Another Look at the Financial Transactions Tax That Could Eliminate Need for All Others

A small financial transactions tax could correct a number of maladies in our economic system, from the federal debt crisis to the widening wealth divide to the rampant financialization of the economy, while eliminating taxes on income and sales.

The debt ceiling crisis has again brought into focus the perennial gap between what the government spends and what it accumulates in taxes, and the virtual impossibility of closing that gap by increasing taxes or negotiating cuts in the budget. 

In a 2023 book titled A Tale of Two Economies: A New Financial Operating System for the American Economy, Wall Street veteran Scott Smith shows that we would need to tax everyone at a rate of 40%, without deductions, to balance the budgets of our federal and local governments – an obvious nonstarter. The problem, he argues, is that we are taxing the wrong things – income and physical sales. In fact, we have two economies – the material economy in which goods and services are bought and sold, and the monetary economy involving the trading of financial assets (stocks, bonds, currencies, etc.) – basically “money making money” without producing new goods or services. 

Drawing on data from the Bank for International Settlements and the Federal Reserve, Smith shows that the monetary economy is hundreds of times larger than the physical economy. The budget gap could be closed by imposing a tax of a mere 0.1% on financial transactions, while eliminating not just income taxes but every other tax we pay today. For a financial transactions tax (FTT) of 0.25%, we could fund benefits we cannot afford today that would stimulate growth in the real economy, including not just infrastructure and development but free college, a universal basic income, and free healthcare for all. Smith contends we could even pay off the national debt in ten years or less with a 0.25% FTT.  

A radical change in the tax structure may seem unlikely any time soon, due to the inertia of Congress and the overweening power of the financial industry. But as economist Michael Hudson and other commentators observe, the U.S. has reached its limits to growth without some sort of debt write down. Federal interest expense as a percent of tax revenues spiked to 32.9% in the first quarter of 2023, and it will spike further as old securities at lower interest rates mature and are replaced with new ones at much higher interest. A financial reset is not only necessary but may be imminent. Promising proposals like Smith’s can lead the way to a much-needed shift from serving “capital” to serving productivity and the broader public interest. 

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