Why Not a Transaction Tax?
I propose that the Congressional leadership re-introduce the Troubled Asset Relief Program accompanied by a major new policy: a small tax on securities market transactions. This will accomplish the political goal of aiming a silver bullet into the heart of the (understandable) popular outrage that blocked passage of the TARP bill on Monday. It will simultaneously accomplish the fiscal goal of raising revenue, which the federal government sorely needed even before the need for the bailout arose and will need even more if the taxpayer is to be protected against subsidization of the financial sector.
A tax on securities market transactions might sound like a wild populist policy that would damage the functioning of the economy. But in fact it is far more sensible than such populist measures as banning short sales which have already been tried to no effect.
Proposals along these lines have a distinguished pedigree. Best-known was the Tobin tax proposal, by Nobel Prize winner James Tobin, which was specifically aimed at volatility in foreign exchange markets. More relevant to what I am proposing are two articles by the pre-Treasury Larry Summers: “A Few Good Taxes” and “When Financial Markets Work Too Well: A Cautious Case for a Securities Transactions Tax” (1989). Add another Nobel Prize Winner, Joe Stiglitz.
There is extensive experience with securities transaction taxes, especially in other countries, and there have been quite a few studies of their effects. On the one hand, often the motivation for such proposals is to reduce short-term speculative turnover (a tax of 0.1% means nothing to a long-term investor, but is a strong disincentive to those who trade hold their positions for only minutes or hours), with the idea that this will reduce volatility. On the other hand, often the defenders of unfettered financial markets argue that such a tax will reduce liquidity and thus hurt the customers who depend on the market. The historical experience with small taxes seems to be that there is no discernible effect on volatility. In some cases the volume of trading within the country is affected. But what the tax does usually do is raise a lot of money.
The UK has long had a securities transactions tax known as a stamp duty on the order of 0.3%. Sweden introduced a 0.50 per cent tax on the purchase and sale of equities in 1984, and kept it until 1991. (Froot and Campbell, studied these two examples in a 1994 book that I edited.) India introduced a securities transactions tax in 2004 and Japan, Korea, Taiwan and Hong Kong did so earlier; in these cases there were not significant reductions in either price volatility or market turnover. Other countries that have had financial turnover taxes of at least 0.10% include Australia, Austria, Finland, Germany, Malaysia, and Singapore. In addition there are other countrires that have smaller trading fees.
Even the United States imposes an SEC fee of .0033%. Thus our virginity is already lost.
An important potential drawback if the US were to impose a more substantial transactions tax alone, is that it might drive financial business offshore. There is an answer to this point. As noted, lot of countries already have such transactions taxes. Furthermore, lots would love to cooperate with the United States in an international program to harmonize such taxes internationally. This is precisely the sort of thing that many abroad have always asked Americans to participate in, but that we have not hitherto wanted to do.
The level and longevity of the tax could be adjusted over time to achieve the goal of Section 134 the TARP bill: that the taxpayer recoup the costs of the bailout. A 2004 study by the Congressional Research Service reported that an 0.5% tax on stock transfers could raise $65 billion a year. (Others have produced higher revenue estimates.) A tax extended to bonds and derivatives (especially derivatives!) would of course raise more. Remember that one does not compare this annual revenue to the $700 billion headline cost of the bailout; rather one compares the present discounted value of the annual flow to whatever of the $700 billion is left over after the government (we hope) collects something on the troubled loans and also recoups something on the warrants obtained from the banks.
The tax might, on the margin, contribute to a shrinking of the size of the financial sector; but this shrinking needs to happen anyway, as Ken Rogoff has pointed out. And most important politically, it would give expression in a non-damaging way to the blood lust that the public feels toward Wall Street, a venting that needs to take place if the bailout bill is going to be approved.
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This article has 13 comments:
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sr9web
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138 Comments
Sep 30 09:09 PMI traded in and out of the same stock four times today, buying low - which helped it not drop too far and selling high - which helped prevent people from bidding even more to get some other lot.
My actions today helped STABILIZE the stock I am in.
Why should I have to give $$ to IDIOTS in D.C. for that?
Lots of buying and selling REDUCES volatilty - it DOES NOT increase it!
You are a lot stupid and a little crazy!
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sr9web
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138 Comments
Sep 30 09:17 PMAfter all, Harvard often gains over 30% per year - so that's less than 10% of the gain they make each year.
Like any good Democrat, I'm all for tax fairness and that sounds fair too me...
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GKM
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173 Comments
Sep 30 11:25 PMBtw, great idea.
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GKM
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173 Comments
Sep 30 11:29 PM-
The hand
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714 Comments
My Website
Oct 01 02:14 AMthe investor is being wiped out buy this crap - you want to tax him too? tax the bank accounts because the banks caused the liquidity crisis. tax the congressman because they caused this crisis.
use your brains.
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William Davison
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6 Comments
Oct 01 08:21 AMWhy tax someone for investing, I lost enough money as it is and had nothing to do with derivatives, I did not even have any bank shares and I sold my house and so don't even have mortgage, so please explain to me what I have done wrongI!
Its not my fault yet I have lost 25% of my net worth in the last 3 months.
Basically I have lost out because I buy and hold and the UK government has takes 1% if buy a share and then are force to sell it. I could see there is some reason you may want to tax the sale of shares (i.e reduce day trading) but why tax someone for buying them i.e investing for heavens sake. Any way we have capital gains tax to cover that any way at 18%, it was 40%, although who hell has any gain this year anyway.
This just makes a terrible year for the completely innocent investor even worse.
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Brian27
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37 Comments
Oct 01 08:24 AM" On the one hand, often the motivation for such proposals is to reduce short-term speculative turnover (a tax of 0.1% means nothing to a long-term investor, but is a strong disincentive to those who trade hold their positions for only minutes or hours), with the idea that this will reduce volatility."
"The historical experience with small taxes seems to be that there is no discernible effect on volatility. "
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ferguson
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48 Comments
Oct 01 08:38 AM-
Britishsteel
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130 Comments
Oct 01 08:46 AM"Paulson and Bush threatened to veto the legislation if there was an explicit prohibition of transfers from foreign banks to an American subsidiary."
THE ASSETS DO NOT EVEN HAVE TO BE AMERICAN MORTGAGE ASSETS - THEY CAN BE AN OFFICE TOWER IN SHANGHAI!
YOU ARE GOING TO GET FLEECED FOR HUNDREDS OF BILLIONS OF DOLLARS IF THIS BILL PASSES - THAT MONEY IS GOING TO GO IMMEDIATELY OUT OF THE COUNTRY!
SEC. 112. COORDINATION WITH FOREIGN AUTHORITIES AND CENTRAL BANKS.
The Secretary shall coordinate, as appropriate, with foreign financial authorities and central banks to work toward the establishment of similar programs by such authorities and central banks. To the extent that such foreign financial authorities or banks hold troubled assets as a result of extending financing to financial institutions that have failed or defaulted on such financing, such troubled assets qualify for purchase under section 101.
votenobailout.org/
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JohnB
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65 Comments
Oct 01 11:15 AMWait, didn't borrowing have something to do with the crisis we're currently in?
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User 270430
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52 Comments
Oct 01 12:16 PMIf we're going to spend it anyway, spend it on a bailout which actually WORKS and stops the wave of foreclosures and brakes the collapse in housing prices.
You do this by refinancing the underlying mortgages, which will rescue the money markets and the toxic securities.
But it won't happened underl Paulson/Bernanke/Bush trio, who are only interested in bailing out the "fat cat" and incompetent Wall Street banker buddies rather than your average American homeowner about to be thrown out in the street...
Don't forget to express your views as it goes before the US Senate tonight on another attempt to pass a seriously flawed bailout.
www.senate.gov/general...
www.latimes.com/news/o...
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John Lounsbury
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528 Comments
My Website
Oct 01 12:51 PMBrian27 - You should reread the paragraph you appear to criticize. It is very logically constructed: Point of view #1, point of view #2 and then statements expressing the author's opinions and conclusions.
A transaction tax would cause me to construct new investment tactics and strategies for accounts I manage to reduce turn-over. A lot of additional work but not the end of the world.
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kgardens
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1 Comment
Nov 16 10:14 PM129.3.20.41/eps/pe/pap...