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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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Ireland do not overspend domestically, they overspent backing their banks, Irelands endebted is directly and almost solely related to fact they agree to have their country back their banks. When thier banks look shaky a few years ago, they were told they better make it law they would back their banks, or there would be a bank run on their banks. So, like idiots, just like Americans, they backed their banks, and it bought them two years, but then their banks went down anyone, and the Irish govt was left holding the bag, while rich investors in their banks were saved from being wiped out had the banks stocks and bonds become worthless.
Credit collapse surely has deflated their economy, but govt overspending on agencies, safety net, pensions etc was not the problem
Absolutely right. They had a solid gov. budget the whole time. They got killed because they did what they were told by europe and the US.
Compare Iceland to Greece. Iceland told the europeans to stick it, told the UK to keep their losses, and now they're better off for it. Greece played by 'the rules' and now it's well on its way to 3rd world status...
I never implied that they did.
Regardless, this is an especially insidious tax, which I only see other governments adopting and expanding. Nowhere to run, nowhere to hide, both from onerous taxation and ubiquitous financial surveillance. And really, isn't that their master plan? Next, they will start demanding that one declare all of one's physical precious metals in order to tax them --- and will make their taxation-related declaration to the government a condition to legally buy or sell physical precious metals, while providing a convenient registration list for potential future confiscations. Don't say that you weren't warned.
again, 3/4 of fed budget is defense, soc sec, medicare....if you want to pay less in taxes, they figure out what of those you want to cut, but consider we are already in great deficit, so just need massive cuts to balance budget, let alone reduce taxes.
but it is false to think taxes are on the rise, in US, this is simply not the case.
US used to get lots of its funding from tariffs, then corporate taxes, now both of these supposedly "eternal" taxes are mere pittance of what they once were, and instead FICA taxes are much more (seem sensible given Soc Sec and MEdicare are over half fed budget) sales taxes in states more etc...but overall taxes in US are lower.
So once a tax appears in history of US it does not mean it forever exists, many working poor, especially those with young kids, no longer pay fed income tax, estate tax has decreased greatly, corporate tax revenues only 1.3 percent of GDP after bein 32 percent of GDP, prop taxes were lowered and sales taxes increased in local jurisdictions...taxes shift, and overall tax burden is down...maybe higher corporate taxes and tariffs would be good, maybe income taxes are the way to go, maybe VAT tax, mayber tobin tax....we should figure the best way to pay for the fed programs we want with the least messing with good productive parts of the economy...but to discount any new type of tax, even if it is a better way to fund the federal govt, because all taxes remain and grow forever is to ignore reality and history in US, overall tax burden is down, some taxes have decreased after being very high...
If they need the money so bad have Bernake raise rates so people actually get real interest on CD ect. That gets taxed. But not now cause the fucker is raping savers and just said today he will continue to rape savers until 2013. I hope somebody with a brain replaces him and soon.
I still don't get why this isn't a campaign platform. Oh wait....
I hope the Tobin tax fails. If it were enacted, it might save the US from the brink of collapse by punching the paper pushers where it hurts. And who the hell wants another century of the American empire? Not me. I'd rather have the US keep on the path of financially led (militarily followed) self destruction.
Good pt
Just make it .0000000000000000000003%
All Fixed!
The HFT companies will simply walk into the server room and pull the plug if the Tobin tax passes. They're doing thousands of transactions per second. I don't like that fact but you'll see flash crash^100 if it happens. I'll be all in short if it comes up for a vote.
Excellent article, and I totally disagree with Bruce. Here's the fulcrum:
"But a sudden death of the algo computers would be very destructive."
Bruce's argument boils down to, "It's a rotten system, but we're stuck with it for now. If we derail the 30,000 bids-per-second model, markets collapse and exchanges go dark."
I hear, "My wife is a prostitute and a serial killer, but she's the only tail I've got."
HFT trading has destroyed the real markets while making Goldman $120 million per day, and all we got was this lousy sham of a market where GS reads the hyperfeed ahead of NYSE and knows exactly where the NBBO is going, so no honest trading or investing can survive. You want to keep that abortion in place?
No, Bruce. Let it crash. The dislocations are already set in stone. There is no avoiding the unemployment and severe recession. Let the markets crash, let the banks fail, let it all go to hell where it came from. We have no choice but to wrest our market structure and financial structure away from these mafiosa, and face the hard task of starting from scratch. It's either that, or accept slavery.
Actually bruce, I think the opposite would happen in the options market I think because of the illiquidity and vol it would cause, it would mark options prices up!
and stock prices down of course....I think you posted an article like this before...The speculators will win more because spreads would widen....But of course! it will inevitably be a boon for the speculators and a tax on the pensions...but shit, nobody trusts the markets anyway right? Obama would finally come out and say big daddy GOV will take care of you, capitalism failed...
good article though...how long will it take for them to learn the law of unintended consequences...
If accompanied by a means to thwart offshore circumvention, fine.
Totally agree. My sense is that in another year or so, there will be little opposition to this tax anywhere in the world except maybe among those deep in the Amazon, but it will be too little, too late.
Sorry, but unless you have a better idea to skim money from the top 10%, this one sounds like a winner.
How about the SEC, the FBI, the courts, and Obama The Useless Puppet actually enforce the existing laws instead, hard, tedious, work as it may be?
That alone would put a crimp on the top 10%!!
As long as the unregulated, off-the-books, derivatives market is permitted to exist it will be *trivial* to avoid paying transaction tax. This will drive even more financial activity into the OTC market, sticking the regular savers with the tax and giving the finance industry another unwanted pressure point against society to blackmail with: Peoples pension savings will not look so hot after a few hundred trades, each taxed at 0.1% (or whatever).
Standardise company tax and personal income tax, and implement a VAT or equivalent on consumption.
You don't take the oil out of a car to make it run slower...
But no, like if they don't keep raping us n stuff, then they'll go to some other country and rape them
Blow it out your ass bruce. There is productivity and there is productivity... as someone who is virtually wholly unproductive, I definitely know em when I see em... If your argument rests at all upon the fact that jobs may go overseas by virtue of regulation, then I'll posit that they were headed overseas anyway... presuming the jobs are worth saving in the first place... strategically speaking I'm not sure they really help us garner any goodwill among the rest of the world...
Any proposed tax could be tied to the length of time a security is actually held by the buyer -- hold it long enough and the tax gets waived -- anyone see a problem with this?
Exactly... if you want to target a particular action (in this case HFT), then narrow the scope of your regulation... If we can treat items held for a year differently than items held for less, then why can't we treat items held for nanoseconds different than those held for a whole minute?
I've been thinking about tax a bit.
Unless you're an anarchist, you probably want government to be there punishing (and, thus, hopefully preventing) force and fraud. And it's reasonable that the people who use government most should pay the most for its services.
If you expect the government to uphold the rule of law in your business dealings (ie, uphold an environment whereby coercive force is used against breakers of contract), then paying a small fee on each transaction seems pretty reasonable to me.
We already have an organization funded by users of the financial community. It's called the SEC. Instead of doing any regulation or policing, they watch pornography.
The problem isn't a lack of money. The problem is a corrupt and incompetent government.
I meant to add that as it stands, the government shouldn't be getting any of our money until it actually starts enforcing 'little' details like position limits on PMs, commingling of client accounts, etc, etc, etc...
not that some in the sec, etc. are not corrupt or incompetent porn addicts, but this fish rots from its head. corrupt, yes. incompetent, no.
this administration and several prior are effectively doing the bidding of their masters and syphoning wealth upstream to the already very wealthy while producing little of economic benefit in either the government or corporate dimension. they keep profits in bull markets and taxpayers/bond buyers make up bankers' losses in bear markets. wrong on so many levels.
http://www.hussmanfunds.com/wmc/wmc111010.htm
p.s. putting a little extra brake on high frequency trading; could this be a bad thing?
The road to hell is paved with good intentions. Take that cliche! All of ya's!