Bank for International Settlements are discussing
this option, however, suggests that we the people need to jump
in and stake out our claim, before we lose the tax money to international
bodies controlled by global bankers. The tax needs to be collected
by the U.S. Treasury and go into U.S. coffers. It needs to reach
Main Street, where it can be used to stimulate local business
Officials from the International Monetary
Fund insist that implementing a Tobin tax would be logistically
impossible. But Joseph Stiglitz, a Nobel Prize winning economist
and former World Bank leader, disagrees. In Istanbul in early
October, he said that a Tobin tax was not only necessary but,
thanks to modern technology, would be easier to implement than
ever before. "The financial sector polluted the global economy
with toxic assets," he said, "and now they ought to
clean it out."
Economist Hazel Henderson proposes a computerized
system for imposing a graduated tax that is designed to kill "bear
raids" (organized attacks by short sellers). Bear raids on
vulnerable currencies have been known to collapse whole economies.
"Such a currency exchange tax would
be simple to collect using a computerized system, which can be
installed on trading screens, such as the Foreign Exchange Transaction
Reporting System (FXTRS). This system operates like an electronic
version of Wall Street's venerable 'uptick rule' . . . to curb
naked short-selling. The FXTRS computerized uptick rule would
gradually raise the tax up to a maximum of 1% whenever a bear
raid starts attacking a weak currency. Such bear raids are rarely
to 'discipline' a country's policies, as traders claim, but rather
to make quick profits."
Henderson notes that world economies have
become so interlinked that such win-lose strategies are no longer
"In systems terms, the global economy,
by virtue of its real-time technological inter-linkages, has become
a de facto global commons, a common resource of all its users.
Such commons require win-win agreements, rules and standards applicable
to all users. If normal competitive behavior (win-lose) continues,
the result is lose-lose as competition between players leads to
sub-optimization and the system itself absorbs risks and eventually
can break down, as witnessed in the current crisis."
The financial rescue operations to date
have been win-lose, with Main Street being sacrificed at the altar
of Wall Street. Some 48 states have faced budget crises in the
past year, forcing them to cut libraries, schools, and police
forces, and to raise taxes on income and sales. A sales tax on
the exotic financial products responsible for precipitating the
economic crisis could help level the playing field and put some
points on the populist side of the scoreboard._
Ellen Brown, J.D., developed her research
skills as an attorney practicing civil litigation in Los Angeles.
In Web of Debt, her latest book, she turns those skills to an
analysis of the Federal Reserve and "the money trust."