WASHINGTON – Bernie Sanders says his plan for free college for all could be paid for with a tax on Wall Street trading, a plan that his website says will have the additional benefit of reducing "risky and unproductive high-speed trading and other forms of Wall Street speculation."
But how would such a tax work? And could it raise the sums of money needed to provide a free college education for all?
A tax on Wall Street transactions likely would affect both big traders and mom-and-pop investors, and probably would impose different levies on different types of trading.
Supporters of the tax say the burden of the tax would fall largely on frequent traders, while those who buy stocks and hold on to them regardless of market conditions likely would barely notice its effect.
Such a tax has the potential to yield billions of dollars. A recent analysis by the nonpartisan Tax Policy Center found that a 0.01 percent tax rate could generate $185 billion over 10 years.
Financial transaction taxes "are a good way to raise money and they dampen speculation," said Dean Baker, an economist and co-director of the Center for Economic and Policy Research. "They discourage speculation for the simple reason it's more expensive."
Yet many other economists discredit financial transaction taxes for exactly that reason, arguing that they ultimately reduce asset values and cause trading volumes to drop.
"You are going to earn some revenue on the tax side but you're going to lose revenue on the capital gain side," said James Angel, a finance professor at Georgetown University.
Angel thinks implementing a transaction tax would "distort the economy" and undoubtedly reduce investments. He also argues it would likely cause financial firms to pass the cost of the tax on to investors.
"The transaction tax is not going to hit the fat cat fraudsters who brought down the economy," Angel said. "They don't trade very often. … At the end of the day it's your mutual fund and my pension plan that are going to end up bearing the burden of the tax."
