Many people already had low opinions of the Wall Street elite. I’m referring to the investment-banker types who get incredibly rich through financial manipulations, government bailouts and implicit government guarantees provided for too-big-to-fail banks. But a recent New York magazine piece showed that even the most jaded were being too generous in their assessment of this gang.
Kevin Roose, who was working as a New York Times reporter at the time, managed to infiltrate a black-tie party at the St. Regis Hotel sponsored by a secret Wall Street fraternity. The so-called Kappa Beta Phi (the reverse of Phi Beta Kappa, the academic honor society) was not made up of a bunch of college kids or recent grads. It featured many of the leading figures on Wall Street — multimillionaires and billionaires, all of whom were well past the age at which we expect people to start being responsible for their actions.
Roose, whose new book, “Young Money,” includes this episode, reported on childish skits by men dressed up in drag and sexist and homophobic jokes directed against former Secretary of State Hillary Clinton and former U.S. Rep. Barney Frank, D–Mass., among others. There were also tone-deaf wisecracks about the financial crisis and their bailout by the Federal Reserve Board and the Treasury Department, which apparently is quite amusing to these people.
The rest of the country has experienced these events a bit differently. On the basis of Congressional Budget Office projections, the collapse of the housing bubble will have cost the country more than $24 trillion ($80,000 per person) in lost output through 2024. The people who are unemployed, underemployed or have lost their homes probably don’t have as much to laugh about these days as the brothers of Kappa Beta Phi.
The anger prompted by Roose’s account makes this a great time to bring back the idea of taxing their speculation. While Dodd-Frank reforms will curb some of the worst abuses, the Wall Streeters are still making huge fortunes shuffling money rather than doing anything productive. A modest tax can raise a huge amount of money for productive ends, such as infrastructure and education, while making shuffling money a bit less profitable.
Last year, Iowa Sen. Tom Harkin and Oregon Rep. Peter DeFazio introduced a bill that that would place a tax of 0.03 percent (3 cents on $100) on the sale of assets such as stocks, bonds and derivatives. In other words, they are proposing a very modest sales tax. Congress’ Joint Committee on Taxation calculated that this tax would raise almost $40 billion a year. That’s almost twice the amount needed to extend unemployment benefits for a full year.
Rep. Keith Ellison of Minnesota proposed a somewhat higher rate, comparable to the one in place on stock trade in the United Kingdom, which could raise as much as $170 billion a year. In short, there is real money at stake here. All versions of these bills are held up in committees.
The idea of imposing a tax on financial transactions is hardly new or radical. The tax in the United Kingdom dates back to the 17th century, and it hasn’t prevented the country from having one of the largest stock markets in the world.
Even the International Monetary Fund has come out in favor of increasing taxes on the financial sector. It points out that the financial sector is seriously undertaxed compared with other sectors of the economy. Most of us pay a sales tax when we buy clothes or a car, but for some reason we are supposed to believe the world will come to an end if the Wall Street guys have to pay a tax when they are flipping credit default swaps.
When they give up on claiming that a Wall Street sales tax will bring on the apocalypse, the usual fallback is that it would hit small savers and pension funds. The argument is that the brokerage houses will pass on the tax so that everyone with a 401(k) will get socked with extra costs.
There are two problems with this story. First, most people with 401(k)s aren’t buying and selling stock every five minutes. (In fact, many companies now charge a fee to people who change their assets between funds frequently.) This means the cost to most people would be relatively small even if it is passed on.
However, the more important point is that people respond to higher trading costs by trading less. Most research shows that if trading costs go up by 50 percent, then people cut back their trading by roughly 50 percent. This means that people will pay more for each trade but they will be carrying out many fewer trades, leaving their total trading costs pretty much the same.
Since on average we don’t make money by trading, fewer trades are not going to hurt the return we get on our 401(k). It will, however, be bad news for the Wall Street folks who profit from the trades.
And that is why our representatives in Congress are not anxious to take up the Harkin-DeFazio or Ellison bills. Those fraternity brothers telling sexist and homophobic jokes have lots of money, and in Washington that means campaign fundraising, which means power.
For this reason, members of Congress will come up with all sorts of nonsense to avoid making Wall Street pay taxes like the rest of us. In fact, Barack Obama’s administration has been working overtime to block a tax in the European Union. The White House has been demanding an exemption for the European subsidiaries of U.S. banks that would make the tax unworkable.
A Wall Street sales tax would be a quick effective way to bring the brothers of Kappa Beta Phi down to earth. But until people starting making demands of their representatives, they will keep taking the Wall Street money, and the brothers will keep laughing at the rest of us at their black-tie and drag parties at the St. Regis.