Taxing the biggest casino

Opinion: July 2, 2010 at 12:00a.m.

By Sarah Anderson

McClatchy-Tribune

Remember the May 6 stock market “flash crash,” when the Dow plummeted nearly 1,000 points in less than half an hour? The experts are still scratching their heads over the exact cause of that historic market bungee jump.

What is clear is that such a plunge would never have happened without the explosion of automated high-frequency trading, which now accounts for 50 percent to 75 percent of daily stock trades.

How does it work? Financial firms program computers to trade millions of shares every second based on certain triggers, such as when a stock drops or rises a certain percent. Like so much of what happens on Wall Street, this financial activity has little to do with what’s actually happening in the economy. It’s about following market trends, whether they are rational, irrational, or the result of human error.

Taxing the big flippers

One way to encourage investors to go back to thinking with their heads would be to place a small tax on each trade of stock, derivatives, currency and other financial assets. A fee of a quarter of 1 percent or less would be virtually unnoticeable to ordinary investors. But for the big-time stock-flippers and derivatives dealers, it would add up.

Imagine, for example, if such a “financial speculation tax” had been in place before the flash crash. In just the 20 minutes of the wildest trading that day, it would have generated $142 million in revenue. That works out to more than $7 million per minute.

Ideally, though, a speculation tax would change behavior. It would make high flyers in the global financial casino hesitate before making short-term, high-risk gambles that put our entire economy at risk.

Since the tax would apply to each transaction, it would make purely speculative investment less profitable and encourage more long-term, patient investment.

Of course, a financial speculation tax alone wouldn’t stop those who’ve gone truly nutty with greed. Take the AIG case, for example. It’s unlikely that a tax, no matter how high, would’ve prevented the daredevil gambling that bankrupted the insurance giant and nearly drove our national economy off a cliff.

But at least Uncle Sam would have wound up with a sizeable chunk of change to invest in urgent needs. A 0.25 percent tax on AIG’s $440 billion worth of high-risk credit default swaps would’ve added up to as much as $1.1 billion. That’s enough to cover the salaries of more than 20,000 elementary school teachers for one year.

Middle-class exemptions

Support for financial speculation taxes is building in the United States and many countries around the world. Proposals in both the House and Senate would dedicate the substantial revenues from such taxes for jobs programs. Both bills include protections for middle-class investors, such as exemptions for retirement funds and the first $100,000 in individual trades per year.

Several key European governments, including Germany and France, support such taxes, but would like the United States to take similar action. They have been pressing President Barack Obama to get on board at summits of the G-20 large economies, including one in Toronto, Canada last month.

The Wall Street casino got us into the current crisis. A tax targeting the most reckless behavior should be part of the solution.

Sarah Anderson is the director of the Global Economy Project at the Institute for Policy Studies, Washington, D.C., and the lead author of the new report “Taxing the Wall Street Casino.” Distributed by McClatchy-Tribune Information Services.