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CBO on Tobin Tax - "Don't do it!'

Bruce Krasting's picture




 

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:

 

“Wall Street Trading and Speculators Tax Act”

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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Tue, 12/13/2011 - 21:55 | 1976947 catch edge ghost
catch edge ghost's picture

It is meant for ETF trades, in the future, after Social Security is privatized.  But yeah, you'll get the tax before that.

Tue, 12/13/2011 - 21:47 | 1976918 proLiberty
proLiberty's picture

It bascially increases hysteresis, and for some situations, it will kill the play because the tax on the round trip is greater than the average gain can support.  This tax is a BAD IDEA, and like many other "progressive" initiatives, will tend to drive business and jobs outside of US jurisdiction. 

Tue, 12/13/2011 - 22:04 | 1976979 Paul E. Math
Paul E. Math's picture

But what kind of business and jobs are we losing?  They serve no redeeming social value.

Geez, we better not crack down on organized crime either - think of all those good-paying criminal jobs that will go off-shore if we do.

Tue, 12/13/2011 - 23:02 | 1977152 blunderdog
blunderdog's picture

Can't simplify the tax code, either.  Paid preparers and lawyers would be crushed.

Tue, 12/13/2011 - 21:46 | 1976909 ElTerco
ElTerco's picture

Yes, passing a tax that will discourage volaility and shut down HFT is a really, really bad idea.  Long term investing will again be the best way to make money.  What a shame.

Wed, 12/14/2011 - 01:07 | 1977579 CrockettAlmanac.com
CrockettAlmanac.com's picture

And there will definitely not be any unintended consequences. The government will make sure that all goes as planned for the common good of humanity.

Wed, 12/14/2011 - 02:24 | 1977734 Thunder_Downunder
Thunder_Downunder's picture

When has the common good really been a consideration in such matters?

Wed, 12/14/2011 - 12:21 | 1978997 CrockettAlmanac.com
CrockettAlmanac.com's picture

Never.

Tue, 12/13/2011 - 21:47 | 1976902 myshadow
myshadow's picture

Sorry Bruce, it will mean that the market will go back to being an investment vehicle.  The tax is a tax on gambeling transactions.  Now that the frank luntzes of the financial community refer to 'trade', when it is either an algorythmic flash movement or day trading= speculation.  Both excesses will be squeezed out of the market place like the toxic pus that is. 

There is a place for real speculation.  It isn't bidding up fungible commodities to recapitolize insolvent financial institutions.

 

That said, as much as I wish it would happen, it won't.  This government is too corrupt, and totally bought off.

These bastards will have grandmothers eat cat food from dented cans before they will tax the MOTU mills on a transaction.

Wed, 12/14/2011 - 08:06 | 1977996 Lednbrass
Lednbrass's picture

Its a bit of a side point from the value or lack thereof in such a tax, but you went off on a ridiculous emotional tangent there.

A grandmother has children and/or grandchildren quite capable of providing them with food and a roof, if said grandmother failed so miserably with her own parenting that she is despised by her descendants to that degree, its quite frankly her own problem.  Your view seems to automatically assume that care of a senior is a government issue and not a family issue, and that without federal largesse there is no possible way for them to survive.  I think this is false, it is precisely the "government should and must take care of granny" mindset that is the problem.

Tue, 12/13/2011 - 23:03 | 1977154 SV
SV's picture

The general thesis or dynamic that most are objecting to is giving the corrupt government another red cent over the benefit of pulling the plug on HFT.  I think a tier could be better, needs to be at least a couple cents to keep them from banging low hangers like C, BAC, GM, etc., etc.

Better yet, actually having to hold your bid or ask for minimum of 5 seconds - Que Horror!

The latter would be better, but they would enforce that as well as NBBO.

Wed, 12/14/2011 - 02:38 | 1977735 moneymutt
moneymutt's picture

Yeah, the govt does nothing the people of US wants with our tax dollars, all the money goes to fat bureaucrats that do nothing of value ever, every last thing the govt does is waste and of no value? ...fed budget is more than three quarters Defense, Soc sec and Medicare, we could cut everything else in the other quarter, the EPA, the FBI, the DOJ, dept of education etc...and still be in deficit...and on top of that we are running huge deficits, but we should not give the govt one more red penny?

What do you propose we should cut that will eliminate current deficit? Dont say something general, I mean really look at a real fed budget calculater (there are many thorough ones out there) and really decide on cuts that will completely erase our whole deficit with no new taxes. You will have to slash defense (slashing the private defense contractor business in the process) slash Soc Sec payments to elderly, and slash medical care for elderly (taking put the doctor biz and private hospital businesses in the process) and then figure out what you would further cut so taxes could be reduced more.

I just dont get the hysteria about taxes. In 2010, fed tax revenue from corporations was 1.3 percent of GDP, doesnt sound very oppressive to me, and in 1950s, federal tax revenue from corporations was 32 percent of GDP, and our economy did great, govt was reasonably well run, we fought a cold war, provided good benefits to WW2 vets like GI bill, provided very cheap tuition public colleges. And we were paying down WW2 debt. So actual corporate tax revenue as a percentage of GDP was 30 times higher than now, and the economy lived to tell about.

Tue, 12/13/2011 - 22:45 | 1977096 jonan
jonan's picture

absent government intervention destroying free markets, doesn't speculation decrease the spread between the bid and ask? 

i don't think such a tax is a good idea, try selling something you own when there is no one around to buy it, orders would go from being filled in seconds, to filled when there is nothing left to fill...

granted the markets are already broken, which i personally think is more of a function of government than speculation...or am i wrong here?

Tue, 12/13/2011 - 22:15 | 1977018 ffart
ffart's picture

That's not what a fucking market is for, it's for transacting goods as cheaply as possible. All the trading volume leaving the market will just make volatility WORSE.

Tue, 12/13/2011 - 22:43 | 1976901 myshadow
myshadow's picture

Sorry Bruce, it will mean that the market will go back to being an investment,

Tue, 12/13/2011 - 22:56 | 1977137 Bruce Krasting
Bruce Krasting's picture

An investment you say? I say the Vix will be at 50 and you will not have a clue what to do when that happens. No one will.

Wed, 12/14/2011 - 10:28 | 1978351 Imminent Crucible
Imminent Crucible's picture

The VIX is going far beyond 50 anyway, NO MATTER WHAT. I expect it to kiss 90 again, because the system is no longer functioning, except as a conduit for constant manipulations, thefts and interventions.

How can people miss something so obvious? When the market only goes up on days when there is hope for fresh monetizations from central banks, it's over.

Either the market system resets, with all the phony wealth destruction that implies, or you settle for a Harare stock market with Ben Gono Bernanke holding it all up.

Wed, 12/14/2011 - 09:51 | 1978236 centerline
centerline's picture

Stockholm Syndrome.  Lovely.

Wed, 12/14/2011 - 02:40 | 1977741 Thunder_Downunder
Thunder_Downunder's picture

Oh... he'll know what to do Bruce. Natural instincts will kick in.

 

He'll panic, and blame the government, because it's always someone elses fault when the sheeple feel scared and confused.

 

I'm wondering who is crazy enough to jump first on this popularist debacle... the Europeans or Americans. 

 

At least the outcome is predictable enough if it gets passed.

 

<got the popcorn and a comfy chair ready>

Wed, 12/14/2011 - 01:13 | 1977594 mark mchugh
mark mchugh's picture

Wall Street has spent 30+ years building a casino funded by the US government (do I need to explain the 401(k) laws to you?)Without that government giveaway, you'd still be waiting for the Dow to crack 1,000.  That "tax-deferred" growth is the fortunes of Goldman, JP Morgan.

If you analyze the ICI data, you'll find that 401(k)'s as a group have underperformed inflation when you factor in tax consequences.  It's time to scrap the idea, and let Wall Street fail like they would have in 1980.

But hey, that realization is still 10 years away.  For now, just know that the US government has been borrowing about $500 per citizen, per month for three years running.  That reality should trump any and all concerns of traders.  That this escapes you says a lot.

Wed, 12/14/2011 - 00:11 | 1977407 ElTerco
ElTerco's picture

I agree that volatility will increase in the short term, but if your idea of long term health is predicated by short term consequences, then you are fighting a losing battle.

Wed, 12/14/2011 - 00:05 | 1977394 Tapeworm
Tapeworm's picture

What about a tax to pay for the vastly expensive court system that is there for use by financial entities. Joe 6Pack pays for the playpen but gets almost no benefit from it. Make the litigious bastards pay for the courts.

 It can be voluntary too. If you don't want to pay the tax you don't get to use the courts.

Wed, 12/14/2011 - 01:04 | 1977568 CrockettAlmanac.com
CrockettAlmanac.com's picture

The only just system is an entirely voluntary system. People who tell you that they're taking your money and your freedom for your own good are not really your friends.

Wed, 12/14/2011 - 00:05 | 1977391 GMadScientist
GMadScientist's picture

Is this the same kind of BS that Greenspan pulled out of his ass when Brooksley Born said derivatives should be regulated?

Anything that can't stand up to a 0.03% tax (the Swedish one was 0.5%!) cannot prove useful to the market anyway.

 

Bad HFT shops that have been churning (see the Nanex articles for pretty pictures) will slough off like dead skin. Boohoo.

The ones that can dial in algorithms that can work the tax will thrive.

Natural selection: you're what's for dinner!

Wed, 12/14/2011 - 02:41 | 1977756 moneymutt
moneymutt's picture

So Sweden this and the world didn't end, do tell more

Wed, 12/14/2011 - 09:11 | 1978133 ArmchairRevolut...
ArmchairRevolutionary's picture

Sweden removed it. .5% is just too high. That hits people who do normal investing. The proposed .03% will only hit HFT.

Wed, 12/14/2011 - 19:01 | 1980886 moneymutt
moneymutt's picture

thanks, i'll have to look at what happen, what I dont know, as I dont trade is whatever a reasonable level given churn that is useful for industry, normal investors etc

also, did they have to remove due to real market response or was it just a strike by traders as a protest to make them remove it?

Tue, 12/13/2011 - 23:34 | 1977243 LowProfile
LowProfile's picture

You say that like anyone else here gives a shit if the whole thing burns down.

Oh, and if the VIX hits 50?  I'll short the shit out of it via VXX.  How's that for a clue?

Wed, 12/14/2011 - 09:50 | 1978230 Mercury
Mercury's picture

...better look into how well VXX tracks the VIX first.

Tue, 12/13/2011 - 21:42 | 1976892 Corn1945
Corn1945's picture

Plenty of things you've said "are going to happen" have never happened. I highly doubt this goes anywhere.

Tue, 12/13/2011 - 21:40 | 1976883 JustObserving
JustObserving's picture

How about a 0.1% tax if you hold a financial asset  for less than an hour?  That will fix HFT.

 

 

Tue, 12/13/2011 - 22:15 | 1977019 Lux Fiat
Lux Fiat's picture

How about side-stepping a tax and the enforcement bureaucracy that will spring up around it, and adopt a modest proposal mentioned on ZH before - require a bid or offer to be in effect for at least a few seconds.

Not sure if the CBO addressed mkt liquidity in any detail, but suspect it would decline significantly.

Tue, 12/13/2011 - 21:37 | 1976867 Big Ben
Big Ben's picture

The usual procedure is to create a new tax with a very low rate, just to get a foot in the door, and then increase it later. In a couple of decades, it would probably increase by at least 10X, perhaps as much as 100X.

And probably the people who engage in HFT will lobby for an exemption on the grounds that they provide vital liquidity to the market, so in the end the tax will end up being paid mostly by retail investors.

Government is like a black hole. No matter how much money you shovel into it, it will always demand more. You cannot fix a government's deficit by raising taxes. The politicians will always take any tax increase as permission to spend more.

Wed, 12/14/2011 - 02:46 | 1977759 moneymutt
moneymutt's picture

Ummm, many taxes have decreased or been loopholed away,....in 1950s, fed tax revenue from corporations was 32 percent of GDP. In 2010, corporate tax revenue was 1.3 percent of GDP, even while big corps recorded huge profits. So much for taxes always increasiing.

Wed, 12/14/2011 - 02:31 | 1977742 Thunder_Downunder
Thunder_Downunder's picture

Do you mean like US company tax or personal income tax?

 

Oh.. wait they're both in long term decline... nevermind.

Wed, 12/14/2011 - 02:51 | 1977770 moneymutt
moneymutt's picture

Yeah, repub taking point is 46 percent of people pay no fed income tax, but then they complain about how high taxes are?!? (never mindthat 30 percent of pop is too young to be workers or old and reitirmeent with little income or disable and unable to work etc)... But of course the FICA tax, that all wage earners pay no matter how poor they are, that has increased over the years, but is capped at 100k incomes, and corporate taxes are way down.

Wed, 12/14/2011 - 09:14 | 1978138 Lednbrass
Lednbrass's picture

No, the point used is that half-ish of tax filers pay no federal tax.  This has nothing to do with those too young to work.

There is no incongruity in a person who actually pays money to the federal government thinking that they pay too much and is annoyed that others pay nothing at all.  If the person making the point were arguing that there should be no federal tax at all there would be, but this is rarely the case.

Wed, 12/14/2011 - 19:08 | 1980915 moneymutt
moneymutt's picture

46 percent of tax filers pay no fed income tax? if that is true, would love a link...

but it is a stat meant to confuse, as over half of fed expenditures are Soc Sec and Medicare and FICA taxes, fed taxes, pay for these big expenses, and even working poor pay this/ Anyon one working as an employee or showing wages as a self employed person pays FICA taxes, if it is money federal govt takes out of my paycheck, as far as I'm concerned it is a Fed tax, whether or not it is called income tax or payrol tax or FICA tax. It is an especially annoy tax to me because it only applies to wages, but if your income is dividends, capital gains, carried interest etc, you need not pay FICA tax, nor do you have to pay it on wages over 100k.

So everyone is quick with the stat that 46 percent dont pay Fed Income Tax, but where is the stat on the percentage of peoples income that does not pay FICA tax, they are both federal taxes, why is federal income tax the big emphasis and not FICA?

Wed, 12/14/2011 - 20:10 | 1981134 Lednbrass
Thu, 12/15/2011 - 17:35 | 1984979 moneymutt
moneymutt's picture

thanks

Tue, 12/13/2011 - 21:31 | 1976851 blunderdog
blunderdog's picture

The problem with any opposition to a Tobin tax proposal is that you have to get people to agree with the premise that the financial industries that would be harmed most are currently doing good work that benefits society.

Good luck with that shit.

Tue, 12/13/2011 - 21:27 | 1976844 Elmer Fudd
Elmer Fudd's picture

Whats so great about the "financial markets" anyways?  The death of the FIRE economy is gonna hurt, eh?

Tue, 12/13/2011 - 21:26 | 1976842 onlooker
onlooker's picture

  

If this could be tied into the “off the books” transactions, forcing financial dealers/traders to be transparent and documented, then it could produce revenue and expose the leverage bandit gangs. With numbers like 10s of trillions estimated in derivatives and stuff, this could heal the budget boys for a while. TAX the SHADOW.

Tue, 12/13/2011 - 21:21 | 1976830 Georgesblog
Georgesblog's picture

All I had to see was the word "Tax", and I said, "Don't do it!".  You know that every tax has mission creep. Every tax turns into another bureaucratic fiefdom, with it's very own "castle" in Washington, D. C.

  http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/


Wed, 12/14/2011 - 20:10 | 1981138 AchtungAffen
AchtungAffen's picture

Don't you find it weird that just the mere mention of the word "tax" generates such a negative instant reaction. It's almost as if that word just turned off your brain, no thinking. It's just an emotional response. After all, tax are incomes of the state. And if the state is the manager of the republic (the public thing), then it's how you sustain it. You pay taxes to sustain the republic. Without taxes, no republic. Taxes aren't inherently evil...

Wed, 12/14/2011 - 02:53 | 1977772 moneymutt
moneymutt's picture

Like Soc Sec, those checks going out to seniors every month, those little elderly parasites

Wed, 12/14/2011 - 00:27 | 1977399 akak
akak's picture

And just wait until they propose and then institute a tax on assets, and not just on financial transactions, as Ireland did recently. 
Face it: as governments' fiscal houses continue to collapse, they are increasingly going to cut off any avenues of financial refuge or escape.

Wed, 12/14/2011 - 07:54 | 1977975 Ruffcut
Ruffcut's picture

Goldass ballsachs will help tweek the law in their favor, doing god's work and all. They didn't pay shit for tax for certain ops are offshore.

I'm still in favor of a 50% tax on toilet paper and calling it the ass tax.

When I toured in the 70's in a rock band, we wrote off our weed, as first aid.

Wed, 12/14/2011 - 02:54 | 1977774 moneymutt
moneymutt's picture

Ummmm, Ireland was the low tax country in Europe, til they crashed, the taxes now being implemented are paying for effects of crash, they did not cause crash

Wed, 12/14/2011 - 10:00 | 1978259 Imminent Crucible
Imminent Crucible's picture

Ireland was not a low-tax jurisdiction. It was specifically the low corporate tax structure (plus excessive borrowing) that created the "Celtic Tiger" illusion.

The taxes now being implemented are not "paying for effects of crash", they are paying for the massive expansion of Irish govt spending which took place while the illusion was in force.

"There is no means of avoiding the collapse of a boom brought about by credit expansion...."

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