Time for a global financial transaction tax

It is gratifying to note the growing support for the idea of a financial transaction tax (like a sales tax) levied on trades of stocks, bonds, derivatives and other financial instruments, with the revenues applied to lessen or eliminate the national debt in the United States and in other debt-ridden countries.

Support comes not only from the 99 percent Occupy Wall Street movement, but also from such likely and unlikely voices as Nicolas Sarkozy, Angela Merkel, Al Gore, George Soros, Bill Gates, Ralph Nader, Pope Benedict XVI and the Archbishop of Canterbury.

One way to look at the financial transaction tax idea is as a kind of Robin Hood levy on the rich to redistribute wealth to the working poor — a form of class warfare. A better way is to see it as a completely normal, rational and equitable way of raising revenue to pay for the programs we have decided upon to serve the nation, from national security to human health and well-being.

As it is, you and I pay 5 or 6 percent sales tax on a cup of coffee. Why? What’s the rationale? Could investors, especially high volume speculators, pay a mere 0.1 percent or 1.0 percent tax on turnover of financial paper? Why not? What’s the difference?

The argument against such a tax is that it would impede the efficiency of the markets by adding to the cost of trading — a cost that would be passed on to ultimate investors, such as pension funds.

The flip side of this argument is that a transaction tax would actually discourage pointless speculative trading, and encourage genuine, longer term investment in American enterprise. How discouraging would this be? Let’s look at an actual example.

When in 2008 hedge-funder John Paulson notoriously short-sold $10 billion worth of U.S. mortgage instruments, thus betting against the U.S. real estate market, he scooped up more than $2 billion in unearned profit for himself. If we had a financial transaction tax at the time, Paulson would have paid, at the rate of 0.1 percent, a transaction tax of $10 million. That’s a lot, but he would still have taken more than $1.9 billion in net revenue all the way to the bank. How much of a hardship would that have been for Paulson? Or, if too much, then maybe he wouldn’t have bet against the market and his country in the first place.

What are the tax revenue implications? Let’s do the math: A turnover of $10 trillion, taxed at a mere 0.1 percent ($10 per $10,000), would yield $10 billion in new revenue for Uncle Sam. Or a turnover of $100 trillion would yield $100 billion. In the case of Europe, the European Commission in Brussels estimates that a 0.1 percent financial transaction tax would raise $77 billion a year in European countries alone. This can add up to real money. It could help resolve the European debt crisis.

Some anecdotal studies in Greece, Italy and, yes, even here in the United States, suggest that the failure of many super-rich citizens to pay their fair share of income taxes is the leading cause of the national debt crises in all three countries. Yet in all the media discussions of the debt crises, how often do you hear this root-of-the-matter dealt with? It’s as if the obvious solution were off limits. Furthermore, when citizens and corporations find ways to evade taxes, a solution such as raising tax brackets becomes almost irrelevant, because they aren’t paying those tax rates anyway. So, while overall tax code reform is needed in the long haul, we should start now with the one obvious solution staring us in the face.

The financial transaction tax is an idea whose time has come. It is time to adopt and enforce a financial transaction tax globally — the same rules for all, in all countries. If the USA, the U.K. or France were to go it alone, the likely result would be to drive the financial markets out of New York, London or Paris, and overseas to foreign tax havens. That would be self-defeating, economic suicide. Therefore, the financial transaction tax reform will have to be adopted globally, by international treaty among all nations participating in the international financial market system. The international debt crisis demands this. The diplomatic negotiations have to begin now.

The global financial transaction tax provides a win-win solution that will, once again, help save capitalism from itself.

Sharon resident Anthony Piel is a former Citibanker and general legal counsel of the World Health Organization.