In the midst of the current haggling over the US federal budget, the main fact is being ignored: the fiscal shortfall of the US government over decades is largely due to Wall Street’s rigging of the tax code so that the main money center banks pay little or nothing in the way of taxes.
Like the haughty nobility in France before the Revolution of 1789, the Wall Street banks are practically exempt from taxation, and the burden of paying for the government is shifted to the middle class. Anybody who is serious about reducing the power of Wall Street bankers in US politics must now mobilize to educate public opinion about the situation and its main remedy - the 1% Wall Street Sales Tax.
Wall Street banks are corporations, and US corporations are supposed to pay a federal corporate income tax of 35% on their profits.
Over recent decades, government revenue from the federal corporate income tax has been in sharp decline, as more and more companies learn the secrets of tax loopholes, offshore tax shelters, and other accounting tricks. Some of the most adept in dodging tax payments are the leading Wall Street institutions.
Some statistics on Wall Street’s amazing ability to evade taxation come from Senator Bernie Sanders of Vermont and from Citizens for Tax Justice, a think tank supported by organized labor.
It turns out that Goldman Sachs, the classic zombie bank, paid just 1.1% tax on its total profits in 2008. This scandalous situation did not prevent Lloyd Blankfein, Goldman’s boss, from appearing on CBS television to demand draconian cuts in the meager entitlement payments received by the poor, the sick, and the old.
Goldman paid 1%, Bank of America, Citigroup, Wells Fargo paid nothing.
Citigroup made out even better, paying 0% taxes on $4 billion in profits. In 2011, Bank of America also managed to pay 0% on 4.4 billion of its profits. Another leading bank which managed to avoid the federal corporate income tax altogether is Wells Fargo, which succeeded in paying nothing to the US Treasury in 2008, 2009, and 2010 (See Pat Garofalo, “30 Major Corporations Paid No Income Taxes in the Last Three Years, While Making $160 billion,” Think Progress, November 3, 2011).
Another spectacular example of Wall Street’s tax dodges is General Electric, which long ago ceased being an industrial corporation and became a hedge fund in drag, built around its financial arm, GE Capital.
GE racked up worldwide profits of $14.2 billion in 2010, but managed to avoid the federal corporate income tax completely. Instead, GE accountants were able to secure a $3.2 billion refund from the US Treasury. This happened even though GE was laying off 21,000 US workers and closing 20 US factories over the years 2007-2009.
And these results were typical of GE’s performance over the most recent decade: GE paid a 2.3% tax rate on profits during 2002-2011, and succeeded in paying zero federal corporate income tax in 2002, 2008, 2009, and 2010 (See Citizens for Tax Justice and Jake Tapper, “General Electric Paid No Federal Taxes in 2010,” ABC News, March 25, 2011).
The scandal is made even greater because GE boss Jeffrey Immelt was serving as Obama’s business liaison in his capacity as Chairman of the White House Council on Jobs and Competitiveness. Rapacious predators like Immelt apparently believe that good corporate citizenship starts with evading all taxes.
Wall Street pays no tax on its transactions
But these scandals, though outrageous, barely beginning to scratch the surface of the insane world of US tax law. US states collect sales taxes usually ranging from 6% to 12% on transactions involving merchandise, sometimes including even groceries. But when the Wall Street banks, hedge funds, and brokerage houses sell their stocks, bonds, derivatives, debt instruments, etc., they pay no sales tax whatsoever.
This outdated approach goes back to when the stock and bond markets were considered capital markets. But today, in the era of high frequency trading and flash trading in which one computer can carry out a million trades per second using algorithms, we are obviously dealing with a high-tech gambling casino that poses grave dangers to the public.
In short, the greatest single flow of untaxed money is the stocks, bonds, and derivatives which cross the exchanges in New York and Chicago, as well as the over-the-counter derivatives which are contracted behind the scenes. If sacrifices are required, this is obviously the place to start.
The obvious way to stabilize the US federal budget is to levy a sales tax on these financial market transactions. A sales tax will be paid immediately on every trade, without regard for the yearly profits and losses reported by smart accountants, making it much harder to cheat.
The US federal government collected a financial transaction tax of between 0.04% (0.0004) and 0.1% (0.001) between 1914 and 1966. Even today, the US government still collects the Section 31 fee, a microscopic tax of 0.0034% on stock transactions, which in 1998 produced $1.8 billion and financed the operations of the Securities and Exchange Commission.
The State of New York currently has a small financial transaction tax on the books, but since the late 1970s the proceeds (estimated at about $25 billion per year) have been remitted to the bankers in response to their blackmail threats to move their operations out of state. In any case, there is no serious constitutional challenge to the legality of a Wall Street sales tax.
The AFL-CIO, European Trade Union Confederation, the International Metal Workers Federation (including the UAW), National Nurses United, and other labor organizations all support some version of the Wall Street Sales Tax, but usually at a very low rate, and without a clear demand that the proceeds be used to maintain and expand the in-country social safety net. There is a proposal for a Global Tobin Tax, and for a Robin Hood Tax - not a clever name. The G-20 has discussed a financial transaction tax, and the European Union is slowly implementing a tiny financial transaction tax.
The average American, who pays sales tax every day, often demands that Wall Street pay exactly the same sales tax (6% to 12%) on its transactions as the general public pays on purchases. This is an important political fact, which ought to encourage lawmakers to substantially increase the narrow scope and miniscule transaction tax rates contained in their proposals, especially in view of the inevitable resistance by reactionary princes of privilege.
The goal should be a 1% across-the-board Wall Street Sales Tax, paid by the seller, on stocks, bonds, and the notional value of derivatives. It also makes sense for the federal government to share half of the proceeds with the states, in order to support the key role of state and local governments in preserving the essentials of modern civilization.
While flash trading and high frequency trading have driven stock transactions up to unprecedented levels, the real mother lode of transactions is to be found in the area of derivatives. Futures, options, and indices and their various combinations are traded on public exchanges and can be easily tracked.
Over-the-counter derivatives, which take the form of private contracts between counterparties, are still a matter of guesswork because of the failure of the Dodd-Frank law to force the reporting of these trades.
The best remedy might be to specify in legislation that any over-the-counter derivatives contracts which have not paid the 1% Wall Street Sales Tax cannot be enforced in court, meaning that the losing counterparty would always be able to renege if the tax has not been paid.
World derivatives must currently be in excess of two quadrillion dollars in notional value. As these derivatives are bought and sold, some estimates put the resulting turnover in the range of six to seven quadrillion dollars. This suggests that revenues on the order of tens of trillions of dollars would be available from a 1% Wall Street Sales Tax.
At the same time, it should be clear that the presence of such a tax would cause many derivatives transactions and many high frequency trading operations to cease. Even so, we can be confident that a 1% levy can provide several trillion dollars in new tax revenue.
By contrast, competing proposals for a wealth tax may face prolonged constitutional challenges. They will require police state methods to carry out a census of taxable assets. In return for this effort, a 1% wealth tax cannot hope to exceed several hundred billion dollars of yearly revenue -- not the many trillions which the Wall Street sales tax can deliver.
A wealth tax does nothing to discourage speculation nor foster real production. Finally, a wealth tax provides an easy way for reactionary forces to pose as the defenders of the middle class, as seen through the eagerness of Bill O’Reilly of Fox News to invite wealth tax advocates on his show. The justifiable concern about the exorbitant size of certain family fortunes can be met by better enforcement of the Estate Tax.
In order to avoid an excessive burden on families and individuals who are buying and selling stocks to finance college education, retirement, or medical emergencies, it will be wise to establish a $1 million per person exclusion; only if securities trading goes over this threshold will the Wall Street Sales Tax be paid.
A society which taxes the sales of industrial manufacturing and agricultural products, but which establishes a tax exemption for speculation, derivatives, and financial services has tilted the playing field in favor of a parasitical casino economy of the type which has historically led to widespread immiseration and recurring financial panics.
The Wall Street Sales Tax will tend to reduce the social evil of speculation, while ending the tax subsidy to financial gambling at the expense of tangible, physical production. It will enhance the possibilities for rational investment choices. In the current season of debate about tax policy, the 1% Wall Street Sales Tax is the idea whose time has come.
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