Money Morning Mailbag: Tobin Tax a Healthy Solution to Wall Street Greed

Last week Money Morning Contributing Editor Martin Hutchinson presented an open letter to U.S. President Barack Obama and members of Congress regarding passage of a Tobin tax.

The simple solution of a Tobin tax handles three of the U.S. government's biggest challenges: It resolves the controversy over expiring Bush tax cuts, helps reduce the federal budget deficit, and offers more regulation over controversial Wall Street profits. 

Hutchinson said a Tobin tax – a tax on financial transactions – is the one tax increase that would not damage the already fragile U.S. economy.

"[It] is one tax increase that would generate substantial revenue, help knock down the deficit, and even produce major improvements in the operation of the capital markets in both the United States and abroad," wrote Hutchinson. "It wouldn't increase taxes to U.S. households or most U.S. businesses, meaning it also wouldn't harm the U.S. recovery."

The key to making sure the Tobin tax does not harm economic recovery is keeping it low, around 0.01% - 0.02%. This would have little effect on the average consumer and taxpayer, but hit Wall Street's profits hard – and bolster the financial state of the country in the process.

Reader support for Hutchinson's proposal was overwhelming, with readers writing in from all over the country to say they forwarded the letter to their elected representatives in Congress.

While most readers supported the idea, some were skeptical about another government tax and whether or not lawmakers would keep the low rate if given the power to enforce a Tobin tax.

The following concerns and comments were sent in to the Money Morning Mailbag, questioning the true effect of a Tobin tax and if there could be a better alternative.

I read with great interest the proposal to institute a Tobin Tax to help relieve the out-of-control U.S. deficit. This tax has been used in other countries to increase tax receipts but not control government spending.

I am a U.S. expatriate living in socialist Brazil where the country's internal deficit and debt seems to grow uncontrolled. Brazil imposes a Tobin Tax called "Imposto sobre Operacoes Financeiras," Tax over Financial Operations or IOF as it is called here, on all money transactions. The very low rate of 0.01% - 0.02% may not initially cause any pain to the taxpayer. But it would give the politician another avenue/source of funds to tap into. Pretty soon, that rate could rise to 1.0% - 2.0% or higher - and sky's the limit. Hence, a definite no-no.

Similarly, a Value Added tax is another no-no. Socialist governments love "hidden" taxes where the citizen does not see it paid in front of him. It is imbedded in the product or service.

We must first hold the government to fiscal restraint. We must first see deep cuts implemented in government programs across the board, eliminate programs that have accumulated over decades, many that serve no purpose except to propagate bloated government bureaucracy. And this belt tightening must be demonstrated for at least three to five years.

– Avi B.; Brazil

The temptation to raise the Tobin tax rate in the future may be as addictive as the urge to borrow and spend now is by both political parties. Perhaps we could blend it with the Fair tax (HR25) and get this country back to work. But, I doubt that we could elect enough 'saints' to Congress to get a quorum in either house.

Limiting military spending and other bulging budgets then fixing the infrastructure, going green and drafting reasonable laws may be way too sensible for the kids in D.C.

– Chas D.

In response, Money Morning's Hutchinson said the following:

"I think the Tobin tax as I stated just hits Wall Street and so would be popular as well as productive. I don't see too much risk of lawmakers raising it too high because it would do far more damage to the economy than it would raise in revenue. The Law of Diminishing Marginal Returns is very applicable to a transactions tax, because people would find ways of evading it if it was too high, and economic activity would fall.

"A Fair tax is also a good idea, but a separate question -- it pushes tax onto consumption, but is rather regressive. The Fair tax and the Tobin tax are not really connected – or at least don't have to be, either way."

For those who do support the Tobin tax, and want to see change brought to Wall Street, please
click here
and scroll down for a form letter to forward to your elected representative.

(**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Web site. Please include your name and hometown with your email.

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