This idea has been kicked around in Europe for sometime. While Wall Street is a nice, easy target to tax, there is no way that the Robin Hood tax is going to accomplish what it is suggesting.
The idea is that Wall Street should be taxed 50 cents on every $100 transaction. These transactions include the purchase and sale of stocks, bonds, commodities, unit trusts, mutual funds, and derivatives such as futures and options. Fifty cents may not sound like much, but it is really a huge chunk just to shift money around. Advocates claim that it will raise hundreds of billions of dollars for needy social programs. It is being promoted as a sales tax. It sounds simple and straightforward:
This small tax of less than ½ of 1% on Wall Street transactions can generate hundreds of billions of dollars each year in the US alone.
Enough to protect American schools, housing, local governments and hospitals. Enough to pay for lifesaving AIDS medicines. Enough to support people and communities around the world – and deal with the climate challenges we’re facing.
It won’t affect ordinary Americans, their personal savings, or every day consumer activity, such as ATMs or debit cards. It’s easy to enforce and tough to evade.
The first problem is that this is a financial transaction tax, not a sales tax. A sales tax usually involves the consumer paying a fee at the final point of purchase. This proposal is more of a tax on intermediate transactions, which are usually exempt from sales taxes. Regardless of what it is called, it still is a tax of half of one percent.
Not every transaction on Wall Street is a profit so if someone makes a bad trade, this will only compound the problem. Sucking hundreds of billions out of one aspect of the economy as this proposes is also unrealistic. It could possibly exceed the profit margin for the transaction. No business is going to conduct a transaction if it is destined to lose money.
For those transactions that do occur, the burden could be passed onto the small trader disproportionately. Wall Street is no longer for the wealthy; the middle class owns a large stake in it too. The impact on pensions could be enormous.
This tax could impair day trading and many shortly held trades. That is not such a bad thing, but fewer trades means less revenue to tax. Wall Street would not have the transactions it now numbers if this tax was in effect. While speculation has created higher oil prices, it is not as significant a problem for other essential commodities like clothing.
The financial sector has profits of about 3% the GDP. Using a $15 trillion economy, that would be about $450 billion. Taking hundreds of billions from the profits is going to be less than that. Presumably, it has to be more than $200 billion. The Robin Hood advocates must be thinking somewhere between $200-300 billion because more than that would drive financial institutions away because the risk is greater than the potential profits. Since the tax will lessen the number of trades, then that $200-$300 billion will drop to closer to $100 billion, but I bet Wall Street will find a way to keep their profits in place as much as possible.
What is left is not a lot in relation to what the federal government spends. Yet the Robin Hood advocates think that it will go to fund needed programs to help the poor and small time entrepreneurs. That is the biggest deception in this idea. With a deficit still at $1 trillion, every dollar raised by this tax would go to the deficit not new spending.
There is no need for anyone to hold his or her breath on this tax. Congress cannot even agree to raise the debt limit on spending that it has approved. It is not going to pass a dubious tax like this one. The simple solution for new revenue is right in front of us. The repeal of the Bush tax cuts or at least a modified repeal.