Why Is Geithner Dead Set Against A Financial Transactions Tax?

AP091107010794At a meeting of the G-20 over the weekend, British Prime Minister Gordon Brown turned some heads by suggesting that the cost of any future bank failures be funded by assessing a financial transactions tax (FTT) on all trades (assuming that other nations agree to implement such a tax).

While the idea that taxpayers shouldn’t have to foot the bill when a bank fails was widely agreed upon, the FTT proposal ran into a wave of opposition, including from U.S. Treasury Secretary Tim Geithner:

U.S. Treasury Secretary Timothy Geithner on Saturday firmly opposed a proposal by UK Prime Minister Gordon Brown for a global tax on financial transactions. “That’s not something we’re prepared to support,” Geithner said, speaking after meetings of Group of 20 finance ministers and central bank governors in Scotland Saturday. He added that it is an idea that has been around a long time and has received mixed results.

While I don’t think that revenue from an FTT should contribute to the bank failure fund — because that would cause all traders, instead of just systemically-risky banks, to foot the bill — Geithner should be open to looking at an FTT as a general revenue raiser, particularly as Wall Street rebounds to record profits while Main Street stays in the doldrums.

The FTT, in theory, would be a fee of a fraction of a percent imposed on all trades. Regular investors likely wouldn’t notice it at all, but it could raise significant revenue from firms like Goldman Sachs, who are consistently churning paper back and forth.

Consider that, before the economic crash, financial service companies accounted for 41 percent of all domestic corporate profits. And just more than one year after Wall Street’s collapse, they’re back to making 31.5 percent. As Felix Salmon wrote, “financial services companies are meant to be intermediaries, middlemen.” But instead, they’re netting a huge chunk of domestic profit all for themselves, casting serious doubt on whether their activities are actually providing any social benefit.

As Dean Baker, the most outspoken advocate of the FTT, wrote, “if a financial transactions tax reduces the volume of trading, and therefore the resources used by [the financial] sector, without harming the sector’s ability to allocate capital, then it will be making the sector more efficient and freeing up resources for more productive uses”:

This could potentially be a very large benefit from an FTT. If it reduced trading volume by 25 percent (the middle scenario in Pollin et al.), leading to a corresponding reduction in resource use, it would free up more than $60 billion a year in labor and capital for productive uses.

So the tax could raise some deficit-reducing revenue, while giving us a more efficient financial system. That’s something that Geithner should be willing to spend a few moments contemplating.