A tiny fee that could generate billions in deficit reduction

Introducing a one-cent fee on every share of stock and every commodity contract traded and a 10-cent fee on each $1,000 bond traded would be a simple and painless way to increase government revenue and reduce our nation’s menacing deficits and debt. 

{mosads}Many traders, banks and investment trading desks would fight this tooth and nail because Wall Street has evolved into a kind of Las Vegas casino where enormous volumes are traded for profits of even a fraction of a penny per trade. The introduction of such fees would undoubtedly cut the volume of trading. But even if it dropped by as much as 50 percent, which is highly unlikely, it would still generate $24 billion annually.

 Even a fee of two or three cents a share would hardly be onerous and would double or triple the amount of revenue generated. Historically, the spread between the bid and asked prices for any security was far greater than it is today, and thus generally far more costly than the small fee I am proposing. 

For years prior to the elimination of fixed fees in the early 1970s, the stock market functioned smoothly and effectively for investors despite the fact that the fixed commissions were much higher — approximately $1 per share for a $30 stock whether you bought 100 shares or 100,000 shares — and it was charged both at the time of purchase and of sale. So, the miniscule fee I am proposing should not be burdensome.

 To those who suggest such trading fees or taxes would be unfairly discriminatory, it should be pointed out that far more burdensome taxes are paid by others, including those at the bottom of the economic ladder, on such everyday essentials as gasoline, restaurant food, shoes, clothing, text books and so on. So it’s unpersuasive, indeed unscrupulous, to say it would be terribly unfair to impose a small fee on financial transactions.

 In contrast to the high-frequency instant traders, real investors such as individuals, pension funds, mutual funds and insurance companies would be almost totally unaffected.

 And we should not be sidetracked by suggestions that such a fee would stanch liquidity. Hundreds of millions of shares trading every hour does not evidence liquidity — it merely confirms that what was once a real and respected marketplace to facilitate real investments has become instead a financial casino. The bulk of transactions are not by investors but by computers that trade automatically based on algorithmic formulas that can pick up hundreds of millions of dollars by front-running other less mathematically-sophisticated investors.

 The nation’s four largest banks made this plain when they announced that they had experienced not a single down day in the first 61 days of trading last year. Not even the most successful genuine trader in history ever achieved such results.

Many experts believe that high-speed computerized trading has spun out of control, is what caused the “flash crash” on May 6, 2010, and frightens and destroys the confidence of the really constructive and critical long-term investors who provide financing for American corporations.

This explosion of high-speed computerized trading does indeed serve to make trading less costly, but that only serves to create frenzied stock market activity that has very little to do with facilitating the raising of the productive investment funds, which is the foremost objective of a well-functioning capitalist securities market.

The most powerful players would strenuously resist the infinitesimal fee I am proposing. But, while it’s useful to do all that we can to strengthen our banks and financial system through enhanced profitability, that’s not a good reason not to introduce this fee. Helping banks play a more productive role in the recovery of the economy is an important goal. But it does not override the need to do what is best for the economy and the country as a whole.

Let’s enact this immensely beneficial fee. It could prove to be one of the most successful, least painful, revenue generators ever implemented.

Davis, a shareholder in The Hill’s parent company, is a Wall Street investment banker and author of Making America Work Again and From Hard Knocks to Hot Stocks.