Let Wall Street Pay for the Restoration of Main Street Bill
Encyclopedia
The proposed bill "Let Wall Street Pay for the Restoration of Main Street Bill" is officially contained in the United States House of Representatives
bill entitled "H.R. 4191: Let Wall Street Pay for the Restoration of Main Street Act of 2009". It is a proposed piece of legislation that was introduced into the United States House of Representatives
on December 3, 2009 to assess a tax on US financial market
("Wall Street
") securities transactions. Its official purpose is "to fund job creation and deficit reduction." Projected annual revenue is $150 billion per year, half of which would go towards deficit reduction and half of which would go towards job promotion activities.
In 2009, U.S. Representative
Peter Anthony DeFazio proposed this financial transaction tax
for within the United States
only (not internationally). He first raised the idea earlier in 2009, and then officially introduced it as a bill on December 3, 2009.
The day he introduced the bill, DeFazio said, "The American taxpayers bailed out Wall Street during a crisis brought on by reckless speculation in the financial markets. ....This legislation will force Wall Street to do their part and put people displaced by that crisis back to work." The "bailout" he referred to was the US Emergency Economic Stabilization Act of 2008
, and the "crisis" he referred to was the financial crisis of 2007–2010.
The day it was introduced, the bill had the support of 25 of DeFazio's House colleagues. It has not yet passed.
To ensure the tax is appropriately targeted to speculators and has no impact on the average investor and pension funds, the tax will be refunded for:
article by Richard T. Page, who has suggested that imposing a financial-transactions tax in response to the 2007-2010 economic downturn would be "foolish revenge". Page has instead lent lukewarm support to President Barack Obama's Financial Crisis Responsibility Fee
.
Some empirical researchers have expressed concern that financial transaction taxes would in practice become entirely pass-through, ultimately increasing transactions costs for long-term investors, rather than merely creating distortions and reducing market efficiency
. For instance, Princeton University
Professor of Economics Burton G. Malkiel, author of classic finance book A Random Walk Down Wall Street
and several publications on mutual fund performance, predicted that:
Professor Malkiel argued that taxing speculators would reduce market efficiency, harming the economy:
, Irene Aldridge, argued that a financial transaction tax proposed in the US would lead to job losses in non-financial sectors of the economy through the so called multiplier effect forwarding in a magnified form any taxes imposed on Wall Street employees through their reduced demand to their suppliers and supporting industries:
According to Irene Aldridge, there is also concern about the reduced return on investment for individuals, the higher spreads and volatility in the market, and possible increased banking fees, which will need to be increased in order for banks to cover the higher risk associated with holding stocks, all of which will have detrimental effects on the "main street".
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
bill entitled "H.R. 4191: Let Wall Street Pay for the Restoration of Main Street Act of 2009". It is a proposed piece of legislation that was introduced into the United States House of Representatives
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
on December 3, 2009 to assess a tax on US financial market
Financial market
In economics, a financial market is a mechanism that allows people and entities to buy and sell financial securities , commodities , and other fungible items of value at low transaction costs and at prices that reflect supply and demand.Both general markets and...
("Wall Street
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...
") securities transactions. Its official purpose is "to fund job creation and deficit reduction." Projected annual revenue is $150 billion per year, half of which would go towards deficit reduction and half of which would go towards job promotion activities.
In 2009, U.S. Representative
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
Peter Anthony DeFazio proposed this financial transaction tax
Financial transaction tax
A financial transaction tax is a tax placed on a specific type of financial transaction for a specific purpose.This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. However, it is not a taxing of the financial institutions themselves...
for within the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
only (not internationally). He first raised the idea earlier in 2009, and then officially introduced it as a bill on December 3, 2009.
The day he introduced the bill, DeFazio said, "The American taxpayers bailed out Wall Street during a crisis brought on by reckless speculation in the financial markets. ....This legislation will force Wall Street to do their part and put people displaced by that crisis back to work." The "bailout" he referred to was the US Emergency Economic Stabilization Act of 2008
Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 (Division A of , commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis...
, and the "crisis" he referred to was the financial crisis of 2007–2010.
The day it was introduced, the bill had the support of 25 of DeFazio's House colleagues. It has not yet passed.
Elements
These are the elements of his proposal:- StockStockThe capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
transactions would be assessed a tax of one-quarter-of-one percent (0.25 percent)
- The tax on futures contractsFutures contractIn finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
to buy or sell a specified commodity of standardized quality at a certain date in the future, at a market determined price would be 0.02 percent
- Swaps between two firms on certain benefits of one party's financial instrument for those of the other party's financial instrument would pay a 0.02 percent tax
- Credit default swaps where a contract is swapped through a series of payments in exchange for a payoff if a credit instrument (typically a bond or loan) goes into default would also pay a 0.02 percent levy
To ensure the tax is appropriately targeted to speculators and has no impact on the average investor and pension funds, the tax will be refunded for:
- tax-favored retirement accounts
- 401(k)s
- mutual funds
- education savings accounts
- health savings accounts
- the first $100,000 of transactions annually that are not already exempted
Evaluation
Criticism of this bill has included (1) a December 2009 Wall Street Journal op-ed by Burton G. Malkiel and George U. Sauter; (2) a December 2009 online op-ed by Irene Aldridge; and (3) a December 2010 Tulane Law ReviewTulane Law Review
The Tulane Law Review, a publication of the Tulane University Law School, was founded in 1916, and is currently published six times annually. The Law Review has an international circulation and is one of few American law reviews carried by law libraries in the United Kingdom.-History:The Law Review...
article by Richard T. Page, who has suggested that imposing a financial-transactions tax in response to the 2007-2010 economic downturn would be "foolish revenge". Page has instead lent lukewarm support to President Barack Obama's Financial Crisis Responsibility Fee
Financial Crisis Responsibility Fee
The Financial Crisis Responsibility Fee is a proposed tax by U.S. President Barack Obama which would act upon certain financial firms, being imposed until that financial firm had paid off all money provided to it under the Troubled Assets Relief Program. It was proposed in January 2010. The tax...
.
Criticism from Malkiel and Sauter
On December 8, 2009, criticism came from Burton G. Malkiel and George U. Sauter:Some empirical researchers have expressed concern that financial transaction taxes would in practice become entirely pass-through, ultimately increasing transactions costs for long-term investors, rather than merely creating distortions and reducing market efficiency
Financial market efficiency
In the 1970s Eugene Fama defined an efficient financial market as "one in which prices always fully reflect available information”.The most common type of efficiency referred to in financial markets is the allocative efficiency, or the efficiency of allocating resources.This includes producing the...
. For instance, Princeton University
Princeton University
Princeton University is a private research university located in Princeton, New Jersey, United States. The school is one of the eight universities of the Ivy League, and is one of the nine Colonial Colleges founded before the American Revolution....
Professor of Economics Burton G. Malkiel, author of classic finance book A Random Walk Down Wall Street
A Random Walk Down Wall Street
A Random Walk Down Wall Street, written by Burton Malkiel, a Princeton economist, is an influential book on the subject of stock markets which introduced the random walk hypothesis. Malkiel argues that asset prices typically exhibit signs of random walk and that one cannot consistently outperform...
and several publications on mutual fund performance, predicted that:
"Wall Street" would not foot the bill for the presumed $150 billion [transactions] tax. In fact, the tax would simply be added to the cost of doing business, burdening all investors, including 401(k) plans, IRAs and mutual funds."
Professor Malkiel argued that taxing speculators would reduce market efficiency, harming the economy:
"Transactions taxes would make most current high-frequency tradesAlgorithmic tradingIn electronic financial markets, algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading, is the use of electronic platforms for entering trading orders with an algorithm deciding on aspects of the order such as the timing, price, or quantity of the...
unprofitable since they depend on the thinnest of profit margins. Trading volume would collapse, and there would be a dramatic shortfall in the tax dollars actually collected by the government. Market liquidityMarket liquidityIn business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...
would decline, bid-offer spreadsBid-offer spreadThe bid–offer spread for securities is the difference between the prices quoted for an immediate sale and an immediate purchase...
would widen, and all investors would pay significantly higher costs on their trades.
Criticism from Irene Aldridge
On December 21, 2009, a financial industry representative, a managing partner at a New-York-based hedge fund and an author of a book on high-frequency tradingAlgorithmic trading
In electronic financial markets, algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading, is the use of electronic platforms for entering trading orders with an algorithm deciding on aspects of the order such as the timing, price, or quantity of the...
, Irene Aldridge, argued that a financial transaction tax proposed in the US would lead to job losses in non-financial sectors of the economy through the so called multiplier effect forwarding in a magnified form any taxes imposed on Wall Street employees through their reduced demand to their suppliers and supporting industries:
"100 financial security jobs are estimated to support 27 to 37 jobs in the retail sector, 72 to 91 jobs in the business services sector (think staples and copy machines), 79 to 112 jobs in the services sector (like dentists, nurses and gas station operators), and 5 to 12 restaurant and pub workers. Even the smallest FTT that reduces transaction volume by as little as 10% will, according to Schwabish, result in the loss of over 30,000 jobs just in NYC."
According to Irene Aldridge, there is also concern about the reduced return on investment for individuals, the higher spreads and volatility in the market, and possible increased banking fees, which will need to be increased in order for banks to cover the higher risk associated with holding stocks, all of which will have detrimental effects on the "main street".
Another bill introduced by DeFazio
Another bill, which remains a proposal, was tabled by DeFazio on February 13, 2010. It is called "H.R.1068 - Let Wall Street Pay for Wall Street’s Bailout Act of 2009."See also
- Financial transaction taxFinancial transaction taxA financial transaction tax is a tax placed on a specific type of financial transaction for a specific purpose.This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. However, it is not a taxing of the financial institutions themselves...
- Financial crisis of 2007–2010
- Financial Crisis Responsibility FeeFinancial Crisis Responsibility FeeThe Financial Crisis Responsibility Fee is a proposed tax by U.S. President Barack Obama which would act upon certain financial firms, being imposed until that financial firm had paid off all money provided to it under the Troubled Assets Relief Program. It was proposed in January 2010. The tax...
- Peter DeFazioPeter DeFazioPeter Anthony DeFazio is the U.S. Representative for , serving since 1987. He is a member of the Democratic Party. The district includes Eugene, Springfield, Roseburg and part of Corvallis. As Oregon's most senior member of Congress, he is the dean of Oregon's House of Representatives delegation...
- Tobin taxTobin taxA Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another...