A Tax Dedicated to the “American Dream”

Nothing is more central to the American Dream than equality of opportunity. In today’s world, that usually means a college education—and, for most families, the challenge of paying for it. Congress could help meet that challenge. It could pass a financial transaction tax (FTT), and dedicate the proceeds to providing equal opportunity for college.

The midterms showed a country in a sour mood. They also showed a country hungry for a sense of purpose. In 1961, heralding a New Frontier, President Kennedy called on the nation to send a man to the moon. In 2015, pointing to The Dream, President Obama could call on the nation to send the sons and daughters of working- and middle-class families to college—and do it without leaving them deeply in debt. An FTT would provide the rocket fuel propelling America toward that goal.

Financial transaction taxes are small fees levied on sales of stocks, bonds, and other commonly-traded instruments. They serve two purposes: they raise revenue and discourage Wall Street speculation. Twenty-three countries currently levy FTTs, and 11 member states of the European Union are closing in on a version of their own. The U.S. is the world’s only major financial center without one.

The makings of a bipartisan education tax are in place. Higher education enjoys strong appeal across party lines, and both parties claim they’re in the corner of Main Street Americans. Instead of just talk, legislators from both parties can act. They can give Main Street kids the ticket to a better life.

Federal Reserve chairwoman Janet L. Yellen has emphasized the link between equal opportunity and a college education—and the strains on that link. In October, speaking at a conference on inequality at the Federal Reserve Bank in Boston, she put it plainly: “It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.”

Study after study has confirmed the payoff from a college diploma. Yellen cited a 2014 Urban Institute paper showing a 79 percent premium in median annual earnings for full-time workers with a bachelor’s degree. A working paper from the National Bureau of Economic Research found that earnings of the average college graduate in 2008 roughly doubled those of the average high-school graduate. According to a Georgetown University study in 2011, even college graduates in lesser jobs, open to non-degree candidates, “earn between 50 and 65 percent more than those with only a high-school diploma.”

The guidelines for sharing FTT revenues should focus on fairness. First in line are community colleges; they currently enroll 45 percent of America’s undergraduates, largely from the working class. Then come public colleges and universities, long a middle class haven. Today, hit with funding cuts during the recession, their tuition and fees have skyrocketed. California’s state system, for example, has approved a 27.6 percent increase over five years—raising the in-state charge to $15,560 in 2019-20, not including room and board.

Opponents of a higher-education FTT will likely argue that Congress has already done enough to give the children of working- and middle-class families an equal shot at college: there are Pell grants, tax deductions, Obama’s American Opportunity Tax Credit.  They all help, but they’re no match for the endless escalation of college costs. Millions are left behind. Millions are left mired in debt.

Yellen noted in her speech that student loan debt quadrupled from $260 billion in 2004 to $1.1 trillion in 2014. The debt burden, always relatively higher for families with lower net worth, has more than doubled: “from 1995 to 2013, outstanding education debt grew from 26 percent of yearly income for the lower half of households to 58 percent of income.”

Wall Street showered itself with gold in the run-up to the financial crisis. The Street again struck gold—this time from taxpayers—with the bailout from the crisis. It was a neat trick to profit so richly both ways, but Wall Street managed; it should easily be able to manage an FTT. Even the tiniest that’s been floated (0.117 percent on stocks and options, 0.002 percent on bonds, 0.005 percent on futures, swaps and other derivatives) could raise $50 billion a year. Higher rates, still tiny, could bring in at least $175 billion annually.

Congress has nothing to lose in the trying, and might even do itself proud.