- The nation's largest labor union and some allied Democrats
are pushing a new tax that would hit big investment firms such as Goldman
Sachs reaping billions of dollars in profits while the rest of the economy
sputters.
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- The AFL-CIO, one of the Democratic Party's most powerful
allies, would like to assess a small tax - about a tenth of a percent -
on every stock transaction.
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- Small and medium-sized investors would hardly notice
such a tax, but major trading firms, such as Goldman, which reported $3.44
billion in profits during the second quarter of 2009, may see this as a
significant threat to their profits.
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- "It would have two benefits, raise a lot of revenue
and discourage speculative financial activity," said Thea Lee, policy
director at the AFL-CIO.
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- "The big disadvantage of most taxes is that they
discourage some really productive activity," she said. "This
would discourage numerous financial transactions. People flip their assets
several times in an hour or a day. They make money but does it really add
to the productive base of the United States?"
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- Lee said that taxing every stock transaction a tenth
of a percent could raise between $50 billion and $100 billion per year,
which could be used to pay for infrastructure projects and other spending
priorities. She said the tax could be applied nationwide or internationally.
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- The proposal would hit especially hard those hedge funds
and large banks earning hefty profits despite the shaky economy from a
practice known as high-frequency trading. High-frequency traders use powerful
computers to conduct hundreds of thousands of orders in mere seconds, taking
advantage of slower traders.
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- Only the biggest investment firms can afford to develop
the technology, which delivers handsome profits at little risk. The growing
popularity of the practice has contributed to the soaring volume of trades
on Wall Street in recent years and, some critics argue, market volatility
and rampant speculation.
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- High-frequency trading is estimated to earn about $20
billion in profits for the nation's biggest investment firms, who guard
the their practices zealously. Goldman Sachs, for example, has accused
a former computer programmer of stealing the valuable code, launching a
high-profile legal battle.
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- The AFL-CIO and some allied Democrats would like to cut
down on the overall level of trading, or at least give the U.S. government
a piece of the action, which would likely tamp down trading.
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- Democrats and labor officials would also like to take
a bite out of Goldman's profits. Liberals are angry the company, which
immersed itself in the frenzy of speculation leading to last year's financial
collapse, is now making huge profits after accepting (and repaying) $10
billion in government aid. Goldman employees are on track to earn an average
of more than $700,000 this year.
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- There is also a growing realization among Obama administration
officials and lawmakers that tax increases may be necessary to curb the
ballooning federal deficit.
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- The idea of taxing financial transactions has gained
some support on Capitol Hill and among senior government officials in London,
a major foreign financial center.
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- In Congress, Rep. Peter DeFazio (D-Ore.), chairman of
the Highways and Transit Transportation Subcommittee, has seized on the
idea as a way to help pay for a new massive surface transportation reauthorization
bill, estimated to cost $450 billion over six years.
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- Instead of taxing all stock transactions, as the AFL-CIO
has contemplated, DeFazio wants to focus on oil-based derivatives.
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- At the end of July, shortly before the House broke for
the August recess, DeFazio introduced legislation that would impose a 0.2
percent transaction tax on crude oil futures contracts. The legislation
would tax the options for oil futures (in other words, the premium paid
to have the option to buy a futures contract) at 0.5 percent.
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- "The tax is simple; it imposes a small burden that
penalizes short-term traders for speculating on the price of oil,"
DeFazio said in a statement. "This legislation exempts legitimate
hedgers from the transaction tax. Since the tax is on speculation only,
it deters speculation and undermines much of the crude oil price bubble."
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- DeFazio estimates his proposal, which has been referred
to the House Ways and Means Committee, would raise $190 billion over six
years. It has 29 cosponsors.
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- An aide to a liberal Senate Democrat said a transaction
tax seems like a good idea but did not know who might champion the cause
in the upper chamber. An aide on the Senate Finance Committee was not aware
of discussion of the proposal.
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- Taxing financial transactions has gained some momentum
in Europe. Lord Adair Turner, chairman of the Financial Services Authority,
Britain's top banking regulator, voiced support for taxing financial transactions
in a recent magazine interview. The French government has endorsed the
idea as a way to fund development in poor countries.
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- The proposal to tax financial transactions is also known
as a "Tobin tax," after the late American economist and Nobel
laureate James Tobin. Tobin proposed a transactions tax in the early 1970s
to discourage currency speculation after the collapse of the Bretton Woods
fixed-exchange-rate system.
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- Source
- http://thehill.com/homenews/house/56789-afl-cio-dems-push-new-wall-street-tax
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- CNBC coverage, 9 September
- http://www.cnbc.com/id/15840232?video=1247533543&play=1
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- De Fazio, March 2009
- http://www.cnbc.com/id/15840232?video=1051076486&play=1
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