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Most Americans think that health risks also threaten wealth. The COVID-19 pandemic caused the worst economic crisis. Wall Street has increasingly lost touch with the underlying economy of workers and wages over many years. The fortunes of hedge funds and billionaires failed to help millions of Americans in dire need.

This type of tax is known as a Financial Transaction Tax. The main idea of this tax is to prevent economically useless speculation and gradually collect hundreds of billions of dollars for social and economic investment.

Background

We name Financial Transaction Tax a small tax that is applied on every sale of a financial asset. These assets can be stocks, bonds, or derivatives. The type of asset is just one of the factors that determine when the tax is applied.

Nowadays FTT targets a practice that is known as high frequency trading (HFT). It relies on sophisticated algorithms to execute multiple transactions in milliseconds. FTTs are spread all over the world. They have been for a long time in the United States. FTT existed for much of the twentieth century, from 1914 to 1965. It was a period of significant expansion in capital markets.

Several FTT proposals have been put forward recently. Rep. Peter Defazio introduced the Wall Street Tax Act to the House of Representatives last month.

A Financial Transaction Tax is progressive

The main problem of modern tax policy is the principle of progressive taxation. This principle concerns not only how to increase income. It also concerns the matter  how to increase income in an equitable manner.

It is known, that a progressive tax structures the burden according to the ability to pay. Wealthy families hold the vast majority of US stocks.

The Federal Reserve Board states that the 10% of households with the highest net worth own more than 80% of total capital. It includes the value of retirement savings. A FTT debate should start with this fundamental imbalance. The stock market means to the vast majority of families. The most common criticism of the FTT is that it will hurt middle-class pensions. It is important to note that most of these assets are owned by white households.

Only a third of black households own shares at all. However, the share of ownership among white households exceeds 60%. For middle-class households with long-term financial assets, the tax will have little effect as it is only applied during tenders.

Useless speculation vs. the real economy

This concentration of assets affects how often different groups trade their assets. It is currently estimated that HFTs account for half of the market trading volumes performed by algorithms seeking to exploit minor price differences. Since FTT will be applied on a per-transaction basis, this will reduce the frequency of the HFT and therefore its profitability.

FTT can play an important role in curbing excessive trade, which is designed to manipulate markets rather than benefit the economy as a whole. Over the past forty years, the US economy has shifted to a financial economy. Since the financial sector was deregulated in the 1990s, it has grown both as a percentage of GDP and as a hotbed of speculative activity. This transition led not only to the Great Recession of 2007. Reducing speculation can redirect financial markets towards secure investments in the real economy.

A Financial Transaction Tax would raise revenue for real priorities

It is difficult to estimate exactly how much revenue FTT can generate because it depends on both the impact of the tax on trading volume. Recent estimates range from roughly $ 500 billion over ten years to $ 2 trillion. According to the Congressional Budget Office, a 0.1% tax on financial transactions will generate $ 777 billion in new revenue over the next decade.

Pollin, Heinz, and Herndon analyzed the 2015 Sanders version of the Inclusive Prosperity Act and “conservatively concluded” that the FTT will generate an additional $ 220 billion annually. To put this estimate in context, $ 220 billion a year is enough to effectively end homelessness in the United States ($ 20 billion), pay off all outstanding medical debt ($ 81 billion), and create a universal childcare program ($ 70 billion).

Conclusion

The ultimate value of a tax lies not only in the income it generates, but also in the incentives it creates. FTT is badly needed because of this dual impact. Our economy needs a well-functioning financial sector. As economist Joseph Stiglitz, Nobel laureate, noted, our current financial system failed in fundamental tasks such as managing risk, allocating capital efficiently, and providing funds for productive investment and job creation.