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CBO on Tobin Tax - "Don't do it!'
The Congressional Budget Office (CBO) explored the consequences of a Tobin tax, after it was asked to throw in its two cents in regarding proposed legislation, H.R. 3313 / S. 1787. The proposed new law has a very catch title:
Who wouldn't like something like that? For a country that (A) is desperate for revenue and (B) whose populous hates financial fat cats, speculators, monstrously paid bankers, and ridiculously paid hedge fund execs, a transaction tax is an easy sell.
I’ve taken grief on these pages with my position that taxes are a necessity. “Zero” is not the right number. The only questions are who pays and how much. With that said, it’s hard for me to push against a transaction tax. But I’m against this. The costs will outweigh any benefits that are created. I think the CBO agrees. Some bits from the report (Link):
For a transaction involving a stock, bond, or other debt obligation, the tax would be 0.03 percent of the value of the security.
Gee! Only .03%! Hardly worth noticing! Actually it is. Based on recent turnover the cost of the tax would be $1.7mm every day for those trading AAPL. For GE and BAC, it comes to a rake of $327k and $425k, respectively. That’s real money.
The argument will be put forth that the tax is only a few pennies. A long-term buyer of AAPL would have to pay a total of only 24 cents to buy/hold/sell a share. For BAC, it's only 3/8th of a cent (.0032).
The transaction tax on Government bonds will only be applied to maturities over 100 days and not applicable to any new issuance. So if you were looking to park $100k in T notes for a year, you could avoid the tax by participating in the government’s auctions. That’s stupid. No one will do that. People will call their brokers and it will cost them an extra 30 bucks to own the Note.
The US bond market is very complex. It has nothing to do with retail demand. A substantial portion of the $10T of Treasury plus $7T of Agency paper is in perpetual float. I estimate that at least one third of the outstandings have no permanent home. It sloshes about the globe based on a variety of macro forces. How many times do they “slosh” in a year? Much more than you might think. The number is a minimum of 5Xs. (I think it is around 7Xs, it could be as high as 10Xs) Using the low estimate, the annual float turnover impacted by the tax equals $25T. That teeny weeny tax would therefore suck $8 billion out of the market. That’s a very big deal. The CBO sees this pretty clearly:
Securities that are traded frequently, such as Treasury securities, would be more affected than securities that are traded less frequently.
The proposed transaction tax would lay waste to the HFT crowd. Their spreads are far too small and their volumes too high, to not have their business models get crushed by a Tobin tax. Many will cheer, myself included. But a sudden death of the algo computers would be very destructive.
The tax would also decrease the volume of transactions and would make some types of trading activity—such as derivatives transactions to manage risk and computer-assisted high-frequency trading—unprofitable.
This is about the money and how much one keeps. So every effort will be made to divert trading activities outside of US tax jurisdictions.
Traders would have incentives to avoid the tax either by trading offshore or by creating new financial instruments that were not subject to the tax.
As the trading activity goes outside of our borders, so will all those traders and their high paying jobs. Also would go the thousands of back office/ support staff that goes with this.
As foreign holders of U.S. securities moved their transactions abroad, more of the market could go with them, which could diminish the importance of the United States as a major global financial market
All taxes have consequences. A Tobin transaction tax would be no exception:
In the short term, imposing the transaction tax would probably reduce output and employment.
Beyond the first few years the tax’s net impact on the economy is unclear.
Unclear? This is pretty clear:
The transaction tax would raise the costs of financing investments to the extent that it made transactions more expensive, financial markets less liquid, and management of financial risk more costly.
A net change in the amount of investment would in turn affect GDP and employment. In the short term, a decrease in investment would lower demand for goods and services and thus reduce output and employment.
Reduce output and employment? Just what we need.
These consequences are not the ones that worry me. I’m concerned with liquidity. What will happen when 50% of short-term trading is eliminated? The CBO has an answer for that:
The tax might discourage short-term speculation, which can destabilize markets and lead to disruptive events (such as the October 1987 stock market crash and the more recent “flash crash,” when the stock market temporarily plunged on May 6, 2010)
How might the markets welcome a transaction tax? I say this would get a huge thumb’s down. If you believe that wealth in 401Ks drives the economy (I do), then this will bring (another) recession. The CBO agrees, sort of.
Initially, the transaction tax would reduce the value of existing financial assets, because investors would not be willing to pay as much for assets that had become more costly to trade. That reduction would produce an immediate—though probably small—decline in wealth for people who owned financial assets when the policy was enacted.
Note: The CBO are a bunch of bean counters. They have not the slightest idea what the markets may do if this tax was enacted. When they say the consequence to assets values will “probably be small” they are making it up. (A Wall Street broker is not allowed to say things like this. The outcome is not predictable)
This is not a tax on speculators and guys who wear white spats on Wall Street. This will impact all the pension and savings plans:
The transaction tax would also affect the funding of state and local pension plans ($3 trillion as of June 2011). Besides initially reducing the value of their existing assets slightly, the tax would raise transaction costs for pension plans. Both of those effects would increase required contributions to the plans.
Note: There’s that “slightly" thing again. Shame on the CBO for soft peddling the risks.
I wouldn’t be surprised to see that a transaction tax becomes a political football in the next election. Obama will support it. The Republican candidate will oppose it. If the election were tomorrow, Obama would handily beat either Newt the Fool or Mitt the Suit. Unfortunately, I think a transaction tax, and all the bad things it will bring, is in our future.
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They could still do a lot of damage ... just get rid of half of them and then they might have to do a little work. Then give them all commissions based upon how much money they can save.
Government is broken. Anything that fronts it more money before it's fixed is bullshit.
Enough Said.
concise and on target!
The government is proposing a new tax. Most of the posters on this thread support it in the hope that the tax will eliminate High Frequency Trading. Have the supporters considered that the long term results will be more taxes, more regulation, more government "fairness."
Supporting a tax to eliminate HFT is like adding rat poison to your dinner to kill the rats that eat your leftovers.
Brilliant, and beautiful.
Never, NEVER allow any government to get their foot in yet another door by instituting a new tax --- they will always end up pushing it wide open.
HFT provides volume, not liquidity. The minute panic begins, the HFT crowd is nowhere to be found with a supporting bid. The flash crash proved this. I have no problem with some curbs and regulations on this group of traders and others like them. A Tobin tax would certainly put the brakes on the algos, but you'd be hitting a lot of market participants that execute transactions for legitimate business reasons (think an airline that hedges oil or a farmer that sells his crop forward), and you're raising their cost of doing business. If you start exempting people from the tax based on the nature of their transactions, you're just creating more loopholes and problems with special interests. Suddenly so-called "speculators" start finding all sorts of reasons to trade without paying the tax. Then it's basically whack-a-mole.
I guess I would start with: what is the purpose of a Tobin tax? Raise revenue? Punish Wall Street/HFT/algo traders? There are far more effective ways to do either of those things without cutting off our nose to spite our face.
The top 1% of the 1% pays the majority of capital gains in the United States.
and..
so.. the .000003 or 30%.. either way! FUCK THEM AND THE HORSE THEY RODE IN ON!
Besides.. its not like there arent enough loopholes for the snales to slither thru already.
I'm no fan of taxes but, if this puts the HFT houses out of business...then it's worth it.
Ultimately, for the individual investor/trader...this tax rate is virtually meaningless.
Sure, if the HFT houses go under then the volume in the market will lighten up...but right now the volume is just noise not direction...so it is really meaningless. It ultimately won't be missed and may in fact make for a more orderly and fundamental driven market again. I'd surely welcome that even if it means less volume.
@ CGT
I don't hate traders or bankers. I hate corrupt lawmakers and elected officials that take bribes and vote against the people that voted for them. I hate unethical monopolies that win, not because they're better at what they do, but because they bribe and cheat and use their political pull to beat the competition.
This landscape makes it impossible to compete without cheating, bribing and stealing. And of course, I hate people that would steal from customer accounts and hurt so many people in the process. Obviously, not all brokers are like this.
As far as this tax on HFT, frankly I haven't looked into the wider implications of it, it just seems in all of the suggested taxes, this one, seemed to focus on an industry that was the beneficiary of a lot of subsidy, so rather than taxing the doctors, lawyers, and small business owners making over 200,000 a year, I thought a transaction tax on HFT sounded better than that. And since this industry has powerful lobbyists, they will have the tax repealed much faster than your average upper middle class income earners, ever would.
Again, I don't think we should be taxing anyone. I think we should reign in the government and the subsidies given to the insolvent banking sector. We should end the Drug War and all kinds of things that no one has the political will to do.
Swani I absolutely agree with corrupt individuals and corporations being put out of business and the culprits being put in jail. This tax is not going to make any difference to corruption. I should have elaborated more. I agree legalize marjiuana and tax it like eveerything else and do away with the bottomless pit of the war on drugs. Even alot of European countries get it, we do not.
The rule of law only applies to you and I. The big boys get away with just about everything and we need to go back to the rule of law. We need to start putting alot of these shisters in jail. Herein lies the problem they know nothing will happen to them so they do as they dam well please.
I see half of my check disappear already when you include local and state taxes. Some people will still think that is not enough to take from me. Thats ok but I think they take more then enough.
Taxes are slavery and are already too high. - They only go up.
If they were so inclined the government could outlaw HFT in a week, once it had a legal definition. That law would be preferable to new taxes (if Dr. Paul's economists wrote it.)
Without taxes there would never be civilization. You want to live by the rule of survival of fittest, feudal brawn, cave man porn, you vote for no taxes...Just read history and you'll know NOTHING civilized was achieved without taxes.
If you believe in social darwinism and manifest destiny; glory to victors, shame to losers, you are in right mind set.
Just hope you and yours never lose by your own rules...As the Athenians and Romans learnt...like all those who followed on.
In the world I defend there is one Golden rule : do unto others...One Silver rule : DO what you say, be responsible. Never break golden rule. As individual and citizen.
Those two rules and the methodolgy of good governance : logic, primacy of fact, free individual will within legal framework, debate, consensus, ACTION, accountability, feedback and RESET; define Western civilzation. If we have good system of checks and balances in the state power structure that protects individual rights of entreprenuership and effective fair implementation of laws, we progress. Its all a question of balance, for general good, and continued vigilance to ensure its sustainabiiity through the ages. Technology is time's arrow in civilization and the rules have to evolve with new opportunites/trade offs. Never should technological breakthrough change the Republic's priorities. Never, as that would confuse MEANS and ENDS. That is what Oligarchies always try and achieve in their own interest, change the mind set and the priorities. To prevent "technological breakdown", oiling the system, The Oligarchy then promotes the road to hell. And the sheeple buy it!
BTW : I'm not a tax Ayatollah. The key word is Balance : between taxing (ie not interdicting) and regulation (interdicting). You take the swing or the round about; discussion of appropriate 'means'. The 'end' stays the same : never let them run the show as they get more control of money line. Its the Republic that rules in the name of people.
ditto.
http://expose2.wordpress.com
Debt is slavery. Taxes are tolls.
For one thing there was a NY State transactions tax in the 1980's and that did not destroy the market.
second ,the probability of a tax passing in the Eurozone is higher than the in the US.By the time that a tax is passed in the US the Eurozone will already have one.
third ,getting rid of the algos is a good thing for everyone but the algos.Study after study have shown that the algos do not provide real liquidity especially during times of market disruption.
Interesting that the NY State transaction tax is still on the books, it has been suspended. I'd never heard of this tax before. So here's a great story, the gist of which is put a tax on it and it will move. I'm sure London, Hong Kong and Singapore will be happy to pick up the slack. Already many listings have moved overseas due to Sarbanes Oxley, this would be just another nail in the coffin for US based banking operations.
http://www.tradersmagazine.com/news/securities-transaction-tax-104338-1.html
Godpeed. All our manufacturing has left and now the remnants of the hollowed out shell will collapse.
So, if we impose a pittance of a tax that will mainly affect large institutions whose high frequency trading is skimming money by frontrunning retail investors and manipulating/destabilizing the market, it will destabilize the market? Yeah, I'd hate to see that happen.
Although some of you hate bankers and some of you hate traders, think a minute please. I am not a trader or a banker. Who do you think will pay this tax? Why you and I will. New taxes always start out small. Look at almost any tax out there. Lets take cigarettes and alcohol for instance. It was all the rage to impose sin taxes and people supported it because those type of people deserve what they get in alot of people minds. The states and the fed tout how they will use the money to help those people and how small the tax really is. Forward to today and the taxes on these items are even higher then they promised because we the people bought into it. They funded programs with these taxes and these programs continue to grow and now they are underfunded because less people smoke and drink alcohol, and so other taxes are imposed on you and I to cover them. Alot of you are smart people in my eyes. I may be preaching to the choir but this tax will really tax and take from whom? You and I as the tax will be passed on to us. The top 1% some of you so hate do not give a crap about this tax nor do the investors as they know they will never pay them.
Moving along they impose a hamburger tax on you and now they want to impose a soft drink tax because it is harmful and now people in my state are balking because alot more drink soft drinks and do not see themselves as smokers and alcoholics. But we the people allowed this to happen. Most people thought it was a good thing to screw the smokers and drinkers because they are bad people in their small minds. Now the bankers and traders and investors are the bad people. Alot of people in this country have 401k's with these firms and they are now bad. There are alot more good people out there, then the bad apples, yet we allow our emotions to drive the train until it is too late.
The "oh-oh squads are out in force and pointing fingers at some of you most likely. Nothing will change with this tax except me and you will loose more of our hard earned money because our government cannot control its spending. I may be looking at this wrong. But when is enough, enough? How many ways do we allow them to openly screw us becuase we hate someone or someone's habit.
.003% is not enough that it is going to hit you in the pocket book unless you are making thousands of trades on the same stock. The only people that are hurt by this tax are thouse that grafting off our productivity.
We don't need a tax, just limit all trades to ONE per day.
Oh yeah, get rid of puts and calls too.
Too funny. We can all become mutual fund traders.
You are helping to make my point.
Limits trades to one per day? You are joking right?
I know, I'm challenging an addiction, losing battle.
Maybe investment banks will go back to being investment banks instead of hedge funds. Who knows. Maybe, it will be a good thing. Maybe not. Like I said, taxing is never a good thing in my book, but if they are going to tax, which it sounds like they are for sure, I would rather it be a tax on HFT, than an increase in income or corporate tax.
Bruce, tell us again why we care if a bunch of financial sector jobs go bye bye? The 'financial' sector is supposed to be money engine of the productive economy. All it is are HFT/derivative gamblers that add zero value to prodcutive enterprise. I say let all the banks fail: the TARP could have been used to seed seed 10 new banks at 70 billion each to do real lending, with 1 for 1 capital ratios.
Bankers have not added value to the US since they went out of control after Glass Stegall was repealed.
This doesn't just affect fat cat bankers. Let's tax your profession with some silly arbitrary tax.
Umm, the products I work to sell get 6 percent sales on them, why not financial products?
"I’ve taken grief on these pages with my position that taxes are a necessity. “Zero” is not the right number."
Slave,
Give me everything you own. Your life isn't enough. I want all. So I can fuck it all to tears.
Yours Truly
Any old run of the mill piece of shit thieving government
PS Once you've given me a single iota, I take all.
Every business owner taxes their employees every day those employees are working. If the employer paid the employees at the true value of their labor, the employer would not make any money. Are you proposing that business owners stop taking a slice of their employees salaries, aka a tax? I guess what I'm saying is that you can call the government theives all you want, but just remember that employers are also theives, under your logic. In other words, if you are going to argue for no taxes, you are a fool.
Actually the workers would get Nothing.
The Work Product once made needs to be distributed and the contract for its purchase finalised, and monies collected,ect.
Read up; look into the Pin Manufacturing Comparison for example.
Imagine the relationship is reversed and that "workers" paid a portion of their output to the "management" fot the use of capitol and
access to the company infrastructure.
A tax is extracted involuntarily by use of force. Employers and employees are engaged in a voluntary transaction. This is an important distinction.
There is this thing called democracy and elections, and public voted....if the majority of people want taxes lowered, they will, be. See what W did, he reduced taxes on rich and middle class via deficits because he ran on lower taxes, people elcted him to do that, and see Norquist's pledge having great political influence. But thing is, people also want to fight wars, defend country, have police and fire departments, so they vote for spening that has to be paid for by a tax, as deficit spending can only be done for so long. People decide taxes and govt spending, they can change both thru public pressure. It's not like a king is taxing us, we can vote out anyone that raises taxes, if that is what the majority of us want.
If taxing people is thieving, then I guess our military is the thief, I guess elderly Soc Sec beneficiaries are thieves, I guess police and firefighters are thieves...
If I forced you to pay for a service which you did not request would I be a thief?
Of course you would be a thief at the "Things I learned in kindergarten" level. Things have gotten a whole lot more complicated since then, though, my friend.
Like in second grade, when everybody brought treats for the holiday party. Well, not everybody, of course. Funny thing is, those who brought nothing had an uncanny predilection for stuffing themselves on what everybody else brought.
There are always those people. In modern America they've even developed a visionary "moral" system to celebrate their honor.
You're right. If things were left up to me I wouldn't pay a dime to kill innocent Muslims or to bail out insolvent banks. But rational people know better and are right to force me to pay. Thanks for straightening me out and getting me back on the moral high ground.
http://en.wikipedia.org/wiki/Lawrence_Kohlberg%27s_stages_of_moral_devel...
Does that link explain how governmental killing of billions of innocent people is moral?
Even tough I don't agree with taxing anyone anymore than we already are, since the government will just take this money and use it to build another 'department' to spy on it's own citizens, purchase expensive war toys from the usual suspects, or churn it into infinity to create more debt to enslave us with, I support anything that discourages HFT.
The manipulation of commodities and other non productive activity, does nothing for the future of our country, at worst, it hurts people.
If support and back room staff of these trading businesses lose their jobs because this activity moves overseas, so be it. The market will adapt. New instruments will be created and the smart people will find other ways to make money. And, if this makes financial 'risk' more costly, is that such a bad thing?
No one seems to be taking the kind of long term risks that actually create wealth anyway, everything is short term and short sighted, and that, seems to be one of the major problems with our economy today.
High frequency trading IS a tax!
The 'liquidity' benefits of HFT are questionable at best. It is little more than a tax on retail investors that goes to Wall street parasites with the fastest networks and algorithms and smartest software engineers. But it does not actually add any benefit to the economy.
So the price of this tiny tax paid by retail traders will more than be made up for by the amount that is no longer sacrificed to the HFT parasites.
The business will move offshore, and US exchanges, already hurt by Sarbox, will lose a great deal of business. Can't be good--why not just ban HFT?
The business will move offshore:
Well - Let It! Let it move offshore to a place where they chop off bodyparts for stealing, have public floggings for misdemenors and daily beheadings for ... sorcery, "finansial wizardry" or whatever the Crime Of The Day is!!
Or Sell it to your enemies China or Iran - They can pay the bill for 2 times the US GDP that this business has cost in bailouts, so far.
By all means Outsource the fuckers and put them on the "no fly" list!
But GM and Apple off shoring their manufacturing so they can oay lower wages is good? Apple could sell their iPads and phones at current price, and make them all in US and still be profitable....far less profitable then they are currently but still make good money...should we do something to make the, stay I US instead.
Why are traders the only workers that deserve protection from losing their job overseas, but every other type of worker must bow to global pressures
Yes, that's the big elephant in the room question. It's interesting that HFT, which for human traders is analogous to mechanization of production for blue color workers, is deemed evil basically since humans can't compete. Now, in their defense, sort of, finance people are a much more articulate crowd on matters financial--and never at a loss for painting finely detailed disaster scenarios in every color scheme to suit their needs--but in the end it appears that. as you suggest, what is asserted as "right and just" is primarily a matter of who is making the argument on behalf of whom.
Now that, after decades of "globalization and financial innovation," we have a finance industry that is ravenously cannibalizing our real economy, anything can be argued as a threat to GDP. Of course, with the finance industry share now approaching 30% of what is defined as "GDP," anything that is either taken from them or even impedes continued growth is argued to be a threat to our great economy.
Fuck the financial economy. It has become effectively a clever system for grinding down and sucking humanity dry the world over.
http://www.zerohedge.com/article/how-financial-oligarchy-replaces-democracy
Lucky Luciano had it right after spending a day on the NYSE trading floor: "I suddenly realized I had joined the wrong mob."
My apologies to those who feed their children off this racket. No doubt the effects of your industry are not ALL bad (what is, after all?), but you're equivalent to number runners for the mob at this late stage of the game.
I will have to disagree. This will crash the markets as we know them, perhaps regulatory incompetence was always going to be the failure point. I for one want the HFT OUT. I want the market broken, and sooner rather than later. The crash is a certainty, lets do it now. It cannot happen through bravery or insight by our leaders but it can be accomplished through incompetence. This legislation is the most viable path forward and better than delaying the destruction of our markets longer.
Well, we have seen what the world looks like without a Tobin Tax. It pretty much sucks.
I don't know about all of you, but I would be willing to take a chance on it especially if all of the proceeds was dedicated to deficit reduction. Then again, I would buy into a larger gasoline tax - if all of the proceeds were dedicated to deficit reduction.
The only problem is keeping the freaking spenders in chief (R's and D's) from declaring an emergency...blah blah blah.
I will be awaiting the inevitable and numerous down arrows.
Change is EVIL and nothing good can possibly come of it. I think if you keep talkin like that you're going to end up an enemy of the state...
Must... maintain... the... status quo....
You don't have a particularly good handle on cause and effect, do you?
Spending more money on deficit reduction sounds like the wrong approach.