Why the Transaction Tax Isn't Such a Terrible Idea

A year ago, it occurred to me that if the popular blood lust against the financial sector was to be given vent, one could do worse than adopt a small (but global) tax on financial transactions. The Financial Times reports Thursday, August 27, that Adair Turner, head of the UK Financial Services Authority, has come out in support of just such an idea.

It is worth recalling that the original goals of the bailout packages of a year ago have been attained better than many commentators expected. The goal of preventing a depression in the general economy has been accomplished. You don’t punish someone who has been smoking in bed by allowing the resultant fire to burn down the block. The Administration and the Fed always said that helping some undeserving financiers would be an undesirable but necessary side effect of the rescue plan (even though the Treasury would recoup a share of the budget costs, when banks repaid loans).

Nevertheless, it is indeed irksome that the banks have continued to pay out huge bonuses, and to oppose the creation of a new US agency for financial consumer protection. So the public’s anger is understandable. Perhaps the transactions tax is indeed the right way to go. Our Treasury and others’ could really use the revenue. Furthermore, the idea of shrinking the volume of transactions in financial markets nowadays looks much less likely to damage economic efficiency than was once believed.

Comments

[prudentinve...:]

I think a tax on any financial transaction in the public markets would bring credibility back to the system. It would return the markets to their "quaint" original concept of allowing people to make long-term (or even short-term, meaning days) investments that make economic sense, rather than play at a casino for hours, minutes, or, recently, milliseconds, the ultimate manifestation of which is HFT.

Such a tax should be a percentage of the transaction value, high enough that some economic sense must underly the transaction, say perhaps 0.1%.

However, given its manifest sensibility, it has little chance of being enacted; and, if enacted, it will likely be intended to penalise the individual investor making small, rational investments, and not the large speculation houses engaging in HFT.

Aug 28 07:36 AM

[Tom Armistead:]

If the tax were on a per share/option etc. basis, very small, say 1/10 of 1 cent, it would not be noticeable to ordinary traders, even day traders.

But it would nickel and dime the high grequency traders out of business. What could be wrong with that?

Of course you could refine it further, say 1 cent for selling short, and 5 cents for naked short selling...the permutations and benfits are endless.

Aug 28 09:19 AM

[Common Cents:]

I'm for less taxes, but if we have to tax, I think making the capital gains tax a three tier format could be a good idea.
Something like
- Long term - currently one year - make it three years with a lower rate than today's long term rate.
- Short term - three years to two weeks - with rates similar to today's
- Speculative - less than two weeks - with rates higher than the top marginal rate.
I'm not sure there are too many valid business reasons for hedging/speculating that are less than a month in duration. "Wall Street" would scream but it seems to me it would not hurt the macro picture to slow down the churning of the markets. For example the volume/turnover of shares in C, Fannie...the past few weeks is hard to explain as "normal/good" for business/economy. This type of structure would make it less profitable to trade tick by tick but encourage true long term investing.

Aug 28 09:25 AM

[Mill Rat:]

I applaud this idea from Jeffrey Frankel.

I especially like the proposal described above by Tom Armistead.

Similarly, a few weeks ago, while commenting in 2 other articles, I suggested that consideration be given to taxing the issuance of Credit Default Swaps. The tax would be paid by the "seller of protection".

Such a tax seems rather fair in light of the fact that very large sums of taxpayer dollars were used to clean up the consequences of AIG's reckless sale of CDS's.

CDS's did not even exist until the 1990's.

Bryan

Aug 28 10:13 PM

[Ernesto Gom...:]

You foolish, foolish man.

A Transaction Tax on stock trades is asinine and totally unethical.

If you don't want to trade, the DON'T - but leave me and my transactions alone.

There is ZERO rational justification for this.

Only imbeciles who care nothing about the stock market think it's a good idea.

When will the CONTROL FREAKS of the world ever cut the crap and stop trying to interfere in the lives of others?

PS: All trading by non-USA entities and people will move/stay overseas and the USA markets will collapse if you do this. So ff you want to cut-the throat of the USA stock market, just keep on pushing your stupid ideas.

PPS: If this were to become law, EFTs that actively trade sectors will sprout up overseas, they'll do all their trading overseas and it will only take ONE TRADE to buy into them from USA.

Your stupid tax will do nothing but slow USA trading - while the real power and wealth will move elsewhere.

YOU ARE CRAZY (and stupid!).

Aug 29 12:52 AM

[sabre_jenn:]

The problem with a transaction tax idea is very similar to all "tax this to control it" ideas:

1) Taxes are supposed to fund government, not enforce someone's idea of "proper" behavior. The population's political beliefs go back and forth between conservative / liberal, free market / central planning, etc... its only a matter of time before "the other guys" tell you your lifestyle is not "proper". Revenge is not an economic policy, not even if you are on the side that is (currently) "winning"

2) The government becomes dependent on these weird taxes to fund itself. When the desired change in people's behavior occurs, the government suddenly has a "revenue problem"... If everyone quit smoking and drinking -- which is supposedly the point of "sin taxes" -- state and federal coffers would be in trouble

And one other point: all this "kill the bankers" hysteria ignores the undisputed fact that many of the problems in the economy were caused by the people who will not be effected by transaction taxes... the Fed/Alan Greenspan (too many errors to list here), Barney Frank (pillaging FNMA), Bill Clinton/Larry Summers (legalizing CDS trading in 2000), Henry Paulson (rob the taxpayer to pay Goldman Sachs), the SEC (ask them what they did if they ever wake up), Tim Geithner (rob the taxpayer, reward inept bankers, and then blame it on Turbotax)

If the author really wanted to restore market credibility (and not just exact political revenge) -- he would have suggested taxing political speeches, regulatory documents, and lobbying activity -- all of which contributed heavily to the economic situation of today

Aug 30 06:33 PM

[Mill Rat:]

On Sept 29th, the following commentary appeared on the web site of the New York times:

economix.blogs.nytimes.../

Although this type of taxation may not be a perfect way to regulate, the concept of using taxation to correct the economic distortions of structured investment vehicles still has many merits. Additional regulations would still be needed, however. And, I would not want to see us rely entirely on just a tax strategy to inhibit the potential abuses and economic distortions related to structured investment vehicles.

Bryan

Sep 30 07:35 PM