How about a securities transaction tax?

The idea of placing a small tax on each security transaction is something that I've heard kicked around a bit in populist circles. Today Harvard economics professor Jeff Frankels endorses the idea, 

I propose that the Congressional leadership re-introduce the Trouble Asset Relief Program accompanied by a major new policy: a small tax on securities market transactions. This will accomplish the political goal of aiming a silver bullet into the heart of the (understandable) popular outrage that blocked passage of the TARP bill on Monday. It will simultaneously accomplish the fiscal goal of raising revenue, which the federal government sorely needed even before the bailout arose and will need even more if the taxpayer is to be protected against subsidization of the financial sector.

A tax on securities market transactions might sound like a wild populist policy that would damage the functioning of the economy. But in fact it is far more sensible than such populist measures as banning short sales which have already been tried to no effect...

I propose that the Congressional leadership re-introduce the Trouble Asset Relief Program accompanied by a major new policy: a small tax on securities market transactions. This will accomplish the political goal of aiming a silver bullet into the heart of the (understandable) popular outrage that blocked passage of the TARP bill on Monday. It will simultaneously accomplish the fiscal goal of raising revenue, which the federal government sorely needed even before the bailout arose and will need even more if the taxpayer is to be protected against subsidization of the financial sector.

A tax on securities market transactions might sound like a wild populist policy that would damage the functioning of the economy. But in fact it is far more sensible than such populist measures as banning short sales which have already been tried to no effect...

The UK has long had a securities transactions tax known as a stamp duty on the order of 0.3%.  Sweden introduced a 0.50 per cent tax on the purchase and sale of equities in 1984, and kept it until 1991.  (Froot and Campbell, studied these two examples in a 1994 book that I edited.)   India introduced a securities transactions tax in 2004 and Japan, Korea, Taiwan and Hong Kong did so earlier; in these cases there were not significant reductions in either price volatility or market turnover.  Other countries that have had financial turnover taxes of at least 0.10% include Australia, Austria, Finland, Germany, Malaysia, and Singapore.  In addition there are other countrires that have smaller trading fees.

Even the United States imposes an SEC fee of .0033%.  Thus our virginity is already lost.

An important potential drawback if the US were to impose a more substantial transactions tax alone, is that it might drive financial business offshore.   There is an answer to this point.  As noted, lot of countries already have such transactions taxes. Furthermore, lots would love to cooperate with the United States in an international program to harmonize such taxes internationally. This is precisely the sort of thing that many abroad have always asked Americans to participate in, but that we have not hitherto wanted to do.

The level and longevity of the tax could be adjusted over time to achieve the goal of Section 134 the TARP bill: that the taxpayer recoup the costs of the bailout...