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Why a financial transactions tax would work, expert says

HFT transaction tax a good idea?

A smartly designed financial transactions tax could go a long way toward helping reduce income inequality and won't negatively impact the markets, according to Andy Green, managing director of economic policy at the Center for American Progress.

The issue is part of Hillary Clinton's economic plan, which will be highlighted this week at the Democratic National Convention.

The soon-to-be Democratic nominee proposes taxing canceled high-frequency trading transactions.

"Putting a modest tax or a fee on order cancellations would do a lot to change the economics of high-frequency trading, restore stability and make our markets work better for investors," Green said in an interview with CNBC's "Power Lunch " on Monday.

Green, who once worked for the Securities and Exchange Commission, believes those canceled orders are related to some of the opacity in the markets right now. However, the amount of revenue it may raise would somewhat limited, he said.

While Clinton's plan is narrowly focused, there are other proposals that are more broad-based. Sen. Bernie Sanders wants to tax all bond and stock trades. He introduced a bill last year that proposed taxing $5 for every $1,000 in stock that trades.

And earlier this month, Rep. Peter DeFazio, D-Ore., introduced a bill that would tax all stock, bond and derivative transactions.

Green thinks the U.S. markets can handle a "reasonably sized" financial transactions tax.

However, Joe Saluzzi, co-founder of Themis Trading, believes a broad-based tax will harm all investors by hitting every trade that is made.

Plus, even if some type of tax is passed, there will probably be exemptions, he said.

"Here's what we're afraid of — they'll exempt the market makers, they'll exempt certain guys and then you've diluted to the effect where only Joe average trader gets taxed, which makes no sense," Saluzzi told "Power Lunch."

He said Clinton's, proposal, on the other hand, is a different story.

Saluzzi looks at it more as a usage fee "which would hit those users of the system who use it the most who cause regulators to go out there and basically upgrade their systems … to monitor the high-frequency traders."

— CNBC's Bob Pisani and Hailey Lee contributed to this report.