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With Transaction Tax Becoming A Distinct Possibility, Does It Bring Benefits To The Table?
Even with a thoroughly discredited Tim Geithner repeatedly saying that a transaction tax is the worst thing since, well TurboTax, the topic is generating more and more traction, and earlier House Democrat leader Steny Hoyer noted that the topic is now a discussion item "on the table". With fervent voices on both side of the table, we would like to present the following paper by Dean Baker highlighting the benefits of a financial transaction tax.
Among the key points:
Taxation generally leads to economic distortions, with the possible exception of cases where the activity being taxed is itself harmful, such as smoking or drinking alcohol. While there are undoubtedly distortions associated with financial transactions taxes (it will have some impact on the cost of capital), much of the economic activity that will be lost as a result of the tax has the character of gambling. It will have very little effect on the effectiveness of capital markets.
In this sense, a financial transactions tax can actually increase the efficiency of financial markets. If the sector can just as effectively fill its function as an intermediary while employing fewer workers and requiring less capital, then the tax will have increased the efficiency of the financial sector. In this respect, it is worth noting the explosive growth of the financial sector over the last three decades. In the years from 1977 to 2007, the share of private sector wages in the narrowly defined securities and investment sector grew from less than 0.6 percent to more than 2.3 percent.
There is a real economic benefit to this growth insofar as it improved the allocation of capital, allowing firms to better gain access to capital markets or for individuals to better adjust their saving and spending patterns over their lifetimes. However, if this growth in resource use was only associated with additional trading and did not actually lead to better allocations of capital, then the resources were wasted. If a financial transactions tax reduces the volume of trading, and therefore the resources used by this sector, without harming the sector’s ability to allocate capital, then it will be making the sector more efficient and freeing up resources for more productive uses.
This could potentially be a very large benefit from an FTT. If it reduced trading volume by 25 percent (the middle scenario in Pollin et al.), leading to a corresponding reduction in resource use, it would free up more than $60 billion a year in labor and capital for productive uses. Whether or not reduced trading leads to serious harm to financial markets would depend on its impact on liquidity and market volatility. Obviously the tax will reduce liquidity by reducing the volume of trading, but it is not clear that the impact will have much consequence. For example, if trading of the most liquid assets, like government bonds, were cut by 50 percent, or even 75 percent, these assets would still have enormous markets. Such reductions in trading may reduce the volume to levels of 20-25 years ago, but these markets were already highly liquid in the 80s.
With empty federal tax coffers screaming, and the only industry reaping massive benefits courtesy of the government's largess, we believe a FTT will get more and more proponents as democrats and republicans alike realize that the tax revenue to fill the budget deficit is just not there, and relying on China to fund endless future deficits is simply too big of a risk.
The one clear benefit, from our perspective, that would accompany a Tobin tax, in whatever version it is ultimately implemented, would be elimination of such clearly market adverse phenomena as predatory algos and other HFT aberrations that have made trading even in the most liquid of stocks expensive, as we will shortly demonstrate, despite HFT proponents claiming the opposite.
Full Dean Baker paper below.
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I would support this tax wholeheartedly if its application was strictly to paying down principal on the national debt, and disappearing at such time and as for as long as the debt has been fully retired. And I'd be fine with trades less than $100,000, too, if that were the only permissible use for taxes collected under this method.
However, since I live in the real world, I oppose it, since it's just another way to give DC more cash to buy votes with.
The $100k number you're talking about isn't per trade. It's the first $100k in trades on an ANNUALIZED BASIS. Read the news. The tax would be devestating.
was strictly to paying down principal on the national debt,
TILT. We can't have that
A transaction tax would put most traders out of work. wtf are you talking about. 1/4% tax on 1000 shares of Walmart = $271.50 in taxes alone on a roundtrip. Painless tax? wtf?
Fock the Daytraders, WOPR, and HAL 9000.
How about we just get GoldSach to pay an effective income tax rate that is greater than 1% ??? Is that asking too much ???
Go to http://www.tinyurl.com/TransactionTax to get educated on what's going on.
If there are no exceptions for the bankers, the tax would be an excellent idea if it is as minimal as people have discussed.
It will barely be noticed by the average 'investor' but will hit the HFT crowd hard.
If it is passed with exceptions for you-know-which-banks-that-must-not-be-named, then the people should begin a program of mass civil disobedience, because it is the only thing that will take on the Wall Street - Washington cartel.
the tax would be an excellent idea if it is as minimal as people have discussed.
The income tax was only 1% so you won't even notice IT, that's what we told good old Joe bag of donuts, MUHAHAHAHA
then the people should begin a program of mass civil disobedience
You hit the nail right on the noggin..Jesse
watch the most liquid products suddenly become.... illquid.
Wow!, and you think the NYSE volume is light now?
Once a tax is established, regardless of how seemingly innocuous, it has the potential to grow and morph into something very destructive to capital formation, particularly as our august government starts scrounching under the sofa cushions for lost change. Think about our current personal income tax.
An emphatic no. There have got to be other, less potentially destructive, ways to get rid of HFT and other such problems. Or is the cure worse than the disease?
Haven't we already seen enough rotten fruit result from the marriage of good intentions and additional government intervention and control of the private sector over the past decade?
Encouraging home ownership among lower-income or less credit-worthy folks. Wonderful intentions that helped pave the road to hell.
No thank you!
Rather than a percent of the nominal, a flat fee per trade would be the way
to do it, say $1.00 per trade at most.
The usual arguments of 'liquidity' and 'competitiveness' will be made but the
nation has to wring the gaming and speculation out of the markets and let the
price discovery mechanism work again.
Liquidity. Hah! Watch how fast the markets melt again in a downturn. The liquidity
is vaporous, not based on anything more substantial than a computerized keystroke.
What leads you to believe price discovery now is worse than in the past?
I would argue that it is much better with competing software trying to improve on NBBO in record short amounts of time, with record low spreads on equities driving down the range of uncertainty as to where the market currently values assets.
The less speculation you have in any market, the more uncertain prices are.
Latest Bill Gross monthly letter if you are into that sort of thing
http://www.fundmymutualfund.com/2009/11/pimcos-bill-gross-december-2009-...
Just another ploy to take more money from the pockets of us small timers. I am sure if you trade over 1 billion shares, you will be exempt from this transaction tax.
This should be a progressive tax. First 100 trades per year are Tobin-tax free; trades 100-1000 pay half the tax rate; trades over 1000 pay full freight.
> The one clear benefit, from our perspective, that would accompany a Tobin tax, in whatever version it is ultimately implemented, would be elimination of such clearly market adverse phenomena as predatory algos and other HFT aberrations that have made trading even in the most liquid of stocks expensive, as we will shortly demonstrate, despite HFT proponents claiming the opposite
Utter nonsense. Retail pays 1 penny spreads and all-in 1/2 penny commissions per share (Interactive Brokers awaits you with open arms). Never in history has it been less expensive for retail investors to trade shares - period.
A Tobin tax will only decrease volume (which means the per share taxes to SEC / FINRA / NSCC / NASD all go up) and increase spreads.
the issue is that HFT makes it possible to artifically pump a stock way beyond its value. regardless of whether theres a greater fool. the current buyers are chasing momentun, they don't want shares of companies they are investing in. this is like a rigged slot machine parlor. not a market. if I wanted to gamble, I'd go to a casino, theres lots of them. where do I go to invest now, theres nowhere.
It has been possible to artificially pump a stock beyond (or pummel below) its value since the inception of markets.
Get a history book. There is nothing new here except a faceless enemy.
What about the notion of tying it to national debt repayment? If you like it, start a #transactiontax topic on twitter, and let's get it out.
No slush funds for congress! Pay down our debt! (No exceptions for HFTs, either).
Depends.
I assume leasing will become be more popular if it is exempt from the tax, or the tax is assessed over the life of the lease.
Please understand that this would land out being a net NEGATIVE for revenue and cause more job losses. From a congress that bring ridiculously stupid ideas to the table all the time, this may be the worst. This tax would bring more job losses, an overall net negative in revenue (actually research this and prove me wrong) and would drive transaction costs through the roof regardless of 401k's being exempt. Costs will be passed down, spreads will be huge, commissions will rise, nothing good could come out of this!
spell out your logic, come up with a better solution
How would this tax affect the "high frequency" traders?
If your doing $100,000,000.00 a day, the math from there is easy.. GS Has it figured because they already know the %
@Jesse
"It will barely be noticed by the average 'investor'"
50 shares of AAPL = ~10K = a transaction tax of $50 ($25 to buy and $25 to sell), plus commissions, plus capital gains tax on any profit. This will most assuredly be noticed.
"say $1.00 per trade at most."
This is more realistic.
If you want "wall street" to pay up then tax the institutions directly. Most transaction are made on behalf of penstion funds, retirement accounts, and small business traders not B of A, CITI, and AIG.
Fleecing the returns of retirement savings is the wrong way to go.
In the UK there is a tax already on shares purchase... Stamp Duty
I can see the point of a transaction tax if things like orange juice has 17.5% VAT slapped on it just because the oranges are squeezed by someone else!
Or 17.5% tax on shoes... or 5% tax on heating or insurance premium tax for insurance that you are legally obliged to have to drive a car so you can put petrol in it that is taxed to the maximum they can get so it is around 110p a Litre now.
Oh and if you bought a new car recently that was also taxed too.. luckily only 15% for now (soon to be back at 17.5% though) and that is after you paid tax on your earnings to pay the extra tax on things that you are silly enough to want or need to exist so you can go to work to earn more to pay the tax to pay the tax......
@Jesse
"It will barely be noticed by the average 'investor'"
50 shares of AAPL = 10K = a transaction tax of $50 ($25 to buy and $25 to sell), plus commissions, plus capital gains tax on any profit. This will most assuredly be noticed.
"say $1.00 per trade at most."
This is more realistic.
hmm. how's that worked out for Brazil lately?
you procede from the false premise that it is necessary and/or expedient to own publically traded equites. that is not so. if there were no desire to own them on the part of the masses, hft, etc. would never work.
the solution is not taxation, but the realization that there are many places to put your money, not just vanguard/pimco/etrade. you think that the big boys are abusing you? fine. don't play in their casino. open a lemonade stand.
don't get me wrong - I am not condoning their deplorable behavior. But I am surprised how almost no one has noticed that the greed of the average joe enables the big guys.
1 contract of January soybeans = 5000 bu
current price of January soybeans = $10.34
Notional value of 1 contract of SF =$51,700
1/4 cent profit on 1 contract = $12.50
FTT on my 1 contract trade @ .02% = $10.34
Of course, I'll end up paying this tax on losers as well.
Bye bye liquidity...
This transaction tax is nothing but Intentional Wealth Destruction of the middle class and poor. The cost of Wall Street's own transactions will increase the cost for them of doing business. The cost of all those transactions will be passed onto us in addition to our own transactions, so we pay twice. Stocks are practically the only way we can increase our wealth. As a result of liquidity drying up, experts say the spread that we pay for stocks will increase to $0.53 per share. That is a 2% loss upfront on a $25 dollar stock. The loss in compounding is tremendous. Expect to lose one half of your retirement because of cost side effects of the transaction tax.
What do stocks have to do with the real estate and banking crisis, you know, the ones that created this disaster? A study from the Independent Budget Office of New York City found that a much smaller tax on just the NYSE and AMEX exchanges would result in Net Negative Revenue and result in hundreds of thousands of jobs lost, most of them unrelated to finance. There would be millions of jobs lost if all exchanges were taxed.
Look at Taiwan. They keep trying. Why? 10-14-09: Taiwan tax commission wants to introduce for a 3rd time a stock transaction tax. 1973 was the first time they introduced the tax, result: the market fell 63% within a year. In 1988 they reintroduced the tax for a second time, result: 19 consecutive losing days, down 43% in less than 3 months.
Just make everyones' paycheck a direct deposit to the US Treasury.
A politicaly appointed compensation czar would then distribute the wealth as he or she sees fit.
Would that be awesome or what?
Everything that has transpired has done so according to my design. Your friends, sitting behind their computer monitors, are walking into a trap, as is your "Joe Sixpack". It was I who allowed Goldman Sachs to know the location of the exchange servers! It is quite safe from your pitiful little band. An entire legion of my best traders awaits them! Oh, I'm afraid the Federal Reserve HFT Super Computer will be quite operational when your friends arrive.
am I missing something or did John Mack just admit that Morgan Stanley did not participate in risk management prior to becoming a bank (they didn't include the part of the clip where he said that MS was just a breath away from disappearing) - Bloomberg will be rebroadcasting the entire progam again tonight
http://www.bloomberg.com/avp/avp.htm?N=av&T=Morgan%27s%20Mack%20Welcomes...
There should not be any exceptions if it is adopted. Market makers and banks should pay the same tax. Imagine the catastrophe that would ensue if there were exemptions!
Traders would go out of business or maybe move to a different instrument like options or single stock futures especially if those instruments were exempt.
Buy and hold would return. Booms and busts would be more exagerated probably. Most people will not want to pay $271.50 roundtrip on a WMT trade if they think it can come back.
This is soooo populistic.
The Big players will think for about an hour...
And then invent several loopholes..
And Voila... Business as usual
A tax would be a legal way for the government authorities to keep their eye on what the risks the IBs are creating.
Agree that the tax should apply only after a certain daily volume. The small trader is no systematic risk to the market.
Populistic? Goddistic? How about 10% on each transaction, and 0% of income tax. A perfect win-win. Oh, and please make the Captcha computable easily in my head - sadly it is not very large, if pretty.
Again, REQUIRE that revenues from this tax be applied to our $10T+ national debt, and it's a winner. Don't make this requirement, and it's a loser.
Ugh, sorry. Don't know what happened. Tyler, please remove the 8 repeats above...
If congress eliminates active trading in the markets by a transaction tax, they're going to lose a ton of capital gains tax revenues. Someone isn't thinking this thing out. Is slowing down economic transactions really progress?
With all due respect, did you think it through? Your assumption is that there are not counterbalancing capital losses.
Pay the debt back??? To WHOM do we owe it? Is it not our money?
This tax is a GREAT idea. We must return markets to their one and only purpose -- getting money from true investors to true companies.
Markets are no good when they exist for the enrichment of intermediaries. If I have $2 and a vendor has a hotdog, I guaran-dam-tee you, the vendor and I will get screwed if there are 12 layers of smiling Wall Streeters passing the money between the vendor and me. Get rid of the skimmers and I'll pay $2.05 for the hotdog with the tax compared to now paying $4 and getting back a half-eaten hotdog.
The times they are a-changin', Wall Street skimmers. Go get real jobs. Or starve. I could not care less which you choose.
EXCELLENT point. Same thing for food - those damn grocery stores are greedily collecting all the profits while the farmers and consumers are being fleeced.
Anyone in support of this tax is an idiot.
Let's tax the one business America still has some strategic advantage over the rest of the world (our capital markets) and lets make ourselves even less competitive.
Instituting such a tax won't generate 1/20th the forecasted revenue because trades will be executed in other countries without such taxes.
Moreover, when the US still needs massive capital inflows to support our structural trade and fiscal deficits (which are not going away overnight), why would you propose making the US even less competitive in the capital flow arena.
I pray to god this does not happen.
This doesn't have a chance of passing. Note the Reuters followup with Pelosi equivocating, plus there is no support to move it out of committee.
Anyone who supports this tax idea is an idiot.
It will not generate 1/20th of the projected revenue because all of the trading will go somewhere else.
Moreover, why would you support anything that impugns one of the few remaining strategic advantages America (the US Capital Markets) has over the rest of the world?
Let's just put another gun to our head and make ourselves even less competitive.
Moreover, America's reliance on capital is the only thing that supports our structural trade deficits and the government's insatiable appetite for deficit spending. Add a tax on capital transactions and I assure you that you will have less capital.
We all better pray that this tax does not happen or our day of reckoning will come a lot sooner than anyone is willing to admit.
We don't need more capital. There is probably 5 times more money than the GDP chasing 10% returns, from that same GDP. To try and supply those returns the financial sphere created several trillion dollars in ficticious assets. Supply side gone psycho.
I know nobody here can imagine that there is such a thing as too much investment, or what is called investment but is pure speculation. Speculation being expecting returns soley by price appreciation, not cash flow. Investment is a religion.
There are two way to stop excess speculation. Taxes, either the gains or the transactions, or making all the money disappear so it isn't there anymore to speculate and the desire to disappears. It's too late for #1.
Uh, did you actually read the report? You call people idiots and you didn't even read it. If you had, you'd know they have such a tax on the London stock exchange. And that is the place the Wall Street skimmers trot out as a threat.
And frankly, if the Goldman Sachs and Bernie Madoffs all want to move somewhere, I'll help them pack.
And you clearly don't know what YOU are talking about. Institutions and market makers are EXEMPT from the tax in London. Only the little guy pays.
Let's be honest, if this horrible idea were to somehow to pass, it would be the same way here. Anyone arguing FOR this tax is implicitly arguing for giving MORE power to Goldman, etc.
There is no good way to stop excess speculation. Essentially 75% of all the money over the last decade that has been put into the financial sphere under the rubic of investment has been speculation. It is dead money. Looked at this way there is little wonder why the economy is so poor. Far too much money has gone into the circle jerk that is Wall Street.
Because 'investment' gains, capital gains, are favored over other income it is no surprise that 'investment' won out. I am sure all people in this forum buy the idea that the key to economic growth is investment so that must get favorable treatment. So we invested in X quadrillion in derivatives. Not so noble perhaps but better than the schmuck who goes to work, assembles widgets for 8 hours, goes home, and want's $50K a year. Right?
much better idea, a notional tax on derivatives contracts thats where the real speculation is.
you folks in support of this tax are deluded ..... you have NO freaking clue how much liquidity in our markets vaporizes if all day traders and high turnover hedge funds , ealer arb desks , etc stop trading because their model does not work .
Do you people realize the entire multi hundred billions TBill market place is under .25% currently ? this tax would be more than their yield !
and the money would be squandered as you know .
Dubai supposedly has a replica of our markets ready to switch on if demand was there ...... let US high freq traders either go under or move and guess what happens ?
Do any of you have any sense of history ?
Old man Bush got talked into a yacht tax by liberals . Hey , who cares if we screw the rich ..... Rich stopped all purchases of yachts in USA and some 50 boat companies ( mostly in Florida ) went under or relocated abroad . tens of thousands of jobs went POOF ..... it was so bad they rescincded the tax .
Guess what happened ? Not a single company that relocated abroad ever came back . Better work conditions , cheaper labor , lower taxes ,etc . To this day , the yacht business that USA dominated is gone from USA . Wealthy americans don't just buy yachts abroad , they keep them there too meaning marinas lose out , restaurants , boat workers , etc,etc,etc .
Gone forever .
I recalll politicians in early 70's claim Big Steel would never leave USA ... and then it was gone . SK , Japan , now Japan . Whats left is mostly specialty steel .......
Wall Street can be gone just as fast and what remains can become like the paris Bourse . a joke .
It's called a global economy. If the Wall Street jobs move overseas, it will free up the people in those jobs to get good jobs. And we'll get our stock trades cheaper and better. It's win-win!!
.25% =/= 25%
.25% is nothing. And that is the high end, most proposals I have seen are .1%. This really only hurts HFT's and day traders who love cranking out those 1% profits on multiple trades.
The only problem I have with it - is will it be across the board for individuals and ALL institutions? I worry the Goldman's of the market will lobby and get exemption claiming they are providing liquidity and should be exempt from taxes and fees much like with the SLP program.
HFT profits are 1%?!? Assuming, HFT participates in 50% of the trades, that would be $500B in profits in 2008 for US equities alone. HFTs profit is clearly WAY less than .1%, and they don't participate in all the trades, let alone both sides of every trade.
You think .25% is nothing b/c you figure it will only be .5% round-trip on buying and selling stocks... unfortunately, you will find the management costs for ETFs will skyrocket as they have to frequently rebalance. Even more unfortunately, you will find the larger cost will be the huge spreads that will result.
We already have a transaction tax: HFT. As for people that think a tax is a good idea, consider the source. The same government that has been negligent, fraudulent, wasteful and dishonest wants you to give them more money. Really? You really think this is a good idea?
If they think its a good idea, then it isn't.
Reprising my earlier question http://www.zerohedge.com/article/frontrunning-november-19#comment-135677 :
Pro: A tax on large financial transactions will help to stymie the finance industry's game of generating large and increasing numbers of financial transactions on any constant amount of real wealth - because, of course, it's paid by the transaction.
Con: A tax on large financial transactions will just cut the government (further) in on the game, giving it an (increased) short term incentive to keep the game going. Public-sector trade unions and other government beneficiaries will enjoy the same incentives.
Discuss.
if this happens we are all phucked. ill move 2 dubai. 0% income tax. oil will run out they need other income. our trading is it.
Financial traders are useless. They provide no benefit to the economy/society. They are a product of a government/financial complex that has pumped more money into the system than any rational person could consider...well...rational. Generally they are to stupid to go out and produce something so they gamble, finding it easier to frolick in the fountain of raining money than to actually work for a living. Don't kid yourself people. You are just as bad as Goldman - living off the promiscuous printing presses held in the deap vaults at the Fed. The only difference is that Goldman controls the printing and you just pick up the nickles and dimes that are scattered in thier wake.
I started and ran businesses for 15 years. Five years ago I decided to retire and "just trade". Shame on me. And shame on all of you for participating in and propogating this insantiy that we call an economy.
Bring on the Tobin tax. 80% on profits made in under 2 years. Then eliminate all tax on all profits made by people who start and operate business. That is what we need.
RRR
From the comments here, I must assume I am among a very few who actually read the paper.
I can't believe people welcoming the government to sticks their hands in our pockets again, we are turning more and more into a socialist welfare state by the day.
The stock market was one of the last frontier's where average Joe could make a living, if this tax comes in, it take's that freedom away and instead he is sponsoring state welfare programs for other people who fucked up.
No doubt Government Sachs will get an exception to this rule and absolutely dominate the stock markets even more whilst Joe Pension fund investor goes to work to pay for the tax.
Yeah main street needs to stand up for itself more and be heard.
What don't they levy insurance fees on financial institutions based on their leverage vs equity, with a upside biased rolling tied structure, to deter excessive speculation and not allow concentrated pockets of risk to build up.
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