An American Financial Transactions Tax? Don’t Hold Your Breath

America has finally started talking about a financial transactions tax (FTT) on Wall Street.  About time.  Academics have always known that FTTs are among the most efficient, best-targeted, least painful and taxes possible.  Celebrities like them too, under the label “Robin Hood Tax.”  You know it’s good for you when the nursing union National Nurses United has come out full-force in favor.

An FTT is a small tax on financial transactions.  Most proposals for FTTs include an FTT on stocks and bonds of 0.5% or less of the amount traded and an FTT on foreign currencies and derivatives of 0.1% or less of the amount traded.  Often the proposed levels are much lower.  The idea is to hit the frequently-trading speculator while leaving the long-term investor largely unscathed.

For bankers, brokers, and high-frequency traders, the FTT is a disaster.  An FTT is effectively a drag on finance industry revenue, since by design it will reduce trading.  Reduced revenue will inevitably be reflected in reduced profits and bonuses.  Only ex-bankers come out in support of FTTs.

[pullquote]Only ex-bankers come out in support of FTTs.[/pullquote]

For the rest of us in America’s realonomy, an FTT is fantastic.  By reducing speculative trading it reduces market volatility and helps prevent bubbles and crashes.  Since resources are directed more to the real economy and less to the financial economy, economic growth is likely to increase.  And of course it gets back at the bankers.

Oh — and it generates valuable tax revenue, as much as $100 billion per year.

So will we be getting one this election year?  Don’t hold your breath.  Banks and financial companies can be expected to spend aggressively to quash, defeat, and water-down any potential FTT legislation that comes before Congress.  In the post- Citizens United era of unlimited corporate campaign spending, it is hard to imagine a tax that is so closely targeted at one (very rich) industry becoming law.

A triumph of democracy and good economic policy over unlimited corporate spending power is always possible, but it is perhaps unlikely in today’s United States of America.  Better luck in Europe.  The worse for us.