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Robert Pollin, who authored the Inclusive Prosperity Act, says transaction taxes are common in many capitalist countries

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to the Real News Network. I’m Paul Jay coming to you from the PERI Institute in Amherst, Massachusetts. Bernie Sanders has promised that his election campaign, free college education for everybody in state and public colleges. And how’s he going to pay for all this? He says a transaction tax on Wall Street. Essentially, every time somebody buys and sells a stock they would pay some kind of a tax. And obviously this would affect high speed traders, and great big funds that move tons of money in and out of the stock market, far more than it would affect individual buyers and sellers who don’t do this all day long. Now joining us to talk about how real is this tax, how practical, is it doable and could it really pay for free college for everybody, is Robert Pollin. Thanks for joining us, Bob. ROBERT POLLIN: Thank you very much for having me, Paul. JAY: So Bob is the co-director of the PERI Institute. He’s the author of Greening the Global Economy, a new book, and he’s told me it’s very important. Okay, I’m teasing, Bob, because we’ve known a long time. But in fact it is very important, and if it wasn’t we wouldn’t be doing a whole series about it. So we’re going to talk about the transaction tax. So the knock on the transaction tax is that there, number one, there really isn’t that much money there, unless it’s more significant if the amount of the tax is significant. It’s going to be passed on into the public anyway, because the people who control these things will find a way that it doesn’t come out of their profits. Talk us through the whole logic of it. POLLIN: The idea of the transaction tax is very simple. It is a sales tax. It’s like, if you go down the street and buy bubble gum you’re going to pay 6 percent, or whatever it is in your particular municipality or state. This is the equivalent in that every time there is a trade enacted for stocks, for bonds, or for derivatives–so you mentioned stocks, but actually as the tax that I designed, that Senator Sanders has picked up, it includes all trades. JAY: And then–the Sanders campaign is actually, acts–is making use of the research you did. It’s actually a plan you helped develop. POLLIN: Well, it was a bill that I helped to write for Congressman Keith Ellison called the Inclusive Prosperity Act. It was introduced three or four years ago. And Senator Sanders has adopted it. He’s calling it the Robin Hood tax. He introduced it as a Senate bill. So it’s the same thing. The tax rates are exactly the same. JAY: Which are? POLLIN: So the tax rates are on stocks, one half of one percent of the value of a trade. So if we’re talking about $100 in trade we’re talking about $0.50 tax on the $100 trade. On bonds we’re talking about 1/10 of 1 percent. So on $100 trade, we’re talking about $0.10. And then on derivatives we’re talking about 5/1000 of a tax, of a percent. So that if we’re talking about a, a $100 trade on, like, a credit default swap or an option, the tax rate is going to be one half of one cent. JAY: So how do you get to these numbers? And it would seem to me it would be in the public interest to have a way higher tax on derivatives, given how much trouble derivatives trading has given us. So how do you arrive at this, and why so low on derivatives? POLLIN: The reason it’s so low on derivatives is because the, we are scaling the derivative tax to the so-called notional value of, of a derivative instrument. And I’ll explain what I mean. A derivative like an, say an option to buy a government bond next year, the government bond is worth $1,000. But you don’t actually–you’re not buying the government bond itself with a derivative. You’re buying the right to buy the government bond. And generally speaking, the research shows that the, the underlying value of the, of a $1,000 government bond is going to be about 3 percent of that bond. So that’s why we scale the tax rate on derivatives to be much lower, to reflect the fact, to make it easy to measure–because we’re saying, okay, it’s a $1,000 option. So we’re scaling the bond to the $1,000, but we’re lowering the rate because you’re not really buying a bond. You’re not buying the bond, you’re buying the right to–. JAY: Does that apply for, you know, if you’re speculating on– POLLIN: Yes. JAY: –movies, or corn, or oil, or–. POLLIN: Yeah. Yeah, you’re–you know, if you’re speculating on the movements of any kind of asset you don’t actually own the asset. You own the right to buy the asset, or to sell the asset. So that’s why it’s scaled much lower. And in fact, the critical thing when you measure these things is we want to know how much it actually costs to transact business in the first place, and that what we’re doing with the tax is adding to these so-called transaction costs already. JAY: So I’m, I guess part of the argument Wall Street would make against this is we’re already paying tax. If we’re doing this personally, we pay income tax, we pay capital gains. If it’s corporate you pay corporate tax. Why should we, why should we get taxed on top of all the–. POLLIN: Well, for one thing, I mean, we, you and I, everyone pays income tax. We pay sales tax when we go to buy things at stores, or over the internet. And in this case all financial market transactions are at present untaxed. So yes, there are other taxes, but this is a tax that would apply to trading in the same way that other kinds of trading. Other countries have the tax. JAY: Who? POLLIN: Well, to start off, Great Britain has had a financial transaction tax for a long time. China has a transaction tax. France now has a transaction tax. Italy has a transaction tax. Other countries have had them at different times. They, you know, there’s a discussion now at, at the level of the entire European union to establish a transaction tax, at least among eleven countries that are interested in it, including Germany. JAY: So the Sanders plan is not, then, is not so radical. There’s lots of capitalist countries–this is not some big socialist maneuver. POLLIN: No. I mean, the great–the tax, you asked me about the tax rates. So the one-half percent rate that I proposed for, well, Sanders has picked up, is exactly the rate that is now operative in Great Britain and has been for a long time. JAY: And how much money can, will you think this generates? POLLIN: Well, if we add up the three taxes, and we look at the level of trading in the United States today, my estimate is that it’s in the range of $300 billion a year after, we assume, that trading falls by 50 percent. Now, that’s implausibly large decline in trade. There’s going to be a 50 percent contraction in–. JAY: Why should there be any contraction? POLLIN: Because you’re imposing a tax. JAY: Yeah, but it’s pretty small. I mean, it’s not a–. POLLIN: Well, it’s not small relative–. JAY: Even on big trades, it’s still not–. POLLIN: Well, it’s not small relative to the level that they’re paying on–I mean, I think it’s appropriate level of added cost, but the key thing is to know how much they’re already paying on transactions costs. So if we look at the transactions cost and we say, okay, we’re adding 10, 15, 20 percent to transactions costs, that’s not negligible. JAY: Well, how could you be adding that much? The numbers you gave were not in the range of 20 percent. POLLIN: They are, actually. Because we’re not talking about the total–you are not–when we buy a bond for $100, or $1,000, I’m not talking about the $1,000 purchase. I’m talking about how much you have to pay a broker, how much you have to pay in fees, and that’s what we’re talking about with respect to transaction costs. JAY: I mean, one of the things in terms of reducing the amount of trades is that high-frequency traders operate within such small margins, and they make money because they use so much, such enormous trades, you might see less high-frequency trade. But a lot of people think that wouldn’t be so bad. POLLIN: No. That’s–so the idea of the transaction tax was actually initially proposed–proposed by John Maynard Keynes in the ’30s, picked up by James Tobin in the 1970s, the Nobel Prize-winning economist. And their real focus was precisely this, to reduce speculative trading, not generate revenue. And they knew it would generate revenue. When you tax, you generate revenue. But they were first of all concerned with reducing speculative trading. So how much would speculative trading fall? It will fall. Will it fall enough to prevent, you know, something like a crisis like we had in 2008? no. I don’t think it will. It’s not a, it’s not designed to achieve that, and it’s not the best way–it’ll contribute to reducing speculation, but not enough. Yes, I think high-frequency trading, because every time you do it, tax, tax, tax, tax, tax, tax, yes. It will discourage super-high-frequency trading. JAY: Which most people, including many regulators, think would be a good thing, because you get these wild swings sometimes because of high-frequency trading. POLLIN: Yeah. Yeah. No, it, it will reduce it. You still–. JAY: Now, so what’s the big knock against this? I mean, it seems pretty straightforward. POLLIN: The knock against it is–. JAY: We don’t want to pay a tax. POLLIN: Yeah, rich people don’t want to pay taxes. JAY: Oh, no, what a, what a unique thing there. POLLIN: Yeah, yeah. We would never want to do that. But on–the other thing is if we take the argument that, you know, Wall Street is making a very important, positive contributions towards channeling money to productive investments in the economy to create jobs, then the argument is, well, you’re discouraging that. And you’re distorting the work that Wall Street does by establishing this tax that, you know, otherwise it wouldn’t be thinking about this tax, and they could make decisions based on which companies deserve to get money. That would be the–. JAY: And not likely they would put it into free college education. POLLIN: No. No. That would not be, you know, where the money would be going, not very likely. Yeah. And, I mean, the more fundamental point is, look, there’s, there’s almost no evidence showing that Wall Street trading has a positive impact on productive investment activity. It’s quite the opposite. It encourages short-termism, it encourages firms to worry more about their stock price than doing things to promote productive activity. So that argument against the tax, I think, is not valid. JAY: All right, thanks very much for joining us. POLLIN: Okay, thanks. JAY: And thank you for joining us on the Real News Network.


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Robert Pollin is Professor of Economics at the University of Massachusetts in Amherst. He is the founding co-Director of the Political Economy Research Institute (PERI). His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. His latest book is Back to Full Employment. Other books include: A Measure of Fairness: the Economics of Living Wages and Minimum Wages in the United States, and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.