With Transaction Tax Becoming A Distinct Possibility, Does It Bring Benefits To The Table?

Tyler Durden's picture

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.

 

 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Don Smith's picture

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.

Anonymous's picture

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.

geopol's picture

was strictly to paying down principal on the national debt,

 

TILT.   We can't have that

Anonymous's picture

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?

mule65's picture

Fock the Daytraders, WOPR, and HAL 9000.

Careless Whisper's picture

How about we just get GoldSach to pay an effective income tax rate that is greater than 1% ??? Is that asking too much ???

Anonymous's picture

Go to http://www.tinyurl.com/TransactionTax to get educated on what's going on.

Jesse's picture

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.

geopol's picture

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

smalls's picture

watch the most liquid products suddenly become.... illquid.

Overpowered By Funk's picture

Wow!, and you think the NYSE volume is light now?

Lux Fiat's picture

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!

Jesse's picture

 

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.

peterpeter's picture

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.

TraderMark's picture

Latest Bill Gross monthly letter if you are into that sort of thing

http://www.fundmymutualfund.com/2009/11/pimcos-bill-gross-december-2009-...

 

  • Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the “systemic risk” of new asset bubbles is rising with the Federal Reserve keeping interest rates at record lows
  • The Fed is trying to reflate the U.S. economy,” Gross wrote in his December investment outlook posted on the Newport Beach, California-based company’s Web site today. “The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.” 
  • Raise interest rates with 15 million jobless and 25 million part-time working Americans?” wrote Gross, co-founder and co-chief investment officer of Pimco. “All because gold is above $1,100? You must be joking or smoking -- something.” 
  • The “heavy lifting” will likely be done first by other central banks such as those in Australia and Norway that have already begun to increase interest rates, Gross wrote. 
Divided States of America's picture

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.

Anonymous's picture

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.

peterpeter's picture

> 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.

 

delacroix's picture

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.

peterpeter's picture

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.

Don Smith's picture

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).

snorkeler's picture

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.

Anonymous's picture

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!

delacroix's picture

spell out your logic, come up with a better solution

Pedro's picture

How would this tax affect the "high frequency" traders?

geopol's picture

If your doing $100,000,000.00 a day, the math from there is easy.. GS Has it figured because they already know the %

 

Anonymous's picture

@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.

Anonymous's picture

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.

Racer's picture

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......

BernardAndy's picture

@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.

bobby02's picture

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.

Flyingtrader's picture

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...

 

 

Anonymous's picture

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.

Anonymous's picture

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?

RagnarDanneskjold's picture

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.

anynonmous's picture

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...

Anonymous's picture

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.

Anonymous's picture

This is soooo populistic.

The Big players will think for about an hour...
And then invent several loopholes..
And Voila... Business as usual

Anonymous's picture

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.

Anonymous's picture

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.

Don Smith's picture

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.

Don Smith's picture

Ugh, sorry. Don't know what happened.  Tyler, please remove the 8 repeats above...

Anonymous's picture

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?

Anonymous's picture

With all due respect, did you think it through? Your assumption is that there are not counterbalancing capital losses.

Anonymous's picture

Pay the debt back??? To WHOM do we owe it? Is it not our money?

Anonymous's picture

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.

Anonymous's picture

EXCELLENT point. Same thing for food - those damn grocery stores are greedily collecting all the profits while the farmers and consumers are being fleeced.

Anonymous's picture

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.

TwelveTone's picture

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.

pbmatthews's picture

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.