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An Idea So Old It's New Again

The next time industry officials forward hysterical predictions over the would-be effects of an FTT, ask yourself this: Are they crying for us or for themselves?
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Man's hand using calculator
Man's hand using calculator

In February 2013, as Washington was hammering out the details of the universally unsatisfying sequester compromise, Pulitzer Prize-winning journalist Jesse Eisinger reported on the purportedly novel idea of levying a tiny tax on financial transactions to raise revenue.

"The unwritten rule of Washington debates about taxing and spending is to never consider anything new," Eisinger wrote in reference to a bill introduced in the Congress to tax stock sales at 0.03 percent (3 cents per $100).

What Eisinger did not mention was that the United States actually had a financial transaction tax for much of the 20th century. From 1959 to 1965, that tax was set at 0.04 percent of stock sales, similar to the 0.03 percent idea of 2013.

A new report by Public Citizen takes a look at what we missed out on by repealing financial transaction tax in 1965, and dispels some myths along the way.

The tax would have brought in nearly $400 billion in inflation-adjusted revenue from 1966 to 2014, and more than $300 billion in actual revenue. A financial transaction taxes would have reduced trading somewhat, accepted economic theory says. Advocates for FTTs tout suppression of trading as an added benefit at a time in which algorithm-driven computers are making patsies out of ordinary investors by flipping stocks in split-second intervals based on inside information.

Even if the trading were reduced by 50 percent, which is well beyond economists' models for the effects of such a small tax, that still would have left about $200 billion in inflation-adjusted revenue since 1966, including more than $13 billion annually in recent years.

Opponents would have you believe that the damage wreaked by a financial transaction tax would stop just short of capsizing the republic. But the historical record says otherwise. In the six years in which the legacy tax most closely resembled current proposals, U.S. gross domestic product grew by an average of 5 percent annually. These days, not even Jeb Bush is promising growth like that.

One FTT opponent, the Investment Company Institute, wrote that in the mid-1960s, "the tax was viewed by Congress as complicating securities transactions and repealed."

In reality, the FTT was just one of dozens of excise taxes that were eliminated as part of a massive tax reform bill in 1965. The FTT was barely mentioned in press coverage of that tax measure. In related congressional testimony, the president of the New York Stock Exchange merely asked that the tax be lowered from 0.04 percent to 0.03 percent -- hardly what one would call for if he thought the tax was poisonous.

The concept of the FTT as an option to raise revenue enjoyed a brief renaissance in 1990, the last time lawmakers seriously worried about the deficit. Predictably, industry went bonkers. Merrill Lynch released a study concluding that a 0.5 percent financial transaction tax would have reduced the GDP by $25 billion ($75 billion in today's terms), cut corporate profits by 5 percent and slashed 300,000 jobs. Naturally, the damage wreaked by the tax would have worsened the federal deficit that it was supposed to address.

That tax proposal was admittedly much larger (at 0.5 percent) than the legacy tax of the 1960s. But costs associated with buying and selling stocks have been reduced by much more than that in recent decades, which begs the question of how we got along back then if fractional extra costs were so detrimental.

What the FTT will do is reduce the ability of professional traders to use technical sorcery to turn ordinary investors' purchase orders into instant profits for themselves. The next time industry officials forward hysterical predictions over the would-be effects of an FTT, ask yourself this: Are they crying for us or for themselves?

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