Execs fighting transaction tax

They say proposal would hurt returns, force investors overseas

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Big bucks: Lawrence Mishel thinks the tax could raise $150 billion each year.

Pension and financial industry executives are fighting a legislative proposal that could force all investors — including pension funds — to start paying taxes on trades of stocks, commodities and other financial products.

Proponents contend the new tax is critically needed to help slash the nation's soaring budget deficit — and to put a damper on the same sort of frenzied speculative trading by hedge funds and others that many analysts believe contributed to the nation's financial meltdown.

But pension and financial industry executives charge that the proposed tax would unfairly hammer investment returns and would drive U.S. investors overseas to exchanges where they could avoid the tax.

“A stock transaction tax would increase costs for American investors, increase the cost of capital for American companies, and drive activity offshore from America's transparent, well-regulated exchanges,” said Ray Pellecchia, a spokesman for NYSE Euronext, New York.

“You discourage what you tax,” added Judy Schub, managing director of the Committee on the Investment of Employee Benefit Assets, Bethesda, Md. “Do we really want to discourage investment activity?”

Still, proponents of the tax insist that pension industry concerns about the proposal are misplaced.

“This (the proposed tax) is going to hit the short-term speculators,” said Dan Pedrotty, director of the office of investment, AFL-CIO, Washington, which supports the proposed tax. “Pension funds should be in this (investment) for the long term,” Mr. Pedrotty added.

Among the key public policy groups in Washington that have endorsed the proposal is the left-leaning Economic Policy Institute.

In testimony Oct. 8 before the House Ways and Means Subcommittee on Income Security and Family Support, Lawrence Mishel, EPI president, asked lawmakers to adopt a permanent tax that would apply to all financial transactions, including stocks, bonds and derivatives.

Mr. Mishel said a tax levied at the rate of anywhere from 10 basis points to 25 basis points per financial transaction could raise $150 billion a year for the U.S. Treasury.

“The finance sector not only caused the recession and the need to generate jobs, but it has also helped to drive up the deficit because of the costs of the financial bailout, some of which will not be repaid,” Mr. Mishel testified.

“A financial transaction tax seems an entirely sensible vehicle to provide the revenues we need to support federal spending and for offsetting the costs of a current jobs package,” Mr. Mishel added.

Another endorsement

Also endorsing the concept of the tax — at least as a short-term measure to recoup from the financial industry the full cost of the federal government's bailout — is Rep. Peter DeFazio, D-Ore., who introduced legislation on the subject Feb. 13.

Mr. DeFazio's bill, the “Let Wall Street Pay for Wall Street's Bailout Act of 2009,” would levy a tax of up to 25 basis points on financial transactions, with the tax phased out once the bailout's full costs are recovered. Mr. DeFazio's bill has been referred to the House Ways and Means Committee but has yet to receive a hearing.

In addition, the liberal Center for Economic and Policy Research and Progressive Policy Institute, both based in Washington, are promoting the proposed tax on financial transactions.

“It's a way to raise modest revenues and discourage (speculative trading) churn,” said Will Marshall, Progressive Policy Institute president.

In addition, as proponents of the transaction tax point out, Lawrence Summers, director of the White House's National Economic Council, supported a transaction tax in a 1989 article he co-wrote for the Journal of Financial Services Research.

The article, ”When Financial Markets Work Too Well: A Cautious Case for a Securities Transaction Tax,” expresses concern about the “spectacular increases” in the volume of trades in securities of all kinds at the time. “The efficiency benefits from curbing speculation are likely to exceed any costs of reduced liquidity or increased costs of capital that come from taxing transactions more heavily,” the article says.

Matthew Vogel, a White House spokesman, in response to the question of whether Mr. Summers continues to support the tax, said, “Given the transformations that have happened in the past two decades, arguments made in 1989 about financial markets transactions, whatever their validity at the time, do not likely apply today.”

Whatever Mr. Summers' position is now, pension and financial industry executives say that lawmakers should pull the plug on the proposed tax.

“It (the proposed tax) is a bad idea,” said David John, a senior research fellow at the Heritage Foundation, a conservative think tank in Washington.

“What you would end up doing is reducing the yields of mutual funds and hurting the retirement savings of the middle class,” Mr. John added.

'On and off'

“Transaction taxes have been suggested on and off at the state and federal levels for as long as there have been both stock trades and governments looking for revenue,” said Travis Larson, a spokesman for the Securities Industry and Financial Markets Association, Washington, in a statement. “As an industry, we have an equally long history of opposing such proposals,” Mr. Larson added.

According to Mr. DeFazio's bill, the U.S. taxed stock transactions from 1914 to 1966. The levy, originally set at 20 basis points, was “more than doubled” by Congress in 1932 to help “overcome the budgetary challenges during the Great Depression,” the legislation says.

To become law, the newly proposed tax would first have to be approved by the House Ways and Means Committee, which had taken no action on the proposal at press time, according to Matthew Beck, a committee spokesman.

“The issue is not currently under consideration,” Mr. Beck said.

In an e-mail response to questions, Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, Washington, said the proposal faces an uphill battle, “given its drain on the economy and its negative impact on Americans.”

Dean Baker, co-director of the Center for Economic and Policy Research, however, said he believes the prospects for the tax are good.

“It's being taken very seriously these days,” Mr. Baker said. “There's a general belief in policy circles that we need to raise a lot of money, and it's hard to think of a way to raise revenue that would hurt fewer middle-class people.”

Even some of the proposal's biggest critics said pension and financial industry executives would be well advised to stay on guard.

“There's a real danger that the House Ways and Means Committee might take it seriously as a way to pay for health-care costs or to reduce the deficit,” said the Heritage Foundation's Mr. John.