A Washington think tank, the Center for Economic and Policy Research, has released a report recommending a tax on financial speculation as a way to help solve the federal government’s long-term budget deficits.

The group argues that the tax would largely fall on hedge funds and banks, and would impose little burden on the average taxpayer.

The report, "The Deficit-Reducing Potential of a Financial Speculation Tax," compares the potential revenue from an FST—1.0 percent of gross domestic product or $150 billion in 2011— with other budget items. 

"This is not hypothetical,” said Dean Baker, a co-director at CEPR and author of the report. “The U.K. has used an FST to collect large amounts of revenue and the IMF is currently advocating the tax in recognition of the enormous amount of waste and rents in the financial sector."

The tax would almost exclusively hit the financial sector, not individual investors, because investors would respond to any increase in transactions costs by cutting back their trading, leaving the total amount they spend on trades little changed. An FST would help rein in the economic rents earned by the financial sector by taxing the turnover of credit-default swaps, options, stocks, and other financial instruments, according to the group.

Revenue from an FST could annually exceed 1.0 percent of U.S. GDP, according to the report. This would more than cover the costs of many government programs and budget items, such as the extension of unemployment insurance, the 2011 pay-roll tax cut, projected Social Security shortfall, and the projected gaps in state budgets for fiscal year 2011.

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