Robert Feinberg: Progressive Push for Financial Transaction Tax

Monday, 03 Dec 2012 02:38 PM

By Robert Feinberg

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The Progressive Caucus last week held a panel presentation on the Wall Street Trading and Speculators Tax Act, a proposal by a coalition of liberal groups for a tax on financial transactions (FTT).

One of the sponsoring groups, Americans for Financial Reform, calls this a “financial speculation” tax, since it would not be imposed on routine consumer transactions. Because this is being offered in conjunction with the current debate over fiscal issues, it is certain to be the subject of great controversy during this year’s lame-duck session of Congress, and probably beyond.

The presenters were Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and a former top adviser to Vice President Joe Biden; Wallace Turbeville, senior fellow at Demos and former vice president of Goldman Sachs; and Damon Silvers, a senior counsel and policy adviser to the AFL-CIO.

Bernstein explained the basic elements of the proposal, which would charge 3 basis points on transactions involving securities or derivatives. Anticipating criticism that this is “an exotic idea,” he pointed to the fact that the London Stock Exchange has a 0.5 percent tax on financial transactions, albeit with considerable exemptions, and he added that the European Union is looking at the idea. Therefore, he discounted the argument that traders will go elsewhere if the United States adopts an FTT.

He also pointed to an extensive list of endorsements, from the Pope and Archbishop of Canterbury to George Soros, Warren Buffet and John Bogle, who said, “I love it.” His comment blames the lack of a tax on transactions of mutual and pension funds for what he called “an orgy of speculation.”

Turbeville stated that since the Flash Crash of 2010, the hedge fund industry has flipped from a provider of liquidity to a user of liquidity, thus discrediting the claim that an FTT would harm the ability of markets to offer liquidity and price discovery to traders. He argued that technology has reduced the efficiency of capital allocation.

He expressed hope that an FTT would reduce volatility and stem the growth of the financial sector by a factor of three in terms of gross domestic product, while doubling its share of profits from 15 percent to 30 percent. He also noted that the average holding period has collapsed from four years to 22 seconds, systematically distorting the market and sucking $635 billion out of the economy. He predicted that the incidence of an FTT would fall on hedge funds, because they would not be able to avoid paying it.

Silvers represented the support of the global labor movement for an FTT, and he proclaimed that labor is opposed to an extension of the Bush tax cuts or reductions in Medicare and Social Security in the current fiscal negotiations. He referred to the European Union’s taxes of 10 basis points for stock and 1 basis point for derivative transactions to support the proponents’ view that a 3 basis point tax would be tiny.

He discounted any suggestion that the tax could be evaded, because the platforms on which financial transactions are executed are heavily regulated and audited. Silvers proposed that in order to reduce further the likelihood of evasion, transactions could be deemed unenforceable unless a box is checked confirming that the tax had been paid. He noted that the official revenue estimate for an FTT is $350 billion over 10 years, but predicted that the actual number would be closer to $1 trillion, so that the tax would be attractive as a means of financing a deal on fiscal policy.

A handout by congressional sponsors stated that the Senate version, S. 1787, has been introduced by Sen. Tom Harkin, D-Iowa, and co-sponsored by Sens. Bernie Sanders, I-Vt., Sherrod Brown, D-Ohio, and Sheldon Whitehouse, D-R.I., while the House version, H.R. 3313, has been introduced by Rep. Peter DeFazio, D-Ore., and has drawn 36 co-sponsors. Rep. Keith Ellison, D-Minn., is working on his own bill.

Robert Feinberg served on the staff of the House Banking Committee for the 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms and trade associations.

Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.

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