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A small financial transactions tax could correct a number of maladies in our economic system, from the federal debt crisis to the widening wealth divide to the rampant financialization of the economy, while eliminating taxes on income and sales.
The debt ceiling crisis has again brought into focus the perennial gap between what the government spends and what it accumulates in taxes, and the virtual impossibility of closing that gap by increasing taxes or negotiating cuts in the budget.
In a 2023 book titled A Tale of Two Economies: A New Financial Operating System for the American Economy, Wall Street veteran Scott Smith shows that we would need to tax everyone at a rate of 40%, without deductions, to balance the budgets of our federal and local governments – an obvious nonstarter. The problem, he argues, is that we are taxing the wrong things – income and physical sales. In fact, we have two economies – the material economy in which goods and services are bought and sold, and the monetary economy involving the trading of financial assets (stocks, bonds, currencies, etc.) – basically “money making money” without producing new goods or services.
Drawing on data from the Bank for International Settlements and the Federal Reserve, Smith shows that the monetary economy is hundreds of times larger than the physical economy. The budget gap could be closed by imposing a tax of a mere 0.1% on financial transactions, while eliminating not just income taxes but every other tax we pay today. For a financial transactions tax (FTT) of 0.25%, we could fund benefits we cannot afford today that would stimulate growth in the real economy, including not just infrastructure and development but free college, a universal basic income, and free healthcare for all. Smith contends we could even pay off the national debt in ten years or less with a 0.25% FTT.
A radical change in the tax structure may seem unlikely any time soon, due to the inertia of Congress and the overweening power of the financial industry. But as economist Michael Hudson and other commentators observe, the U.S. has reached its limits to growth without some sort of debt write down. Federal interest expense as a percent of tax revenues spiked to 32.9% in the first quarter of 2023, and it will spike further as old securities at lower interest rates mature and are replaced with new ones at much higher interest. A financial reset is not only necessary but may be imminent. Promising proposals like Smith’s can lead the way to a much-needed shift from serving “capital” to serving productivity and the broader public interest.
The material economy is roughly measured by the annual Gross Domestic Product (GDP), which for the U.S. had reached $25.6 trillion by the third quarter of 2022. (Michael Hudson observes that even GDP, as currently measured, is largely composed of non-productive financial services.) GDP is defined by spending, which depends on income. Collectively, Americans earned $21 trillion in 2021. The monetary economy is defined as the total amount of money that changes hands each year. Smith draws his figures from data that the Federal Reserve publishes annually in the Bank for International Settlements’ Red Book. The Red Book is not all-inclusive; it leaves out such payments as commodity trading, various options, crypto currency trades, and exchange-traded funds. But even its partial accounting shows $7.6 quadrillion in payments – more than 350 times our national collective income. Smith includes this chart:
Smith comments:
Most of these payments have little to do with what we regard as the real economy— the purchase of goods and services and the supply chain. Our GDP represents less than 0.33% of the payments in our economy. Once we see the big picture, the solution is obvious. We should tax payments instead of our income.
He calculates that U.S. spending by federal, state and local governments will total around $8.5 trillion in 2023. Dividing $7,625 trillion in payments by $8.5 trillion in government spending comes to a little more than 0.001, or a tenth of a percent (0.1%). Taxing payments at 0.1% could thus eliminate every tax we pay today, including social security (FICA) taxes, sales taxes, property taxes, capital gains taxes, estate taxes, gift taxes, excise taxes and customs taxes. With a 0.25% FTT, “If you have a net worth of $20 million or less, you would come out ahead. And if you make $500 million per year, you will finally be paying your fair share of taxes – $1.25 million!”
Bridging the Wealth Gap
The financial transaction tax is not a new concept. The oldest tax still in existence was a stamp duty at the London Stock Exchange initiated in 1694. The tax was payable by the buyer of shares for the official stamp on the legal document needed to formalize the purchase. Many other countries have imposed FTTs, including the U.S. — some successfully and some not. In January 2021, U.S. Rep. Peter DeFazio reintroduced The Wall Street Tax Act, which was accompanied in March 2021 by a Senate bill introduced by Sen. Brian Schatz. According to a press release on the Schatz bill, the tax “would create a 0.1% tax on each sale of stocks, bonds, and derivatives, which will discourage unproductive trading and redirect investment toward more productive areas of the economy. The new tax would apply to the fair market value of equities and bonds, and the payment flows under derivatives contracts. Initial public offerings and short-term debt would be exempted.” Schatz stated:
During the pandemic, Wall Street has cashed in on high-risk trades that add no real value to our economy and leave working families behind. We need to curb this dangerous trading to reduce volatility in the markets and encourage investment that can actually help our economy grow. By raising the price of financial transactions, we can make our financial system work better while bringing in billions in new revenue that we can reinvest in our workers and our communities.
Scott Smith concurs, noting that millions of people were forced into poverty during the first two years of the pandemic. In the same two years, the 10 richest men in the world doubled their fortunes and a new billionaire was minted every 26 hours. Much of this disparity was fueled by fiscal and monetary policy aimed at relieving the effects of the pandemic and of the 2008-09 banking crisis. Smith writes:
Our burgeoning monetary economy has fueled the rise of securitization, private equity, hedge funds, the foreign exchange market, commodity trading, cryptocurrency, digital assets, and investments in China. Quantitative easing further fanned these flames, driving up the price of financial assets. All such assets are monetary equivalents, and, thus, inflating the price of such assets balloons the money supply.
What many lauded as a robust economy was really monetary inflation. This makes it more difficult for the next generation to start life. Monetary inflation moves a select few out of the middle class, making them newly rich, while relegating many more to being poorer.
… The trading of financial assets in the monetary economy represents the majority of the payments in the economy, eclipsing payments related to wages or the purchase of goods or services. Thus, it would be wealthy individuals and institutions, such as hedge funds, that would shoulder most of the burden of a payment tax.
Predictably, the Wall Street Tax Act has gotten pushback and has not gotten far. But Smith says his proposal is different. It is not adding a tax but is replacing existing taxes – with something that is actually better for most taxpayers. He has asked a number of hedge fund managers, day traders, private equity fund managers, and venture capital managers if a quarter-point tax would impact their businesses. They have shrugged it off as not significant, and have said that they would certainly prefer a payments tax to income taxes.
Responding to the Critics: The Sweden Debacle
Among failed FTT attempts, one often cited by critics was undertaken in Sweden in the 1980s. As reported by the Securities Industry and Financial Markets Association (SIFMA):
There were negative capital markets impacts seen in the great migration of trading volumes across multiple products to London, equity index returns fell, volatility increased and the interest rate options markets essentially disappeared.
But as argued by James Li in a podcast titled “The Truth About a Financial Transaction Tax“:
Sweden’s tax policy … had an obvious, massive loophole, which is that Swedish traders could migrate to the London Stock Exchange to avoid the tax — which they did, until it was eventually abolished. On the other hand, the UK’s financial transaction tax has been much more successful. In 1694, King William III levied a stamp duty on all paper transactions, and a version of that levy still exists today, taxing many stock trades at 0.5 percent. Unlike the defunct Swedish tax, it applies to trades of shares of any UK company, regardless of where traders are based.
Again, Smith argues that the challenges met by other transaction tax proposals have arisen because they were being proposed as an additional tax. A payment tax in lieu of personal and corporate income taxes takes on a whole different character. He argues that big firms, rather than moving offshore to avoid a payments tax, would move to the U.S., since the tax rate in other nations would be much higher. Without a corporate or income tax, the U.S. would be the most favored tax haven in the world.
He adds that an exit tax could be a good idea: any money leaving the U.S. could be taxed at a 5% rate. That would discourage people from wiring money to an offshore exchange. But incoming money would not be taxed, encouraging foreign money to come to the U.S. to stay long-term, where it would be taxed less than elsewhere.
The Alleged Threat to Retirees
James Li’s favorite myth about a financial transactions tax is that it would be devastating for Main Street investors. He cites a report from the Modern Markets Initiative on the effects of the tax on savings and retirement security. A Business Wire headline on the report warns, “Latest Data from Modern Markets Initiative Shows the Financial Transaction Tax Would Threaten the Retirement Savings of Millions of Americans.” Among other claims is that a financial transactions tax would cost “$45,000 to $65,000 in FTT over the lifetime of a 401(k) account, or the equivalent of delaying the average individual’s retirement by approximately two years.” How that calculation was made is not included in the article, which refers the reader to the report. Li looked it up, and says on his podcast that it was highly misleading:
[T]he study stated that under this type of tax, for every $100,000 of assets in a 401(k) plan, the saver would owe $281 dollars in FTT taxes in a given year; and then over a 40-year time horizon paying in at $281 a year at 7% annual growth – the average for pension funds – that this would yield a total value of $64,232 after 40 years.
… [What they were] actually saying is, “If you put $100,000 a year into your 401(k), you would be paying approximately $281 in taxes for that $100,000; and if you had instead invested that money every year in a fund with 7% interest, that amount would add up to about $64,000 after 40 years.”
… I don’t know about you, but I can’t put $100,000 in my 401(k) plan every year. Very few people can. A more accurate estimate on how this would actually impact the average retirement savings is to look at the median income, which is around $52,000 a year, with an estimated $5,000 contribution into a 401(k) annually, which is around 10% of your gross pay based on commonly accepted financial planning advice. So the average person would only pay about $13 in FTT taxes in a given year.
These people are extremely tricky and their logic is also extremely flawed, because we pay taxes all the time. It’s like saying, “Oh, if I didn’t have to pay an income tax, I would be able to put all that money away and be up like a million bucks when I retire.”
Similar arguments are made concerning potential losses from FTTs to pension funds and the stock market. SIFMA contends, “What’s bad for the capital markets is bad for the economy,” stating “The capital markets fund 65% of economic activity in the U.S.” Perhaps, but the money paid for shares of stock traded in the stock market does not go to the corporations issuing the stock. It goes to the previous shareholders. Only the sale of IPOs – initial public offerings – generates money for the corporation, and this money is typically exempted from FTTs. Trades after that are simply gambling, hoping to sell at a higher price to the “greater fool.”
Killing the Parasite That Is Killing the Host
In the 2015 book Killing the Host – How Financial Parasites and Debt Destroy the Global Economy, Michael Hudson calls “finance capitalism” a parasite that is consuming the fruits of “industrial capitalism” – the goods and services traded in what Smith calls the material economy. Pam Martens writes in a review of Hudson’s book that this “blood-sucking financial leech [is] affixed to your body, your retirement plan, and your economic future.”
But it is not actually the pension funds that are doing most of the financialized trades or that would get taxed on those trades. It is their asset managers – including BlackRock and Vanguard, both of which lost money overall in 2022. If the asset managers can’t make money in the financialized economy, perhaps it would be better for the pension funds to move to more productive investments – from “finance capitalism” to “industrial capitalism.”
Publicly-owned banks mandated to serve the public interest would be good options if we had them. As the economy falters, the public banking movement is picking up steam, part of a much-needed shift towards an economy that puts the public interest above private profits
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If a FTT would raise all the revenue we need and could replace all other taxes then it sounds great. But would this tax really not reduce the number of transactions by a lot? Isn’t one of the stated goals here to shrink the financial industry?
Hedge fund managers are going to have veto power over this. But if they’re for such a tax then it should become law.
As Pam Martin notes in her review of Dr. Hudson’s book….to paraphrase it: Americans live in a “kleptocracy.”
We no longer have politicians, or presidents to come to our aid. Further problems add to the crisis: multiple millions of US citizens: refuse to educate themselves about this “kleptocracy.” Instead, they only know it’s happening.
And it’s not just the latest Debt “resolution”— as Dr. Paul Craig Roberts points out the US “Trade Deficit” is growing. Meaning, more & more nations are starting to use their own currencies for trade transactions. Great for them. We wish them well, but in America we haven’t that option.
Now, we hear of even more folks lined up at food banks. With the huge rise in food prices, housing and energy, we read more & more folks are abandoning their homes to live out on the streets. Those with a little money, are buying used campers/trailers.
It’s all too late. Too late to find anyone who has the political/financial clout to change things.
Great idea.
As I recall, in one of his presidential campaigns Ralph Nader proposed a small transaction tax to slow HFT, ostensibly to redirect the objective of finance to its original purpose of capitalizing productive pursuits, whether industry or agriculture, rather than being an end unto itself.
IMHO, that goal is laudable and the method a proper application of taxation.
~G
You’re probably right, but this is still the most sensible proposal I’ve seen for a while.
Excellent article!
“Making the government bigger will solve the graft problem.”
“We don’t have a making-things problem, our books simply aren’t cooked enough.”
Yes, exactly what the economy needs: more irresponsibility. That’ll do the trick.
Good idea in theory. Of course, in theory there is no difference between practice and theory, while in practice there is.
What I mean is that I have found that so-called “public banks,” such as credit unions or co-operative banks (if that is indeed not a contradiction), are at least as corrupt, venal, nasty, and bureaucratic as private banks, and perhaps even more so, in the sense that they attempt to justify their (mal)practice with their non-profit do-gooding veneer.
Until usury is once again outlawed and debt jubilees become common again (as revealed by Prof Hudson in “And Forgive Them Their Debts”), any form of banking will be nothing but organised crime, run by assholes, and asserting that a public one is better than a private one ignores the fact that we still end up covered in their shit.
It is too straightforward to work–the ENEMY in DC only caters to HedgeFund Managers and the Military Industrial Complex BUT again—–if these leeches had to cough up a very insignificant charge on their Ponzi schemes and FIRE investments—- THE DEBT would and could be returned to 0 without too much pain–
The present ‘system’ is absurd. Life has been stripped of all genuine meaning. Instead of every person pursuing through personal responsibility a meaningful existence it is all but impossible to realize positive outcomes from logical behaviour.
The present system denies common sense while rewarding the pursuit of moral hazard as sensible. The present system is a Ponzi scheme. If the present system were proposed as an an alternative to a system already existing such as the suggestion of a 0.1% financial transaction tax (FTT) it would be considered absurd whatever it’s few merits.
Indeed arguing for a Ponzi scheme from the perspective of an existing hypothetical — the proposed 0.1% FFT — would be reductio ad absurdum illogical.
Only mad men would dare such a proposal. And who would argue it is not a mad, mad world.
‘Smith contends we could even pay off the national debt in ten years or less with a 0.25% FTT.’ — Ellen Brown
‘Smith’ is tripping on shrooms: this is magical thinking. Fiscal year 2023 federal tax revenue of $4.8 trillion is 18.4 percent of GDP. Extracting another $3.2 trillion annually — by whatever means — to pay down the federal debt in ten years, means exploding the tax burden to an unprecedented 30.8% of GDP.
Moreover, the current stimulative 6 percent of GDP fiscal deficit instantly inverts to an austere, crushing 6 percent of GDP surplus — also unprecedented in the past century. Annual budget chart extending back to 1930:
https://tinyurl.com/32nkv72b
You don’t need no PhD Econ to grok that consumption would crumble. Depression II would stalk the land on hobnailed boots. Not one serious economist advocates running a 6% of GDP surplus. This is delusional, utopian, crackpot. And amateurish.
Go back to the third paragraph: “We would need to tax everyone at a rate of 40%, without deductions, to balance the budgets.” Spot the assumption buried in this sentence: all government spending is justified — it’s just a matter of taxing harder.
That, of course, is the creed of the purblind gov-worshiper: big government is good; bigger government is even better. Bigger government — I promise you — can do only one thing: run up debt even faster.
Watch federal debt escalate to $35 trillion by the end of 2024, then to $40 trillion within the first two years of the next presidential term. No weird FTT trick can stop this. Get a grip, folks.
The economic success of slavery for a few, originated wage slavery that was always recognized as more efficient than chain slavery.
And it is what the world has today millions of wage slaves working for a few and eat only when their work is necessary.
And wage slavery is so efficient that it allows subsidizing slaves when there is no work as something better than keeping them employed.
This would be a good thing since 52% of the GDP comes from speculation. The tax on wage labor should be replaced with this tax.
Now where have we seen that in American history before… hmm…
There is absolutely no reason to raise any new taxes. The simple solution is to reduce spending. Stop taxing people, stop expanding the government, eliminate 3/4 of the federal workforce, reduce the military to a defensive force and turn the Congress into a part time job with part time pay. There will be no reduction of other taxes to offset this new tax, there will just be more spending, more government expansion and more government control. The beast needs to be starved of revenue, not fed more. The feds only expand, they need to be cut off at the knees, not given more.
Curious to know ………didn’t the embrasure of multiple marriages, families, debts, etc. actually create the oil-slick debt economy that America sails on?
How about the Roads For Cars show we all love?
Manipulating the financial minutia in Congress for the upper echelons runs on global exploitation of natural resources which are nearing or has reached exhaustion.
That leaves the arrangement for the third round of MIDDLE CLASS AMERICA to take an introductory bow. The first exited at the convenience of the Spanish Flu, the second was sunk by the torpedo of CoVid and the third will have a global appreciation round of hand clap as we clear the board from the unnecessary European war.
Before we do anything, we must abolish the Federal Reserve and transfer that authority to the Treasury Department with ability to create money out of the thin air to support the economy. No more freeloading for the dozen cabal families of the City of London!
You forgot to include the revenue increase by taxing the political caste. Those who enter Congress with a few dollars in their bank account and retire from the public service as billionaires.
Count me in as long as ALL able-bodied people make a contribution. Taxes collected should be evenly distributed to the communities of origin. Similarly, government contracts should also be distributed evenly across the country. As it now stands, those contracts go to mostly democrat blue states: CA, WA, and the states in the NE.
Another great article from Ellen.
Thanks.
I think they call this ‘Rearranging the deck chairs on the Titanic’
R: “There is absolutely no reason to raise any new taxes. The simple solution is to reduce spending. Stop taxing people, stop expanding the government, eliminate 3/4 of the federal workforce, reduce the military to a defensive force and turn the Congress into a part time job with part time pay. There will be no reduction of other taxes to offset this new tax, there will just be more spending, more government expansion and more government control. The beast needs to be starved of revenue, not fed more. The feds only expand, they need to be cut off at the knees, not given more.”
Exactly, and thanks.
We don’t need no stinkin’ new financial transactions tax.
As you said: “There will be no reduction of other taxes to offset this new tax, there will just be more spending, more government expansion and more government control.”
R: “The beast needs to be starved of revenue, not fed more. The feds only expand, they need to be cut off at the knees, not given more.”
Yes! There are 1000’s of entirely unconstitutional federal agencies that need to be abolished NOW.
The federal government has to be drastically downsized right back down to its original constitutionally allowed functions [ if not entirely eliminated – my preference], NOW!
Therefor I say:
“This government’s grown too big for its boots,
We’ve got to cut it back down, back down to its roots,
It’s taken most of all of our freedom away,
There ain’t much freedom left in the US today…
“We’ve got to start us a new revolution
And get back to the old constitution
We’ve got to stand up and fight for the whole Bill of Rights
Its time to start over again”
Song: “New Revolution”:
Regards, onebornfree
https://onebornfree-mythbusters.blogspot.com/
https://onebornfreesfinancialsafetyreports.blogspot.com/
May 22, 2023 Bank Runs Trash Long-Held Assumption on Deposits Regulators and lenders valued customer accounts higher when rates rose
The theory rests on an assumption: That banks don’t have to pay depositors much to keep their money around, even as rates rise. The deposits would be a stable source of low-cost funding while the bank earned more money lending at higher rates.
https://www.wsj.com/articles/bank-runs-trash-long-held-assumption-on-deposits-474afcc5?mod=djemalertNEWS
May 22, 2023 The Collapse Of More Banks Is Imminent
James Rickards is an Economist & Former Advisor To The Pentagon and CIA. He is also a former lawyer and investment banker turned economist and bestselling author and if there’s one thing you can guarantee with Jim, it’s that he’ll leave you with more answers than questions, and offer some rock-solid advice for protecting your wealth.
Video Link
Jim… someone is extracting wealth from this country by simply paying for real stuff with paper.
Shouldn’t this theft be at least taxed, or tax on the theft is going to hurt the economy.
My goodness, how dense can people be?
The real goal here is to stop high frequency trading. The computerized trading where say 5 million shares of microsoft are bought and then sold a second later.
401 K and similar IRA holders can be compensated by getting the taxaes returned on the trade.
Similarly payments to the individuals below certain annual benefits ,by the government can be left from this taxation.
Sweden example’s failure is possible because it has been allowed . Its not allowed for individual who runs out ofthe borders to evade taxation.
Annual budget deficit surplus will not crash the economy.
“GDP surplus” is ill defined concept.
Taxing trades still will generate trillions.
I certainly agree that financial parasitism should be ended, and a financial transactions tax could be a good way to do it – as long as we could avoid “withdrawal symptoms”.
But the idea that a financial transfer tax could replace existing taxes is I think naive. This tax would likely greatly reduce the size of the parasitic financial economy – a good thing – but we can’t live off of it. All those quadrillions of dollars of financial castles in the air let a corrupt few control real assets, but all those quadrillions aren’t real and we can’t really tap into them.
I mean, suppose there are two apples, and you have a dollar, and I have a dollar. We each get an apple. But now suppose I play some financial shell game and I have a billion dollars. I get both apples. But we can’t get a billion apples because they don’t exist. We’d have to plant real trees etc.
Getting rid of financial parasitism – returning banking to the boring low-profit business of evaluating risk and steering investments to actual productive enterprises – could grow the real economy, but only by resetting incentives to produce real useful goods and services and slowly building from there. I don’t think there is a magic cornucopia here.
For a long time I‘ve been wondering, how western societies, with their advanced technologies and their industrious people, could slowly drift into bankruptcy. Isn’t it mind-boggling, that rich countries, with high revenues on taxes, fail to keep up their infrastructure, their system of public health and a decent level of education? How is it possible that my grandparents raised three children on the salary of one, while Grandma tended happily to their needs, her days full with housekeeping, sewing, gardening, supervising homework ecc.? Today, a couple needs more than one job each in order to make ends meet and the kids devote more time to smartphones or tv-screens than our ancestors did with prayers. Worshipping false idols is part of the deal: the western economies got plundered by the usual suspects who control the newspapers and the public opinion, dictate politics and who shape the world of finance: the wealth of western societies is gone; it didn’t just evaporate, it was leeched from them by a brotherhood of conmen, who in the course of centuries were able to take their expertise to the highest level and who would stop at nothing.
Looking for new prey and other prospering economies to plunder, these masterminds of evil send their emaciated puppets to war in order to finish off a victim that got off their hook when its actual leader came into power. In this conflict they are desperate to win, for if they fail, the agonising western world won‘t be able to save them (again) anymore. It‘s all or nothing, and they‘ll commit any crime in order to keep in power. Only that they‘ve overplayed their hand, as I see it.
Jun 1, 2023 Debt ceiling hypocrisy: US boosts military budget while restricting food stamps for poor
US politicians from both parties agree: the deficit doesn’t really matter. In their bipartisan deal to raise the debt ceiling, Biden and Republicans agreed to boost military spending to $886 billion, while making it more difficult for the poor to receive food stamps and welfare.
Video Link
It seems very optimistic to me. More likely, a collapse in financial transactions and movement of money abroad or into cryptocurrencies or derivatives, where enforcement would be difficult or impossible. However, some form of FTT would be beneficial, even if it brings only a fraction of the revenue claimed by its founders. It would at least hold the financialists partly accountable.
You’re completely right about deck chairs on the Titanic. No new tax measures will work. Economic collapse is imminent, regardless. Any new financial system will be very much smaller and directly geared to the needs of what’s left of the American economy.
Yes, the financial sector would probably shrink by a lot. Where would those working on the Street go?
Business school graduates can’t find jobs as it is:
https://www.bloomberg.com/news/articles/2023-06-01/harvard-mba-grads-anxiously-navigate-a-tepid-job-market#xj4y7vzkg
Journalism is also hemorrhaging jobs, even data journalism sites like FiveThirtyEight.
https://www.niemanlab.org/2023/04/disney-is-shrinking-fivethirtyeight-and-nate-silver-and-his-models-are-leaving/
Nate Silver’s models aren’t as useful when the presidential elections are rigged.
GloboCap – the great planetary parasite/squid – can command every government official in any country for a billion dollars or less.