One-thousandth of 1 percent might not seem like a significant amount. But when it comes to paying off the massive budget deficit in Illinois, it could mean everything.
Paul Buchheit, a professor of economic inequality at DePaul University, says the state needs to implement a financial transaction tax to solve the current economic crisis.
Illinois has a $500 million budget deficit and a $9 billion backlog in unpaid bills. He estimates his proposal would bring in $10 billion.
Generally speaking, a financial transaction tax is a fee investors pay each time they trade stocks, options or other forms of securities. Under Buchheit’s plan, the tax would target only Illinois’ largest trading firms and not the average investor.
“All I’m proposing is a tiny tax, possibly one-thousandth of 1 percent on each transaction,” Buchheit said. “It would only affect the highest-volume trades and computer-generated trades.”
According to Buchheit, large corporations such as Chicago-based CME Group are accumulating enormous profits, while simultaneously receiving generous tax breaks.
“A middle-income mother who goes to the store to buy shoes for the kids pays a 10 percent tax in Chicago,” he said. “If some high-flying financial type goes in to buy a financial instrument for the Chicago Mercantile Exchange, he’ll pay zero percent tax. It’s terribly unfair.”
The CME Group, parent of the Chicago Board of Trade and Chicago Mercantile Exchange, reported earnings of $951.4 million in 2010, up 15 percent from its 2009 net income of $825.8 million. Separately, Gov. Pat Quinn signed an $85 million tax break for CME into law this past December.
Yet the CME Group fears the implementation of a financial transaction tax in Illinois would have extensive repercussions across the Land of Lincoln.
“A transaction tax on futures and options would not only be bad for business and commerce, it would also drive trading overseas or off-exchange – away from the best-regulated markets, into those with less regulation and transparency and more risk,” said Michael Shore, associate director of corporate communications at CME Group.
Leading experts in the financial industry share similar doubts about the effectiveness of a financial transaction tax.
“Imposing a tax on financial transactions is generally a bad idea,” said Jonathan Brogaard, associate professor of finance at the University of Washington. “It hurts both liquidity and price discovery.”
“Futures trading started in Chicago because of its proximity to many of the commodities it was trading. Proximity to the underlying asset no longer matters. Firms and exchanges will simply relocate if their cost of doing business rises enough in Illinois compared to other states,” he said.
David Mirza, an economics professor at Loyola University Chicago, said history proves the tax plan lacks viability.
“It would absolutely never happen,” Mirza said. “Years ago, Mayor Daley decided to place a tax on each transaction. It took him about three days to eliminate that tax because the Board of Trade and banks in Illinois said they would move.”
Despite his critics, Buchheit plans on continuing his more than yearlong research on the topic. He has been working closely with organizations like Pay Up Now and Move the Money Chicago to help conjure up support for his proposal around city neighborhoods.
“People are hanging onto these old theories that the free market should have free rein,” Buchheit said. “The CME Group handles about three billion annual contracts worth well over $1 quadrillion. One-thousandth of 1 percent of that would pay off the total budget deficit of Illinois. It’s just an unbelievable fact that people don’t realize.”