Trading Tax: Why It's Misguided

What could be more appealing to politicians hungrily searching for revenue than a trading tax on those wealthy Wall Street firms that have helped cause the tremendous economic turmoil over the past year or so?

After all, it was "Wall Street" that helped created this financial mess by using excessive leverage, crazy financial instruments and some plain old bad judgment. So why shouldn't those evil greedy folks on Wall Street be forced to pay up, especially since the market has done so well for months now as unemployment continues to mount?

That is the idea behind legislation proposed by Rep. Peter DeFazio (D., Ore.). His proposed bill HR 1068 titled "Let Wall Street Pay for Wall Street's Bailout Act of 2009" has been modified and is now called "Let Wall Street Pay for the Restoration of Main Street Act of 2009." Both bills seek to impose a tax of 0.25% on the "sale or purchase of financial instruments such as stock, options and futures."

This sort of trading tax, which is often referred to as a "Tobin tax," isn't a new idea. Economist James Tobin of Yale suggested it 38 years ago as a way to deal with fluctuations in the international currency market after Richard Nixon eliminated the governmental obligation to convert dollars into gold upon request. With the gold standard eliminated there was concern that there would be wild currency fluctuations around the world. The intent of the Tobin Tax wasn't to raise revenues for other uses but to make currency swings less severe.