Whatever You Do, DON’T TAX WALL STREET!
Reckless financial speculation caused the economic crisis. Meanwhile, U.S. taxpayers have made as much as $23.7 trillion [pdf] available to financial institutions through various bailouts since 2007 in an effort to stabilize the financial system. So maybe British Prime Minister Gordon Brown was on to something last week at the G20 meeting of wealthy nations when he suggested a small tax on all the world's financial transactions to create a fund protecting against future bank meltdowns. Such a tax would both restrain excessive financial speculation (high-volume trading for trading's sake would now cost the traders something) and ensure that banks themselves, rather than taxpayers, are on the hook for any bailouts to come.
The idea of a levy on financial transactions is nothing new. Most recently the Economic Policy Institute has suggested a national financial transactions tax as a means to pay for much needed new job creation efforts. After all "the finance sector was not only a major contributor to the recession and the resulting loss of jobs, but it has also helped to drive up the deficit because of the costs of the financial bailout, some of which will not be repaid." New York City used to impose its own local tax on Wall Street stock trades and has considered reinstituting such a tax at various times.
I've always been skeptical of the glib argument that these modest local levies on finance would drive traders out of the taxing jurisdiction. But even that point is negated when you're talking about a global tax.
Besides, there's a certain symmetry to both slowing the pace of speculation and asking banks to pay for their own future misdeeds in one fell swoop. So why is U.S. Treasury Secretary Timothy Geithner so vehemently opposed?
When asked repeatedly why the U.S. rejected the idea, Geithner argued that the world needs additional economic stimulus. No arguments there - in fact I'm anxious to see the Obama Administration's new job creation plans. But why not impose a modest tax on financial transactions as well? Geithner's answer came down to two points: it might not be effective and, what's more, there might not be enough support for enacting it (certainly not, if the U.S. keeps stonewalling.) That's not good enough.
With world leaders and prominent economists such as Nobel Prizewinner Joseph Stiglitz insisting on the feasibility and appropriateness of such a tax, Geithner owes it a closer look - or at least a better explanation.