California Economic Recovery: La Jolla Democrats Approve 1% Tobin Tax on Derivatives

SAN DIEGO -- October 11, 2009

As California confronts a growing economic crisis, a new idea is emerging: create a small tax or "Tobin tax" on derivative financial transactions to help finance California's fiscal stability, curb reckless speculative bubbles, and encourage investment into productive manufacturing.

The La Jolla Democratic Club (San Diego) has taken up the fight, unanimously passing a resolution in favor of imposing a modest 1% fee on derivatives, and citing the harm done by "reckless and unregulated financial speculation by commercial banks, investment banks, and hedge funds in derivatives transactions" to the state economy.

The budget crisis in California and unimpeded rise of unemployment and homelessness are signals that the California facing a growing risk of becoming "the first failed state" of the Union. The cause of the fiscal emergency is not a lack of productivity or resources; rather, it finds its roots in the devastation wrought by an greed-fueled orgy of financial speculation in unregulated derivatives, which are paper financial instruments with no instrinsic value of their own, and "derive" their value from the often complex and shifting mathematical relationships of underlying assets.

Dealing in derivatives, done mainly by investment banking and brokerage houses, largely in unregulated, over-the-counter exchanges, and purchase of derivatives carries little or no tax -- considered unfair. Commented one of the resolution authors, former Congressional candidate Mike Copass, "Working families in California pay between 8.75% and 10.25% sales tax on items such as school supplies and children's shoes -- a highly regressive tax burden on those least able to pay. Yet the multi-trillion dollar sales of derivatives including the sort of credit default swaps that felled AIG, incurs zero tax."

In recognition of California's dire economic straits, the La Jolla Democratic Club resolved in support of a "Tobin Tax" (named after the Nobel-prize winning economist James Tobin) of one percent on such derivatives to be levied and collected for the State of California or by the Federal Government on California’s behalf. Since derivative trades are largely unregulated and opaque, California's fraction of the $1.5 quadrillion derivatives outstanding globally is impossible to calculate, but one estimate puts potential Tobin Tax revenue at $20 and $100 billion in the first year.

Commented one of the contributors to the resolution, "California is desperate for economic investment to grow jobs and promote a real recovery, raising all ships. A Tobin tax can help direct capital flows into investment in productive manufacturing enterprises." The Southern Californians plan to submit their resolution on Monday October 12th to the State Democratic Party for consideration by the Executive Board.

Added Copass, "This is part of an emergency economic plan for the State of California. A real economic recovery in our state must confront unhesitatingly the reckless speculative 'casino finance' of investment banks and hedge funds, and provide strong incentives for job-creating investment in the real economy."

{Pictured: James Tobin, winner of the Nobel Memorial Prize for Economics)

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For information, contact Mike Copass, California53@gmail.com

Text of Resolution:

Promoting a California Economic Recovery through a 1% Tobin Tax on Derivatives

Whereas reckless and unregulated financial speculation by commercial banks, investment banks, and hedge funds in derivatives transactions (estimated $1.5 quadrillion world-wide) has contributed to the collapse of banks and lending institutions, to the contraction of credit and lending in California, to statewide economic downtown and loss of revenues, and siphoned investment away from job-creating productive and manufacturing enterprises, and

Whereas the State of California faces increasing and dangerous economic hardship, with an approximately $24 billion revenue shortfall for 2009, along with continually increasing unemployment, conditions due in part to the financial collapse triggered by derivatives trades, and

Whereas the State of California currently charges no transaction fee or sales tax on derivatives or speculative financial instruments, yet charges a highly regressive sales tax on working California families between 8.75% to 10.25% on necessities, including Fall school supplies and children’s shoes,

Therefore be it Resolved that the California Democratic Party supports the establishment a 1% Tobin Tax on all derivative financial transactions, including speculation in oil futures, credit derivatives, commodities, foreign exchange, and mortgage-backed securities, whether as a fee on California-based derivative trades, or as California’s population-proportional fraction of a nation-wide federal derivatives tax,

Be it further resolved that Tobin taxes or fees collected for the State of California or by the Federal Government on California’s behalf, which may total between $20 and $100 billion in the first year alone, be used for the purpose of lowering or eliminating the California State budget deficit, to lower the highly regressive sales tax, and to lower tax burdens on small businesses, all of which would have a net effect of both massive new sources of revenue as well as returning capital flows towards creation of job-producing enterprises and productive manufacturing including green technology, rather than to the reckless speculative “casino finance” of investment banks and hedge funds.

Authors and Contributors: Mike Copass, Derek C., Benjamin B, Gerry S.

Approved by the La Jolla Democratic Club, October 11, 2009