H.R. 3313: Wall Street Trading and Speculators Tax Act

I have discovered that there are attempts to introduce a form of Financial Transaction Tax in the US. On the 2nd of November 2011, Senators Peter DeFazio and Tom Harkin proposed the "Wall Street Traders and Speculators Tax Act". Here's the official summary:

"Amends the Internal Revenue Code to impose a .03% excise tax on the purchase of a security:

(1) if such purchase occurs on a trading facility located in the United States, or

(2) the purchaser or seller is a U.S. person.

Defines "security" to include:

(1) stocks, partnership interests, notes, bonds, debentures, or other evidences of indebtedness; and

(2) interests in a derivative financial instrument (i.e., any option, forward contract, futures contract, notional principal contract, or any similar financial instrument).

Exempts from such tax:

(1) initial issues of securities;

(2) any note, bond, debenture, or other evidence of indebtedness which has a fixed maturity of not more than 100 days; and

(3) securities traded pursuant to certain lending arrangements.

Not bad for starters. Unfortunately, it officially has a 2% chance of being adopted.

However, Senator Tom Harkin, has just been arguing that it could indeed provide a way of avoiding the impending "fiscal cliff" that is facing the US government. In an interview with the Wall Street Journal's Market Watch, Harkin was asked for his view on the effect of the tax on high frequency traders. Here's what he said:

"I really don’t see any evidence that these high-speed traders add anything to the economy, but they do also create some aberrations in the market that have led to some disturbances. On the one hand, my transaction tax doesn’t put them out of business but certainly they would have to pay 3 cents on every $100 in transactions they do. That’s really not very burdensome. But also we need revenue. We have to get out of this deficit hole we’re in and this transaction tax is estimated to raise about $352 billion over ten years. That’s pretty substantial. And I don’t think it will do anything at all to hurt trading, what I call “real trading.”

Quite. But it seems to me that the $352 billion over ten years is a massive underestimate of the potential of this sort of mechanism. As I recently argued, the DTCC  (Depository Trust and Clearing Corporation) alone handled $3.2 quadrillion in 2011. Add in the $403 trillion for CHIPS and the $664 trillion for Fedwire, and you have a very handy $4.3 quadrillion per year. Taxed at 0.03%, this could generate up to $1.3 trillion a year - more like $13 trillion over 10 years. Essentially, that would pay off virtually all the US national debt.

STOP PRESS: I've just discovered that veteran politician Ralph Nader has just published a piece in the Washington Post calling for a transaction tax to avoid the "fiscal cliff". As he says:

"Wall Street might object, but taxing its sales is hardly a radical idea. Americans in all but five states pay state sales taxes, ranging as high as 7 percent, every time they buy a car, an appliance, a pair of pants or piece of furniture, but a trader on Wall Street can buy and sell millions of dollars’ worth of financial products each day without paying a cent in sales taxes. A teacher or police officer who buys a $100 pair of shoes in the District or Maryland pays $6 in sales taxes. Meanwhile, if a financial speculation tax were applied to stock trades at a rate of 0.25 percent, a day trader would pay just 25 cents on every $100 worth of stock bought."