As more and more Americans voice concerns about the reckless actions of the financial sector that pushed the banking sector to the brink of collapse, Senator Tom Harkin and Representative Peter DeFazio have introduced a proposal that would impose a small tax on financial transactions. This tax would raise tens of billions of dollars a year while reining in dangerous speculative trading.
The Harkin-DeFazio proposal calls for the implementation of a modest 0.03 percent financial transactions tax (FTT) on the trading of stocks, futures, bonds, and credit default swaps. This would have a minimal effect on individual 401(k) or mutual funds, however, it would impose substantial costs on those who are engaged in short-term trading strategies that can lead to disruptions in markets, such as last spring’s flash crash. This tax would have no effect on ATM withdrawals, short term revolving loans, or other everyday financial transactions.
The FTT enjoys a wide range of support internationally. The European Commission is currently considering a financial speculation tax largely at the urging of the conservative leaders of France and Germany. In the United Kingdom, there is already a similar tax in place that raises 0.2 to 0.3 percent of GDP (the equivalent of $30 to $40 billion a year in an economy as large as the United States) based on taxing stocks alone.
As a policy-tool, this tax would raise additional revenue in the United States. At the same time, the legislation would be an effective disincentive against some of the speculative trading. As a result it would reduce the amount of resources wasted in the financial sector and allow it to serve its economic purpose more efficiently.