NEW YORK (MarketWatch) – Before we start, you should know I’m going to argue that a plan to tax transactions large and small on Wall Street is good idea. That’s right. I like the idea of taxing stock and bond trades, especially in today’s market.
The problem with the plan, as spelled out by the left-leaning Economic Policy Institute last week, isn’t the tax. It’s where they want to spend the revenue. The EPI and some congressional Democrats backing the plan want a new tax on financial transactions to pay for any new health care programs. See full story.
The so-called national transaction tax could raise $100 billion to $150 billion a year. Before writing a check to the new health plan, backers, including Rep. Barney Frank, D-Mass., are considering using the money to temporarily help states, including new hiring incentives for public- and private-sector employers and school construction money.
As noble as those efforts are, they’re misguided. A Wall Street tax that is the equivalent of a toll booth for transaction traffic should pay for the government’s role on Wall Street, not someone’s colonoscopy.
Why? Because a financial transaction tax is going to hurt Wall Street, business and investors. A tax, no matter how small, will escalate costs. That’s going to make institutions that do a lot of trading think twice about their volume, and the new costs are going to be offset by new and higher fees on the people who can’t either fight back or afford to fight back: small investors.
That burden shouldn’t be borne by one industry for the sake of another. It’s true that most of our taxes go into a general fund used to pay for services we may never use, but it’s also true that Wall Street, like the health care system, is in need of reform. Reform is going to cost money.
Think about what kind of inspectors the Securities and Exchange Commission could hire if it had an additional $100 billion to spend on salaries. A top SEC attorney might not bolt to some white-shoe law firm to defend Wall Street bad guys if that attorney were offered a competitive government raise. Maybe the commission has that guy review Bernard Madoff Investment Securities rather than Mr. Magoo.
Wall Street’s tax bill
So now that it’s clear how to spend the money, let’s discuss whether or not to even collect it.
It’s true that when times are good, Wall Street pays its share in taxes. The financial industry had $222 billion in taxable income between 2000 and 2006, the second-highest amount for any industry behind manufacturing, according to Internal Revenue Service data cited by the Tax Policy Center.
But that was then, and this is now. Wall Street is a black hole for taxpayer money.
All but a few Wall Street firms aren’t paying taxes this year and possibly next. Take American International Group Inc. (AIG). AIG isn’t only not paying taxes, it’s taking write downs against future tax bills: $1.76 billion through the first half of the year, according to its financial reports.
At least Citigroup Inc. (C) and Bank of America Corp. (BAC) are paying taxes, setting aside a hardly whopping $1.74 billion and $284 million, respectively, in the first half of the year.
Look closely and you’ll notice those institutions not only are enjoying puny tax bills, but they share the distinction of being the nation’s biggest bailout babies. Wall Street is, after all, an industry that survives because of taxpayer help. Given the damage the industry has caused, it has no legitimate argument against a 0.1% to 0.25% levy on a stock trade.
Taxes are already low
A transaction tax could also help brake the runaway volume of high-frequency trades and in off-exchange dark pools. Trading for the sake of trading would still exist, but the playing field would tilt ever so slightly back to the investors who trade on fundamentals. The tax could potentially make Wall Street rethink proprietary trading.
And with exemptions of trades done on behalf of retirement plans, or small investors who make only a few trades a year, it could be targeted to market players who exist solely for trading profit: hedge funds and brokers.
The anti-tax screamers will argue that it will kill capitalism. They’ll say the government is killing liquidity in the markets. They’ll argue that taxes are already too high. But they’re wrong. Taxes for corporations are historically low.
Corporate income tax as a share of gross domestic product has fallen from 6% in 1951 to about 2% last year, according to the Tax Policy Center. The decline is mostly due to a shrinking corporate tax rate. The top corporate rate has fallen from 52.8% as recently as 1969 to 35% last year, according to the World Tax Database.
You know, tax may even be the wrong word for the transaction tax, if we can use this nominal tax to help avoid Wall Street fraud in the future, a better word might be insurance. Wall Street can pay it now, or we can wait for next trillion-dollar disaster to consider the issue again.
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