Several prominent Congressional Democrats have lined up behind a new stock transaction tax intended to punish financial firms.
The “Let Wall Street Pay for the Restoration of Main Street Act of 2009” would impose a .25 percent tax on all transactions involving stocks, derivatives, options, and futures. It has backing from powerful labor unions and Ralph Nader-linked advocacy groups.
Lead cosponsors Rep. Peter DeFazio (D-OR) and Ed Perlmutter (D-CO) say the proposal would raise $150 billion in new revenue they plan to designate for job creation and deficit reduction.
The bill has not been submitted in final form and thus does not have an official revenue score from the Joint Committee on Taxation.
Retirement Accounts Exempt?
Perlmutter and DeFazio contend some yet-to-be-determined mechanism will make retirement accounts exempt from the tax.
“We think this is one idea that makes a lot of sense,” Perlmutter spokesman Leslie Oliver told The Hill newspaper.
Although she has not endorsed the bill, House Speaker Nancy Pelosi (D-CA) has previously remarked favorably about the idea of a transaction tax. Powerful interest groups such as the Service Employees International Union (SEIU), the AFL-CIO, and Nader’s Public Citizen have lined up to support the proposal.
Although other nations have flirted with the idea from time to time, no other major developed country has such a tax on financial market transactions. Free market advocates fear such a tax could further damage the American economy.
Tax on Wealth-Generation
“A transaction tax is a tax on generating wealth,” says Wayne Brough, chief economist of the free-market group FreedomWorks. “The bill proposes to take money out of the market, which creates wealth, expands economic growth, and generates employment, in order to provide the federal government a fund to redistribute income in order to create jobs.”
By making individual transactions less attractive at the margins, the Perlmutter-DeFazio bill would serve to reduce the rate at which financial asset prices change without actually changing the directions in which they would move over time. Such changes would make it impossible for certain arbitrage strategies to succeed and would significantly reduce the liquidity of exchange-traded mutual funds and smaller-capitalization stocks.
Matches Capital Gains Tax
Although it’s different in some respects from the “Tobin Tax” that Nobel laureate James Tobin proffered in 1971—Tobin wanted to discourage international currency speculation through a tax on cross-border currency trades—the proposed tax would have similar consequences for consumers and investors.
“This new tax would raise as much money as the capital gains tax currently does. If you think doubling the capital gains tax is a good idea for your average investor, you’ll love this new tax,” said Ryan Ellis, tax policy director for Americans for Tax Reform.
Eli Lehrer ([email protected]) is director of The Heartland Institute’s Center on Risk, Regulation, and Markets.