Capitol Hill Democrats introduced legislation today that would impose a tax on financial transactions in order to curb high-frequency trading and force Wall Street to contribute a bigger share to the federal budget.
A measure written by Sen. Tom Harkin, D-Iowa, and Rep. Peter DeFazio, D-Ore., would place a 0.03% levy on financial trading in stocks and bonds at their market value. It also would cover derivative contracts, options, puts, forward contracts and swaps at their purchase price.
“We need the new revenue that would be generated by this tax in order to reduce the deficit and maintain critical investments in education, infrastructure and job creation,” Mr. Harkin said at a Capitol Hill press conference. “This Wall Street tax is a matter of simple prudence, fairness and fiscal sanity.”
The congressional Joint Committee on Taxation has not determined how much the bill might produce in new taxes, but proponents of the plan estimate that it could bring in around $100 billion annually.
The Democratic authors are targeting banks and other financial institutions. Under the proposal, a brokerage company that places an order for a stock or mutual fund would be responsible for paying the transactions tax.
The Securities Industry and Financial Markets Association asserted that the measure would harm financial firms, as well as their clients.
“A financial transactions tax is essentially a sales tax on investors,” Kenneth Bentsen Jr., SIFMA executive vice president for public policy and advocacy said in a statement. “At a time when we face a slow economic recovery, such a tax will impede the efficiency of markets, and impair depth and liquidity, as well as raise costs to the issuers, pensions and investors who help drive economic growth.”
Financial markets in countries that have adopted a financial transactions tax have suffered asset price decreases, lost businesses to other countries and experienced a loss of liquidity, Mr. Bentsen added.
Mr. Harkin implied that the financial industry is crying crocodile tears over a small charge on daily trading.
“This measure is not likely to impact the decision to engage in productive economic activity,” Mr. Harkin said. “There's no question that Wall Street can easily bear this modest tax.”
The point is to curb the high-frequency trading that injects volatility into the market and turn the attention back to capital formation, according to Mr. DeFazio.
“They don't make things,” Mr. DeFazio said of Wall Street. “They don't feed people. They churn. We have to begin to rebuild the real economy.”
Critics of the bill, however, say that retirees will be hurt especially when the costs of the tax are passed along in 401(k) fees and other charges.
Mr. DeFazio countered that people saving for retirement will benefit from a market that is more stable after some of the high-frequency trading has been wrung out. The value of their 401(k)s will be more predictable.
“They won't see them gyrating on a daily basis anymore,” Mr. DeFazio said.
The sponsors hope the bill gains momentum from the growing Occupy Wall Street movement. Mr. Harkin criticized the rapidly increasing amount of national income held by the wealthy, as well as the exorbitant pay offered to employees of Wall Street firms.
But rallies outdoors might not translate to traction in Congress. The bill faces resistance from the House Republican majority and the Senate GOP, as well as conservative Democrats, who can filibuster legislation.
“I don't see any avenues we have,” Mr. Harkin said of the legislative process. But he does want the idea to be included in any deficit-reduction plan that may be produced by the so-called deficit supercommittee.
“This certainly ought to be part of the revenue mix that we're going to have,” Mr. Harkin said.