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Taxing the Wall Street Casino

June 17, 2010

Washington, D.C. – In the United States and many countries around the world, there is growing momentum behind proposals for small levies on trades of stock, derivatives, and currency to curb excessive speculation and generate revenues for urgent needs.

Adoption of such “financial speculation taxes” will be a key piece of unfinished business after Congress concludes round one of financial reform.

A new Institute for Policy Studies report points out that financial speculation taxes could have had a significant impact if they'd been in place before recent financial fiascos:

  • Flash Crash: If a tax of 0.25 percent on securities trades had been in place for just the 20 minutes of wildest trading on May 6, 2010, the day of the stock market "flash crash," it could have generated $142 million in revenue. That's more than $7 million per minute. Ideally, the tax would encourage big-time investors to think before placing their bets, instead of relying on computer-driven high-frequency trading.
  • AIG Collapse: A financial speculation tax on the insurance giant's $440 billion worth of exceptionally risky credit default swaps would have amounted to as much as $1.1 billion, enough to cover the annual salaries of more than 20,000 elementary school teachers.  
  • Greek Tragedy: When Greece cut a $10 billion derivatives deal with Goldman Sachs that was designed to conceal their oversized debts, a financial speculation tax would have raised the cost of the shady maneuver by $25 million.

“No one claims that taxing speculation will solve all of our problems,” says Sarah Anderson, lead author on the Institute’s study. “But combined with other sensible financial regulations, it could take us a long way towards reining in Wall Street and paying for ‘public goods,’ such as jobs, anti-poverty, and climate programs.”

ADDITIONAL KEY FINDINGS:

  • Top Revenue-Raiser: According to the Center for Economic and Policy Research, a financial speculation tax would be expected to generate about $177 billion per year in the United States. That's 20 times as much as could be expected from President Obama's proposed levy on the top 50 banks. It’s also more than three times as much as other key revenue proposals, such as allowing the Bush-era tax breaks for the rich to expire or restoring estate taxes on large fortunes.
  • Global Precedents:  Financial speculation taxes in the UK and many other countries have had little impact on productive economic growth or investment. Other G-20 countries have been pressing the United States to institute such a tax, and will discuss the matter at the June 26-27 summit in Toronto.
  • Tax Would Target Reckless Behavior, Not Small Investors: Proposals pending in Congress would exempt retirement funds and the first $100,000 in trades made by an individual each year. The tax would be paid almost entirely by wealthy investors engaged in high-risk activity.

“A financial speculation tax would be a critical step in restoring fairness to the tax system,” says IPS Senior Scholar Chuck Collins. “The richest 10 percent still own more than 80 percent of the total value of stocks. And it is the wealthiest of the wealthy who are engaged in the type of high-frequency, high-risk trading that is the target of this tax.”

Full report available at:  http://ips-dc.org/Report/taxing_the_wall_street_casino

Taxing the Wall Street Casino was written by IPS staff members Sarah Anderson, Chuck Collins, Scott Klinger, Janet Redman, and Kevin Shih.

Institute for Policy Studies (IPS-DC.org) strengthens social movements with independent research, visionary thinking, and links to the grassroots, scholars and elected officials. Since 1963 it has empowered people to build healthy and democratic societies in communities, the United States, and the world.