Why It’s Absurd that America Doesn’t Tax Wall Street’s Transactions

Yves here. The post below from Paul Buchheit makes a persuasive layperson’s case for a financial transactions tax. There is an equally sound case to be made from a financial markets viewpoint.

The idea of a financial transactions tax started with James Tobin (they are often referred to as “Tobin taxes”). Before the US went off the Bretton Woods standard, exchange rates were fixed. Tobin recognized that the post-Bretton Woods world of floating currencies would encourage currency speculation which if it became excessive would produce undue volatility. Currency volatility is a Bad Thing because it makes it difficult to plan. In the old days, when Italy had the lira, if you an Italian businessman wanted to export to England, you’d need to see if you could earn enough money based on what you’d assume the sales price range would be in pounds. Obviously, you’d need to anticipate price movements within a certain range, but if prices were so variable that you couldn’t make a reasonable forecast of the range of expected pound/lira movements, you probably could not go ahead, since you’d be taking too much risk in gearing up the additional production and investing in marketing in England. To put it more simply, too much volatility hindered trade, and thus commerce. (And if you don’t think currency traders create volatility, I have a bridge I’d like to sell you. I’ve sat on currency desks and watched interbank traders push the markets around. And a very few were good enough to make money consistently doing it. Andy Kreiger was famed throughout the industry for his ability to fake out other traders (we have a short description of his ruses in ECONNED).

So the point of a transaction tax is to dampen volatility by increasing the cost of trading. It’s a deliberate “throw sand in the gears” strategy. Now why could that possibly be a good thing? Let us turn the mike over to Andrew Haldane, the director of financial stability at the Bank of England. From his speech The $100 billion question:

Tail risk within some systems is determined by God – in economist-speak, it is exogenous. Natural disasters, like earthquakes and floods, are examples of such tail risk. Although exogenous, even these events have been shown to occur more frequently than a normal distribution would imply. God’s distribution has fat tails.

Tail risk within financial systems is not determined by God but by man; it is not exogenous but endogenous. This has important implications for regulatory control. Finance theory tells us that risk brings return. So there are natural incentives within the financial system to generate tail risk and to avoid regulatory control. In the run-up to this crisis, examples of such risk-hunting and regulatory arbitrage were legion. They included escalating leverage, increased trading portfolios and the design of tail-heavy financial instruments…

Because tail risk is created not endowed, calibrating a capital ratio for all seasons is likely to be, quite literally, pointless – whatever today’s optimal regulatory point, risk incentives mean that tomorrow’s is sure to be different.

Now let us take this first observation from Haldane, that banks themselves generate risk, and combine it with a discussion in one of his later speeches:

In particular, we can draw on a framework developed a century after the introduction of limited liability – the contingent claims model of Nobel Laureate Robert Merton (1974). This tells us that the equity of a limited liability company can be valued as a call option on its assets, with a strike price equal to the value of its liabilities.

Figure 1 demonstrates this option-like payoff profile to holding a hypothetical bank’s equity. The beta of a firm is measure of how its value varies with the market as a whole. Arithmetically, the beta of a bank’s equity is the product of its leverage and the beta of its assets.11 So assuming an asset beta of 0.1 and a leverage ratio of 10, the bank’s equity beta will be equal to one. The returns on bank equity and the return on the market will then lie on a 45 degree line, provided returns are positive. When market returns are negative, however, returns on bank equity will not follow them south. Instead they will be capped by limited liability.

This asymmetric payoff schedule generates interesting incentives. The value of the equity option is enhanced by rises in the volatility of the bank’s assets. Why? Because volatility increases the upside return without affecting the downside risk. If banks seek to maximise shareholder value, they will seek bigger and riskier bets. Joint stock banking with limited liability puts ownership in the hands of a volatility junkie.

To put it simply, financial firms have huge incentives to generate volatility, which profits them at the expense of the real economy, and they have the means to do so. A transaction tax is one approach to making it less profitable for them to create volatility (Haldane has argued for prohibition, meaning an outright ban of unduly risky activities and products).

I have a minor quibble with the Buchheit piece. He argues, as many do, for both the socially desirable effects of a transaction tax (as in discouraging the real economy tax of excessive speculation) and its revenue generation. Tobin taxes are meant to discourage unwanted activity. Think of them as a tax on pollution. The fact that they’d also produce income is a positive side effect, not the main objective.

By Paul Buchheit, a professor with City Colleges of Chicago, founder of fightingpoverty.org and co-founder of Global Initiative Chicago. He is the editor and main contributor to the forthcoming book, “American Wars: Illusions and Realities.” Cross posted from Alternet

The logic for the tax is indisputable:

1. Financial industry speculation devastated middle-class homeowner wealth.
2. U.S. investors pay zero tax on their speculative transactions.
3. The tax is easy to implement, and is very successful in other countries.

The emotional appeal reaches most of America:

Why should the rest of us pay up to 10% on the necessities of life while risky derivative purchases aren’t taxed at all?
Why should kids around the country lose their arts programs while trillions of dollars flow, untaxed, to Wall Street?

On July 8th, 2013, Chicago Political Economy Group (CPEG) member Bill Barclay and Illinois Green Party Chair Rich Whitney presented arguments for the Financial Transaction Tax (FTT) in front of the Illinois Pension Reform Committee. The video is available here (01:29:40), and the slideshow here. Much of the following derives from their work.

The Tax Works in Countries with the ‘Freest’ Economies

A good place to start is Singapore. Or Hong Kong or Switzerland. These are three of the top five countries on the Heritage Foundation’s Index of Economic Freedom, and they all have FTTs. Critics who might argue that non-FTT taxes are lower in Singapore and Hong Kong should look at World Bank and CIA World Factbook datasets, both of which show the U.S. with lower tax revenues as a percentage of GDP. The U.S. is clearly undertaxed across a wide range of taxes.

Unimaginable Amounts are Being Traded in the U.S., with Zero Tax

Unfortunately, in our country, discussions about pension reform and education and infrastructure usually lead to talk about further cutbacks, as if that were the only solution. But pension funds and schools lost money because of financial industry malfeasance. And yet the financial industry keeps surging ahead. The 2012 trading volume for the Chicago Mercantile Group (CME) alone was $806 trillion, about 12 times more than the entire world GDP. In 2011 it was over $1,000 trillion — that’s a mind-dizzying $1 quadrillion.

There’s no sales tax on all that, just a tiny administrative fee. We’ve had to look elsewhere for our education funds. As Whitney noted, “Our tax system taxes poverty far more than it taxes wealth.”

A Tiny Tax Would Pay the Entire 2013 Federal Education Budget

A bill sponsored by Illinois Representative Mary Flowers would impose a modest .01% tax on CME stock and derivative trades. It would not include transactions involving securities held in retirement or mutual fund accounts. With this little tax, at current trading levels, up to $80 billion would be realized annually. Chicago-area trading alone would pay the entire federal education bill.

It’s Easy to Administer — Especially for One of the Most Profitable Companies in America

What are the objections? Administrative cost and inconvenience? No, the FTT is easy to administer, and difficult to evade. Clearing houses already review all trades, and serve as collection agencies for transaction fees.

How about the threat of a move to another state or country to avoid new taxes? It’s hard to imagine that from the CME Group, made up of the Chicago Mercantile Exchange and the Chicago Board of Trade. From 2008 to 2010 the company had a profit margin higher than any of the top 100 companies in the nation.

Big Revenues, Little Risk

Objections to the FTT seem superficial in light of the two main benefits: (1) The massive revenue potential; and (2) the likelihood of limiting the speculative trading that contributed to the financial meltdown in 2008. Informed Americans are in agreement on this. The tax is simple and effective and fair and long-overdue, and obvious to everyone except the business-friendly members of Congress.

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  1. two beers

    “Why should kids around the country lose their arts programs while trillions of dollars flow, untaxed, to Wall Street?”

    Arts programs? They’re shutting down entire colleges.

    Consider the current assault on City College of San Francisco by an out-of-control accreditation agency replete with conflicts of interest, an obsession with secrecy, and ties to libertarian foundations intent on privatizing public education.

    The accreditation agency in question has it in for dozens of California community colleges. Why?

    1. C

      Because they are under orders to pave the way for online education. Never mind that over half of the students who were forced into an online remedial math course failed.

    2. mookie

      CCSF is the canary in the coal mine demonstrating the neoliberal agenda for public education. It’s the dominant ideology of the day, and the boomers at ACCJC and elsewhere who are enforcing it are true believers. ACCJC has no problem with the quality of education at CCSF, only with the fact that CCSF continued to provide the same level of service during an economic downturn, shrinking their economic reserves. They want CCSF to provide fewer classes at a higher cost to the lower classes. That “market forces” (read: private education funded by public coffers) will pick up the slack is left unstated, but it’s a poor student who can’t read between the lines.

      1. Nathanael

        The accreditation agencies are completely deranged. I watched two local colleges go through the process.

        They add no value; they judge based entirely on bullshit having nothing to do with education whatsoever.

        I’m waiting for high-end liberal arts colleges and Ivy League schools to simply dump accreditation, and say “We’re not accredited. Deal with it. You know our reputation, we’re better than those accredited idiots.”

        This is a very likely event, since the accreditation agencies are completely worthless in every way whatsoever.

  2. Otto Maddox

    I wonder who ultimately pays for a financial transactons tax? Where is the incidence?

    1. mookie

      These days the OVERWHELMING majority of financial transactions are created algorhythmically by computers running programs created by the so-called quants and executed on the level of milliseconds. That’s the incidence. The effect of these transactions is to drain money from real investors into the pockets of those at the top.

      1. redleg

        This is a very good reason to impose this tax on BIDS rather than the transactions, as HFT submits millions of offers that are there for milliseconds and withdrawn.

  3. psychohistorian

    I dislike the transaction tax approach to our problems because it is a fig leaf of “control” of the financial sector being touted in the posting as a tax base for education.

    Don’t we want a stable tax base for education? Why not tax all the corporations that operate in the US to pay for the educational system we think is best?

    Ad hoc, lurch management of our society will not get us out of the mess we are in. Even if a Tobin tax was created and implemented, given the current condition of corporate law bending, IMO, within 5 years the tax would be foisted off on the small investor.

    I see a Tobin tax as a little pink bandaid on a metastasizing cancer within our financial system….and a waste of time w/o some real change in the structure of human finance.

    1. Glenn Condell

      Yes, but no suggestion for change on its own is likely to be enough. A Tobin tax should be just a part of new regime, along with Glass Steagall, MMT, TBTF, a ban on HFT, higher capital reserves, global legal sanction to breakup offshore entities and repatriate the 32 trillion dollars of taxable funds therein, Central Banks to have publicly elected heads and a North Dakota style charter, bankers receiving public funds to be paid public servant wages, and perp walks and jail time for corrupt bankers and hedgies and mortgage fraudsters. Together such measures might make a dent…

  4. mookie

    That it’s a band-aid may be true in the larger scheme of things but, if enacted, a transaction tax would lessen the power of the house in the grand market casino.

  5. GRP

    FTT is a great idea to limit volatility. However, I am not sure about its effectiveness in bringing in significantly large tax revenue. The transaction volume will be significantly reduced once FTT is introduced, since several transactions that take place today will not be taken up when the overheads of the transaction go up.

    It would have been nice if the author presented figures of what percentage of tax revenue comes from FTT in countries that already have it.

  6. John F. Opie

    I’ll be the contrarian here: it’s not a good idea.

    First: Wall Street speculation didn’t devestate middle income wealth: as Yves has amply documented, it was outright fraud and duplicitiousness that caused the crash. Add to that terrible government policies that created subprimes – I know many don’t think that the subprimes were the cause of the crisis, but hey: no subprimes at all and you remove the tool which Wall Street fraudsters used to crash the system after first betting that it would crash – and the crash was just a question of time, especially with the pathetic regulation that Yves, once again, has documented here extensively. The lack of prosecution for these crimes and the lack of effective regulation remains, for me, proof that the criminal inmates are in charge of the asylum. If you want to prevent the crash from happening again, that has to be changed.

    Second: sure, the transactions aren’t taxed: the profits, however, sure are. Maybe not at the rates that y’all would like, but most certainly they are taxed.

    Third: this is throwing out the bathwater with the baby. If you want to punish speculative activity by making it more expensive (i.e. tax what you don’t want people doing), then do that, rather than tax all transactions. Otherwise you are taxing every single financial transaction, regardless of its “validity” or “worth” in order to reign in an activity that will scratch its collective pointy head and keep on doing what it does.

    What a Tobin tax really does is simply add revenue to the government general revenue coffers. It’s not neutral nor is it “too small to hurt”: that 0.01% tax, in the example ut supra, generates $80bn in revenue, and that’s $80bn taken from the private sector to finance government spending. While you might think that this would directly affect only speculators and the like, it doesn’t: the trading on the CME goes into manufacturing industries, foodstuff production, etc etc etc, and you are, effectively, taxing something that you should be wanting more of, not less (industrial activity). That $80bn will necessarily either have to come from reduced profits or increased prices: this is not money out of thin air (that’s reserved for the Fed, and they are jealous of their perogative).

    Now, regardless of what I’ve argued here, there’s another reason why the arguments presented above just doesn’t hold water: it won’t stop financial misfeasance. Seriously, it won’t. It might dampen some volatility, but only where the margins are so small that they would actually be dissuaded by a 0.01% transaction tax. If that is enough to dampen volatility, then there is something seriously wrong with your financial system.

    While you might want to punish financial “speculators” and generate income to fund your pet projects (and to be honest, that is what they seem to be: arts programs are nice-to-have, rather than necessities), a financial tax as proposed is simply yet another way of taking money from the private sector and giving it to the government to spend instead: we all know how well that works in today’s marvelous world of crony capitalism and government malfeasance.

    If you really want to tax speculative activity, then capital gains is where you go, since reducing profits reduces the incentive to take on risky business (then again, the real-world effect is greater volatility, since you have to generate even greater returns to pay the tax and yet make the returns you want…). If you really want to be able to fund pet projects like art programs, then you’d better be able to make more fundamental choices like everyone else about budgeting and staying within that budget.

    Otherwise, you’re actively punishing those who are in the financial markets buying and selling commidities for use by taxing them for something they’re not doing. That’s just?

      1. John F. Opie

        Yves, there is nothing there that challenges what I say: HFT isn’t the problem that is being addressed here. I don’t like HFT; I don’t think HFT does any good for anyone except the companies driving it; HFT increases volatility; HFT masks “normal” price-finding by distorting and manipulating what little price-finding is left in the markets; HFT is utterly intransparent and makes it virtually impossible for anyone outside the HFT world to even attempt pricing trades; HFT richly deserves to be banned entirely and forbidden under penalty of castration, disembowlment and dismemberment with extreme prejudice, preferably salting the grave as well to ensure that nothing every grows from such an abomination.

        But a transaction tax? I’d only agree if there was a transaction tax, say, for any transaction executed within n or 1/n seconds of other transactions from the same company in order to only tax HFT transactions. Otherwise you are punishing the innocent in order to reach the guilty.

        To be sure, taxes are a necessarily evil to pay for the commonweal: they should, however, not be blind if they are aimed at reducing activity that politicians have deemed undesireable, but who at the same time fail to address the primary problem, rather than a symptom.

        1. Yves Smith Post author


          You are missing the entire point of the argument.

          An transaction tax is meant to increase cost and discourage speculators. A very small charge will drive out a lot of speculators, particularly the HFT sort (who do account for most transaction volumes today, the average holding time on a NYSE stock was down to 22 seconds, and IIRC that was as of 2011, it has to be even shorter now).

          People traded stocks just fine in my youth when transactions were dominated in eights and a discount broker cost huge multiples of what the costs are now. Your idea of how much of a charge constitutes harm is way out of line with anything that would affect anyone other than ridiculously high volume traders and the professional intermediaries, both of whom NEED to be discouraged because they generate unnecessary volatility that profits them and hurts you (on a transaction level and in terms of systemic risk).

          1. Nathanael

            People traded stocks just fine when the NY State Government actually *imposed* a Tobin Tax (under another name) on the NYSE and OTC trading, as it did in the 19th cenutry.

            Someone can look up what year that tax started beeing “rebated” to the stock speculators. The tax is actually still on the books.

        2. skippy

          “To be sure, taxes are a necessarily evil to pay for the commonweal” – Opie

          Excuse me good commenter, but…. what end of the bad part of the stick do you spawn from…

          Skippy… and again where is the delineation of market and polity[???] as the polity is serving the market at the end of the day…

    1. skippy

      “a financial tax as proposed is simply yet another way of taking money from the private sector and giving it to the government to spend instead: we all know how well that works in today’s marvelous world of crony capitalism and government malfeasance” – Opie

      Skip here… what planet did you just arrive from[???]… the “PRIVATE SECTOR” please provide the delineation of such distinction ——- its the financial sector… en fin~

      skippy… hint – its a step in the right direction… me personally… my ancestor says flamethrower… burn all the BS paper… its a pox on humanity+++

      1. John F. Opie

        Private as opposed to public, Skippy. Real simple. If it’s not government, then it’s private.

        Besides, if such a tax were to be implemented, you can be assured that those who receive such tax assessments will pass that on to someone else, ultimately reaching the consumer in the form of higher costs. Bank fees or brokerage fees would increase. That’s not going to deter Mr HFT.

        1. skippy

          Not having a bar of it mate… history refutes you.

          Skippy… I’ll suck up the diff… just to see the bastards hack of meters off their toys…

        2. Mannwich

          If the industry is inherently supported by taxpayers (“the government”), then it’s not “private”. At least not in my view.

        3. Me

          Your logic is absurd. If we used your logic for everything nothing would ever be justified. Want to stop a nuclear power plant from dumping pollution in a river? Well, it will cost more to store the pollution and some of those costs could be passed off onto consumers. Obviously non-market, external costs, or hard to calculate social costs, don’t exist in your universe.

          Nothing ever happens without costa and benefits. It is possible that the giant financial institutions can pass off some of the costs onto the tax payer or consumer. Wow, would that not be a change. We the tax payers haven’t given trillions since the financial crisis have we? The financial parasites haven’t created massive social costs by robbing home owners, consumers, tax payers, local, state and national governments blind, have they?

          The people, or machines, that are doing a massive amount of trades are not helping to lower the costs of business or to help society at large. They are holding their investments for a few minutes on average then trading it for speculative purposes. It doesn’t benefit society at large a bit. Finance has to shrink relative to the real economy. A debt write down and a move away from financialization needs to happen or this economic system will collapse. If you always prioritize finance you do so, in the long run given what we are faced with, at the expense of the capitalist system. I wouldn’t have a problem with that, I am guessing you would.

        4. Nathanael

          Don’t be stupid. The distinction between government and private is REAL vague.

          Is the local cable monopoly, existing solely due to a government “franchise” grant, “private” or “government”? Effectively, it’s government. But the profits are private and it is unaccountable, compared to government.

    2. jayray

      I wouldn’t say that it’s “punishing” anybody; that line of thinking might lead you to conclude that all taxes are punishments. Those conclusions lead to anarchy since taxation is a sovereign rite and we the people are the font.
      A tax is not only a means of raising money (especially in an economy with a sovereign currency). Taxes should be crafted with incentives in mind, i.e. if you want to limit a potentially harmful activity, then tax it more, take for example cigarettes. High-Frequency trading is an activity that is harmful to pretty much everyone, so why not create tax barriers? Of course this line of thinking leads you to conclude that we should be very careful about taxing non-harmful activities, such as employment, food, etc…

      1. PaulArt

        Well said. The aim of proressive taxation is to provide a level playing field. Progressive taxation is the bit and bridle to be applied on the human vice called greed. Greed unfortunately happens to be the only way to motivate some people to get their creative juices flowing. Albert Schweitzer and Gandhi did not need it to accomplish their objectives but some life forms lower down the evolutionary scale need it to get the gears and pinions in their craniums ticking. For example like the one to whom you replied – the kind that lives under a bridge, has missed several dental appointments and jump out frequently to accost passing strangers with riddles.

    3. petridish

      I couldn’t figure out what bothered me about your comment until I reread it. It’s the same formulaic rebuttal generated every time a regulation or regulatory tax is proposed. Calmly written, reasonable use of grammar and paragraphs, replete with assertions and completely devoid of supporting links and documentation.

      First. Deflect responsibility for middle class devastation away from Wall Street and onto the CRA and its filthy subprime spawn. Again with the CRA–you people will not let this go.

      Second. The poor Wall Streeters already pay taxes although maybe they’re not gouged as much as the rabble would like.

      Third. The tax, as proposed, won’t do what you say you want to do. (No evidence, assertion only.)

      Next is a nicely choreographed and well-paragraphed ping pong game. On one side is the “all you really want to do is steal private money to fund unnecessary “pet” public projects” argument. Obligatory references: tax will just be passed on, hurts manufacturing. (Jobs reference.)

      On the other side is “the system stinks, what you really need to do is reform the system and you do that by doing something other than what you’ve proposed” argument. Insert straw man here.

      The finish? It’s just not FAIR.

      The only Norquist box you didn’t tick was the union box. Is that you, Grover?

    4. Moneta

      Financial markets are supposed to grease the economy, not take over.

      If the financiers are printing without doing their work properly, such allocating capital efficiently, then they are a commodity and should not deserve outstanding compensation.

      Since they have demonstrated zero skill in capital allocation over the last few decades, and all they are doing is skimming the market, we should tax them outright and give the money back to the real producers who will better allocate capital.

      The financial sector needs to shrink relative to the rest of the economy.

    5. craazyman

      Mr. Opie you have hit the nail on the head!

      Even a late night scan of the peanut gallery brings unexpected intellectual reward.

      $80 billion spent for art classes would be a waste of money almost beyond imagination — were it not for the Department of Homeland Security or the NSA, but lest we digress . . .

      Most folks spend money on art classes and then don’t practice and never get anywhere. They buy art supplies and don’t use them. They pay for lessons but they don’t learn. The problem isn’t the classes, the problem is the students. $80 billion won’t change anything!

      However, if the $80 billion were spent on real, honest Wall Street regulation and enforcement — repairing the vast deficiencies you rightly accuse — imagine the return on investment. It would be incalculably large. Why try to put a price on justice? It can’t be done.

      $80 billion spent the right way, That’s really the problem and the transaction tax could be half the solution. The other half would show up if they got paid.

  7. LAS

    Why can’t something like this be passed in the US? Is financial services resistance primarily exerted through (a) political fund raising, (b) through ALEC or other organized corporate lobbying, (c) through revolving door crony capitalism or (d) something else? It would be great if we better understood the attributable power of each barrier; then we could target our efforts to knock one of them down.

    1. Strangely Enough

      If it doesn’t fall under (c), (d) could easily be “Clintonesque windfall.”

  8. allcoppedout

    Transaction taxes tinker at the edges. Haldane is a smart cookie, even paying attention to models of stable ecosystems. Any options we take are subject to scuzz factors of the ‘criminal minds’ looking to subvert them. Evolution is always something of an ‘arms race’. Sport changes rules to change behaviour with high levels of scrutiny and umpires to make decision. Players and coaches still game the system.

    What we presumably want to stop is cheating, but we seem to do this without realising most of the problems and leaving the default to an honour system. What we really need is public scrutiny. The plot is already lost before we consider stuff like transaction taxes because they have the umpiring system rigged.

    Years ago in Britain we paid the slave owners compensation (massive amounts) and I’d suggest we are in a similar pickle with the financiers now. We need braver thinking than this.

    In principle we could develop open auction systems that prevent front running and the rest – the old question of owning the means of production. What we are getting wrong is the use of technology. By now we could pick up a jar of coffee or a pair of trousers equipped with a mass of supply chain information – and much the same could be done in respect of trades. Instead, technology remains harnessed to cheating systems in a financial system at least two thirds too big. Competition is by technology and the first rule of management information systems (that there should be equality of access) is breached to maintain privileged control of what makes money.

    I’d say the real problem we can’t address is the replacement of much so-called professional activity by machine. Rather than footling with the tax system, our concerns should be with the embodiment of knowledge and how professionals keep their restrictive practices when everyone else has been through lean re-engineering. I can weld with computer help (welder skills are embodied) though could never master such skills – teaching in business schools was much easier.

    Back in the 80’s we hoped to embody professional skills (an old marxist theme), much as we had artisan skills in machines. Professionals like to imagine we failed because these skills were too high level to computerise (how awfully smart lawyers, teachers, doctors, financiers etc. are). In fact, professionals engage in restrictive practices in very cunning ways. Tobin tax suggestions are part of this cunning strategy – the idea is always to leave what could be made transparent and available to all to use in the hands of the few. Literature on this is legion.

  9. washunate

    I’m not adamantly opposed to Tobin taxes specifically, but I personally have deep reservations about using the tax code for any purpose other than raising revenue (taking currency out of circulation).

    There are just too many unintended consequences in the broad range of taxes and tax deductions/credits that our leaders have so befriended over the years. I think the costs of supporting the broader idea that tax policy can have positive social benefits vastly outweigh the specific benefits of financial transaction taxes.

    1. Yves Smith Post author

      A lot of people prefer banning various activities (Haldane is one and I’m of the same school) but politically that’s even harder than getting a tax. So I’d rate make some progress than throw in the towel.

    2. Nathanael

      There is *huge* historical evidence that it works better to tax and regulate bad things than it does to ban them.

      Alcohol prohibition is a case in point. Banning alcohol didn’t work at *all*. Taxing it had some positive effect.

      1. washunate

        Alcohol, cigarette, and gambling taxes place a disproportionate burden on lower income citizens and small business establishments. I do not consider that working.

        I think you think I’m advocating prohibition of recreational drugs? I assure you, I am as far from that position as is possible. Rather, I am pointing out that sin taxes are regressive. IMO, if we need revenue, we should levy other kinds of taxes. If we’re trying to influence behavior, we should use tools other than the tax code.

  10. Moneta

    Debt-to-GDP is too high. Capital markets are too big for the level of GDP. We need to increase GDP and we refuse to write down anything.

    If we want to fix the system, we need to shrink the banking system. But no on wants to write down anything. Everything wants to paper over everything and see where the ball rolls.

    In the final analysis, you can’t have printing without fraudsters. As long as we print our way out of this mess, corruption will prevail.

  11. F. Beard

    Our financial system is based on usury from one’s fellow countrymen and theft by money dilution. And via government privilege* too!

    Why should anyone even try to make that unjust system work better?

    Do we believe in a meritocracy? Then why do we subsidize theft?

    *In our so-called “free market economy.”

    1. Nathanael

      “Why should anyone even try to make that unjust system work better?”

      Path dependency. Overthrowing an existing system and replacing it creates very, very large temporary dislocations, which people would like to avoid, hence the taste for tweaking the existing system repeatedly until we get to a new system.

      If the system refuses to be tweaked until it becomes something new and more useful, then revolution becomes unavoidable.

  12. washunate

    Also, this section is confusing a number of different issues:

    “Unfortunately, in our country, discussions about pension reform and education and infrastructure usually lead to talk about further cutbacks, as if that were the only solution. But pension funds and schools lost money because of financial industry malfeasance. And yet the financial industry keeps surging ahead. The 2012 trading volume for the Chicago Mercantile Group (CME) alone was $806 trillion, about 12 times more than the entire world GDP. In 2011 it was over $1,000 trillion — that’s a mind-dizzying $1 quadrillion.

    “There’s no sales tax on all that, just a tiny administrative fee. We’ve had to look elsewhere for our education funds. As Whitney noted, “Our tax system taxes poverty far more than it taxes wealth.””

    First, various funds lost money due to a combination of three main factors that have nothing to do with financial transaction taxes: mismanagement (incompetence/corruption), underfunding (and thus, investing too riskily), and financial crimes. Basic rule of law is under assault here – that’s the core problem.

    Second, there is no sales tax on almost ANY financial activity. That would actually be an interesting proposal – but the author doesn’t talk about this at all.

    Third, transactions aren’t the same as wealth. A wealth tax would also be an interesting proposal, but again, the author doesn’t talk about that or relate it to transaction taxes.

    Fourth, the reason that public assets are under assault has nothing to do with taxes or revenue or costs or speculation or gambling or anything like that. It is an ideological assault on the idea of public good. The desire is to privatize the public commons for private gain, from education to transportation to healthcare to water/sewer to electricity to fill in the blank.

    Fifth, specific to education, we don’t fund education nationally. In fact, the USFG in aggregate imposes more K-12 educational mandates than it provides funding to local school districts to pay for them. National financing of public schools through progressive income taxation, inheritance taxation, wealth taxation, capital gains taxation, or similar methods, is another interesting proposal that has nothing to do with financial transaction taxes.

  13. Dan Helphrey

    I wonder if simply taxing realized capital gains at the same rate as other income, and making sure every transaction is counted, wouldn’t have the same effect? Buy a stock and hold it – no tax until you sell; move money from stock “A” to “B” to “C” in a millisecond – pay full rate on the capital gain from selling stocks “A” and “B”.

    Besides the tax itself, the compliance cost of having to account for each one of those millions of individual transactions would be a strong incentive to get out of the casino.

    1. Nathanael

      If banks and similar speculators were taxed on GROSS profits from capital gains, that would do it, but it is contrary to the way businesses are usually taxed, which is on NET capital gains. They get to deduct the losses.

  14. TC

    “To put it simply, financial firms have huge incentives to generate volatility, which profits them at the expense of the real economy, and they have the means to do so.”

    Just wanted to add that, from a chart-watching technician’s perspective this point you have made appears quite evident.

    Thanks for posting this article! Hope many readers will tweet it using the #WallStreetSalesTax hash tag.

  15. Another Gordon

    A while ago I crewed for a weekend on a friend’s sea-going yacht. These days he uses GPS for navigation but as insurance still has a traditional compass. Obviously the compass disk cannot be allowed to swing too freely or the motion of the boat would make it practically unreadable so it’s damped by immersing it in clear oil slowing its swinging so as to give a usable reading.

    Surely this is the perfect metaphor for transaction taxes. Of course the big traders want maximum volatility since that’s what they make their income off. Of course everyone else wants a more stable and more useful reading. Transaction taxes are the compass oil that should provide the necessary damping.

  16. kimsarah

    Our priorities are messed up. What’s more important? An arts program or bonuses for our job creators who toil to put roofs over our heads and food on the table.

    1. Moneta

      We already have enough food and roofs.

      If we limit ourselves to the essentials, less than 10% will have jobs.

    2. Moneta

      I would prefer more art and less stuff…

      Art can be in everything we do. Frankly, I find a big percentage of North America incredibly ugly. Too much has been based on utility and minimizing short term costs. Planned obsolescence is ravaging our cities and the landscape will look increasingly ugly over the next few decades.

      Once the basic needs are met, humans need art. When it is not valued, cities implode. The moneyed leave and look for more appealing places. Gentrification always starts where the artists live.

      No art no soul.

      I believe we need art that incorporates sustainable development and brings back skills that offer flow.

      The day we can get beyond materialism is the day we will be taking power away from the bankers.

    3. Strangely Enough

      job creators who toil to put roofs over our heads and food on the table

      They don’t seem to be doing much to earn those bonuses…

  17. darms

    The US imposed a financial transaction tax from 1914 to 1966. The federal tax on stock sales of 0.1 per cent at issuance and 0.04 per cent on transfers. Currently, the US has a very minor 0.0034 per cent tax which is levied on stock transactions. The tax, known as Section 31 fee, is used to support the operation costs of the Securities and Exchange Commission (SEC). In 1998, the federal government collected $1.8 billion in revenue from these fees, almost five times the annual operating costs of the SEC.

    1. Nathanael

      The problem is that various types of floor traders, including market makers, are exempt from the Section 31 fee, which enables them to engage in high-frequency trading.

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