Monday, March 1, 2010

California Emergency Economic Stabilization via One Percent "Sales Tax on Wall Street"

Today, banker Jamie Dimon, CEO of JPMorgan Chase, warned investors that "California is at greater risk than Greece" for default.

Dimon, (pictured at right) who holds a seat on the Board of the New York Federal Reserve bank, may in fact be in a position to make a very educated assessment -- made with the precision that comes from a lifetime of taking huge bets and hedging against default risks, a strategy which has created record profits for JPMorgan Chase recently, despite the hardship experienced by nearly everyone else, save Goldman Sachs, a fellow practitioner of the "dark side" of the financial arts.

California faces a massive budget deficit of $20 billion -- and growing -- which may precipitate a debt crisis not dissimilar to that of Greece. Despite the already-bloody axe that California Governor Arnold Schwarzenegger has taken to the state budget, including cuts in subsidies for medications necessary to life for those living with HIV/AIDS and diabetes, Schwarzenegger now demands that the legislature must come up approximately $9 billion more in state budget cuts over the next 16 months. Failure is not an option; default on California bond payments would trigger a tsunami of credit rating downgrades on the state's bonds, and foreclose on the California's ability to borrow in the future -- not unlike the effect on personal credit of mortgage default or missed credit card payments.

But where are the solutions? To deal with the debt crisis, California faces brutal choices, either proceed with massive cuts including laying off hundreds of educators, peace officers, and state fire crews, or revert to issuing IOUs, a stop-gap measure at best, according to Treasurer John Chiang. The austerity measures envisioned for California are tantamount to "death by Banker" -- and default would make the Golden State the nation's first failed state.

Should the state increase taxes? California residents already pay between 8.25% and 10.25% sales tax, even on necessities like a child's shoes, and the current state income tax already has the "Tea Party" movement issuing calls to arms.

But what about the fees on transfers of securities, such as bonds, credit default swaps, and mortgage-backed assets, and the alphabet soup of Wall Street's securitized instruments (CDO, MBS, ABS, etc)?

It may come as a surprise, but the state of California imposes no fee on the sales of these arcane and largely speculative financial instruments, many of which first came to our attention during the collapse of Bear Stearns, nor on any securities transfer. Period. This, despite the fact that California's own Orange County was forced into bankruptcy, having lost billions gambling in the derivatives game, with the connivance of Wall Street's Merrill Lynch & Co.

Furthermore many of the most complex structured finance products are traded "over the counter" designer derivatives bets which ought to be cleared on regulated exchanges. Proprietary and speed-trading systems churn further billions daily at banks and hedge funds from San Francisco to San Diego. All in all, not a dime's sales tax is levied on California's fraction of the estimated at $1,500 trillion of annual securities transfers world-wide. (In case it didn't register, that's $1.5 quadrillion dollars, a sum that dwarfs the GDP of the planet many times over.)

Therefore, as one pillar of an urgent "Emergency Economic Stabilization Program" for California, we issue a call for a small fee to be imposed on the sales of securities -- not the 8.25% rate paid by a working parent for a child's shoes, but a far more modest one percent sales tax, payable by the seller of the security or paper instrument. Moreover, this "Tobin Tax" (named after the Nobel-prize winning economist James Tobin who first proposed it) would only be levied on securities trades of over $1,000,000 in value per year, exempting the vast majority of California households making sales or trades in their personal investment portfolio.

This securities transfer tax (SST) would truly be a "Millionaires' tax" -- and may be critical to generating the kind of annual revenue streams California so desperately needs to stay afloat and thrive. Moreover, in addition to staving off collapse, a securities transfer tax could provide the foundation for California's eventual recovery and growth, allowing the state to invest in large scale infrastructure projects, such as the maglev & high-speed rail project, massive renewable energy arrays, and improvements to shipping ports, all of which would support California's organic economic growth.

How much annual revenue could this modest "Sales Tax on Wall Street" generate? By requiring all securities transfers to be reportable, including the opaque and obscure derivatives market, and subject to a small sales charge, a conservative estimate suggests that California could raise $15 to $50 billion per year in revenue through such a plan. (Precise estimates are difficult to calculate, since the trades of many structured financial products are not reported.)

We fully expect howls of protest from bankers and hedge fund managers like JPMorgan Chase CEO Jamie Dimon, Goldman Sachs and the titans of private equity. They have become accustomed to profiting through massive daily trading operations, even during the recession, and earning large bonuses as a result of the trillions in securities traded. Let us welcome the howls of Wall Street rage. It would be a small price to pay for what could be gained. Unlike many services that the state of California provides, speculative financial trades are not essential to human life.

In the year 2010, California faces no easy choices. It is time for California to seriously consider a 1% tax proposal on securities transfers, for the sake of its survival, and for the people, the children and grand-children of the Golden State.

The author is a former Candidate for United States Congress, currently working with the San Diego homeless, working poor and the new victims of the economic collapse.

Mike Copass

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