In the Arena

How to Close the Deficit (A Little)

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My colleague Fareed Zakaria has a really smart column today about Germany’s role in the Greek debt crisis–and guess what? He’s not bashing the Germans for fiscal austerity. He’s praising them for the compassion they’ve shown, at a stiff cost to German taxpayers, to keep the Greeks afloat. For me, though, the most interesting thing about the situation is how the Germans have decided to maintain fiscal austerity and pay for their compassion:

This month, Parliament will easily ratify…a new financial-transaction tax to pay for part of this.

A financial transaction tax is a neat little thing levied on every stock, bond and fancy derivative trade. I’ve long argued that we might use such a tax here to accomplish several things:

1. Make Wall Street help close the enormous deficit caused by the 2008 stock market and housing crash. After all, it was the casino gambling on exotic derivatives by cowboy financiers that precipitated the crash.

2. Discourage the sort of stock churning and arbitrage that do nothing for our economy, but allow traders to make fortunes on tiny market shifts.

3. Take some of the profit out of the financial sector–which has been far too profitable for too little effect the past 30 or so years–and perhaps encourage some of our young geniuses to pursue careers that involve productive labor rather than casino gambling. After all, if Steve Rattner, who brilliantly led Barack Obama’s auto bailout team, had spent his career running General Motors rather than make private equity deals, GM might not have needed a bailout in the first place.

Now, we should be under no illusion that a financial transaction tax will close the federal deficit by itself. And we may want to target that tax a bit, making exotic derivative transactions cost more, or letting my maiden aunt off the hook entirely when she wants to buy 100 shares of facebook. But you should tax the things you want to discourage–and financial chicanery is definitely something we should want to discourage.

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