Karen Petrou on Transaction Tax Told-You-So

When we first warned clients about the transaction tax, some of you told us not to worry so much. They could, they felt, kill it quickly. Now that Speaker Pelosi supports it and Secretary Geithner’s back is against the wall, that sanguine view was clearly wildly over-confident. This isn’t to say the tax is for sure – far from it. It’s only to reiterate that no one loves bankers these days and, thus, taxing them is very, very tempting.

To be sure, Speaker Pelosi hedged her bet. She made clear that she now generally supports the tax – often called a “Tobin tax” after the Nobel Prize-winning academic who first thought of it. At the same time, though, she emphasized the need to ensure it’s imposed in an international fashion to mitigate its adverse U.S. competitiveness impact. The U.K.’s Prime Minister, Gordon Brown, also supports the tax, but that still leaves eighteen G-20 nations to go.

This international hurdle is large, but we don’t think it will slow the idea down much in Congress. Its advocates aren’t as troubled as Speaker Pelosi with international competitiveness – they just want billions in new revenue and they want it now. Legislation introduced earlier this week by a group of liberal House Democrats would, they say, raise $150 billion a year – a lot of money to use for their goals of job creation and deficit reduction. Both of these issues are, of course, top priorities as Democrats face a tough mid-term election. If they need to pick between popular domestic issues and what some will call theoretical long-term concerns about financial-sector competitiveness, count on it – they’ll pick themselves over bankers every day of the week.

Still, as we said, the Tobin tax is far from a done deal. Despite Speaker Pelosi’s growing support and all the political pressures boosting the proposal, it isn’t a slam-dunk. For one thing, the cosponsors to date are a small group of vigorous liberals. Until they are joined by leadership like Ways & Means Chair Rangel – whose home town of New York isn’t exactly rooting for a Tobin tax – the bill will be hard to move through regular order in the House. Senate Finance Chair Max Baucus isn’t likely to support the idea either, despite the big push from HELP Chairman Harkin who will drop a bill with the Senate version of the tax next week.