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Thursday, July 28, 2016

The Case for a Financial Transactions Tax

Dean Baker:

The Case for a Financial Transactions Tax, The Century Foundation: There has been considerable interest in financial transactions taxes (FTTs) in the United States and other wealthy countries in the years since the financial crisis. An FTT can be a way to both raise a large amount of revenue and also rein in the financial sector. This report examines the evidence on the potential for raising revenue through an FTT, its impact on the economy, and also the possibility of using the revenue to defray in particular the cost of higher education. The report argues:

  • A financial transactions tax could likely raise over $105 billion annually (0.6 percent of GDP) based on 2015 trading volume. This estimate is roughly in the middle of recent estimates that ranged from as high as $580 billion to as low as $30 billion.
  • The full amount of this tax would be borne by the financial industry, and not individual holders of stock or pension funds and other institutional investors. Evidence suggests that trading volume is elastic with respect to price, meaning that any drop in trading volume resulting from the tax would reduce costs for end users by a larger amount than the tax would increase them.
  • It is reasonable to believe that the industry would be no less effective in serving its productive use (allocating capital) after the tax is in place. This means that one of the primary effects of the tax would be to reduce waste in the financial sector, reducing costs while having little or no effect on its principal purpose: to allocate capital effectively.
  • The revenue raised through an FTT would easily be large enough to cover the cost of free college tuition (among other social programs), although if nothing were done to stem the growth rate of college costs, it would eventually prove inadequate.

The report also notes that the financial sector is the main source of income for many of the highest earners in the economy. This means that downsizing the industry through an FTT could play an important role in reducing income inequality. ...

    Posted by on Thursday, July 28, 2016 at 09:23 AM in Economics, Taxes | Permalink  Comments (60)


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