Not a Silver Bullet, but...

Stock_tax.jpgWhen the CEO of Wells Fargo came by Raleigh last night to offer a few words of wisdom to students at NC State, the assembled wolfpack greeted him more as prey then as predator. Is it fair to blame one man for the financial mess of the entire world? Not really, but fairness is in short supply these days, and John Stumpf can afford it more than most, so I don’t feel too bad about it – and apparently he’s used to it. The more important question is figuring out what we can do to fix the mess we’re in and try to prevent it from happening again.

Aside from taxing the super-rich, we really haven’t seen much public debate about a sane, sustainable, long-term solution to plug holes in our federal budget, and the only solution thus far has been cuts to spending. Cuts do work to a certain extent, but they produce two major problems – they put people out of work, and they reduce the amount of money floating around the economy. Neither of these would be a particular problem if were weren’t sitting on sky-high unemployment or some nasty liquidity problems, not to mention that we’re cutting programs that people really need, so maybe it’s not the economic panacea the conservatives would like us to believe it is. Austerity has never been very American anyway, and we don’t seem to be particularly good at it.

What if I told you that I had a magical idea that would help to stabilize our crazy markets, raise hundreds of billions of dollars to plug deficits and fund important programs, and even had the added benefit of driving those bankers absolutely crazy? Friends, I proudly introduce you to the Financials Transactions Tax (or FTT), an idea whose time has come. Again.

Here’s the idea: every time a financial instrument, be it a stock or bond, a futures or option buy, or even an interest rate or credit default swap is made, a tax is charged to the buyer. Think of it as a sales tax on stocks, the same way you pay a sales tax on anything you buy in a retail store. The rate of the tax is very, very low – somewhere in the neighborhood of .03% of the price of the stock – in order to not unduly impede the ability to trade these instruments back and forth. Based on volume, that would come out to somewhere in the neighborhood of $100 billion a year, depending on the actual tax rates and any decreases in volume attributable to the tax itself.

Know anyone who could use an extra $100 billion a year? The failed Supercommittee was tasked with making $1.5 trillion in cuts over a 10 year period. Over 10 years, the FTT could easily generate over $1 trillion, with no cuts necessary.  Hmmm…

Lest you think these are just the musings of a crazy man, I should point out that I am not the first to advance this idea, nor would the United States be the first to implement such a system. The financial giants in London, Hong Kong, and Singapore all use a similar system, and their markets have been chugging along quite well. In fact, the US already had a similar system, the stock transfer tax, for most of the first half of the 20th century. It was repealed in 1966.

There are some additional benefits of reducing churn in some areas with high-volume trading which I will cover in a future post, but keep your ears out for more about the FTT in the coming months in the news and from politicians. We think it just might stick this time.