November 8th, 2011 – One thing traders do not need is more taxes. Trader’s profits are already taxed at often outrageous rates. The percentage taxed on short term capital gains is said to be greater than the tax rate that triggered the American Revolutionary War. Despite this already dire situation, certain forces are pushing for another tax on traders. Called by different names for different markets, this so called stock transaction tax, financial transaction tax or the Tobin tax is gaining support in high places. Even the once uber capitalist Bill Gates has come out in support of such taxes. Gates got involved when the G20 leader asked his foundation to look at ways member countries could raise money for developing nations. This includes an estimated $80 to $100 billion to help the poor adapt to climate change. Yes, you read that right. For further absurdity, Gates suggests even a small tax of 10 basis points on equities and 2 basis points on bonds would raise about $48 billion among G20 member states, or $9 billion if only adopted by larger European countries.
While making sense to ivory tower rich guys like Gates, financial transaction taxes have proven to be ineffective and damaging to markets. Basically, what happens is the tax results in trading volume decreasing thus lowering the amount of projected revenue. When this tax scheme was tested in Sweden in 1984 revenues were less than 5% of the projections on average. This is not mentioning a sharp decline in trading volume. The tax was abandoned in 1991 after proving itself a disappointment.
Not only Bill Gates disagrees; according to Harvard’s Paul Epstein in his Atlantic Magazine article, “In April of 2011 over 1,000 economists, including Jeff Sachs of Columbia’s Earth Institute, called for a Tobin Tax (aka, a “Robin Hood tax”) to address world poverty and disease. And in June 2011, Jose Manuel Barroso, president of the European Commission called for a Tobin Tax to address the imploding economies of Europe. A recent Oxfam poll showed that 51 percent of Britons support a Tobin Tax. A small Tobin Tax would make possible a global Keynesian stimulus package for clean development that could address our needs for climate adaptation and stabilization, disease control, ecological restoration, and sound economic development. Will world financial leaders ever agree to such a thing?” It’s important to note that Epstein is speaking about the Tobin tax. This would tax financial transactions in currencies. Wonder why he doesn’t mention the cross border regulatory arbitrage and other means to circumvent this pie in the sky idea.
History and common sense makes it clear that a financial transaction tax is a bad idea for everyone. Traders need to educate politicians and others to this fact before it’s too late.
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