Medicine for Wall Street: A Financial Transactions Tax
In the best "kick em, when they're down" spirit of American politics, now is a great time to be pushing a financial transactions tax. The greed and incompetence of the Wall Street crowd has thrown the economy into a recession in which hundreds of thousands have already lost their job, millions are losing their homes, and tens of millions of losing their life's savings as their home equity vanishes before their eyes.
In the fallout, some of the big Wall Street firms are going down too, Lehman and Merrill Lynch yesterday, maybe AIG today. Of course Freddie and Fannie sank last week. But even with the collapse of these financial giants we still have a badly bloated financial sector that preys on the rest of the economy.
We should seize on this moment in which the public is rightly outraged by the greed and stupidity of these financial wizards to drive a stake into the heart of Wall Street. With a financial transactions tax we can bring this financial behemoth down to size once and for all.
The basic point is very simple. We impose a modest transactions tax on all financial transactions, for example a tax of 0.02 percent on the purchase or sale of a future contract or a tax of 0.25 percent on the purchase or sale of a share of stock. (The United Kingdom has had a tax of 0.25 percent on stock sales and purchases for many decades.) Such a tax could easily raise a $150 billion a year, enough to pay for a national health care program or a major clean energy initiative.
A tax of this magnitude will have almost no impact on someone who intends to buy and hold a financial asset. No airline is going to be discouraged from hedging on jet fuel futures because of a 0.02 percent tax, nor will any farmer be dissuaded from hedging on her corn crop.
Similarly, most long-term investors will not even notice the 0.25 percent tax when they buy or sell their stock. The reduction in transactions costs due to the development of computer technology over the last quarter century far exceeds the size of this tax. Most traders will be paying far less for their trades in 2009 with the tax, than they did in 1980 without the tax.
The only people who will really be hit by the tax are speculators; people who buy futures at 2:00, with the intentions of selling at 3:00. Even a modest tax can put a serious dent in the profits of those whose business is short-term speculation. We will therefore see less of this speculation, but it is hard to see why we should care.
Investors who focus on long-term fundamentals will still have every bit as much reason to be in the market. We will just have chased away some of those who use the financial markets for their gambling. In this sense, we would just be treating their gambling as we do other forms of gambling. Gamblers who place bets in Las Vegas or in state lotteries pay very heavy taxes. What is wrong with imposing a modest tax on those who place bets in financial markets?
Of course the financial firms who run the casinos will also face a big hit. The bulk of the tax revenue will be money that otherwise would have flowed into the coffers of the financial industry. This will be a serious blow to the financial industry.
But, this is a benefit, not a loss. We need a financial industry to facilitate the flow of capital from savers to people who want to buy a home or start a business. We don't need a financial sector that develops complex financial instruments as an end in itself. We will have the financial sector that we need with a modest financial transactions tax. We won't have the bloated parasitic sector that has produced the current crisis.
What about all the Wall Street wizards who will lose their jobs? Well what did these people say about the steel workers who lost their jobs in Pittsburg or the auto workers who lost their jobs in Detroit? They had to adjust to the modern global economy. The more liberal folks among the Wall Street crew proposed wage insurance and other measures to cushion the blow. We can give the same to the Wall Street crew.
Let's be clear on what has gone on over the last quarter century. Over this period, there have been enormous gains in productivity, however most workers have seen very little benefit from this growth. Foremost among the big gainers have been the Wall Street crew with compensation packages that routinely run into the tens of millions of dollars. The sector became so bloated that it accounted for more than 30 percent of all corporate profits at its peak in 2004.
The basic story is Wall Street has our money. There will be innocent victims in the battle to rein in Wall Street: the administrative assistants, the custodians, the ordinary workers who will also lose their jobs. This is unavoidable. If we eliminated sweetheart defense contracts with Halliburton and Blackwater, innocent people would also lose their jobs, however few would argue that we should therefore continue to throw taxpayer money in the garbage paying exorbitant fees to these firms.
We have a historic opportunity to correct one of the major distortions to the U.S. economy if we move now. There is no way to reverse the growth in inequality over the last three decades without attacking the elite Wall Street crowd. Those folks who back away from this task simply are not serious about addressing inequality. They have our money. It's that simple.
Supported by the way by the other Bush Administration, after that other stock market meltdown:
http://www.time.com/time/magazine/article/0,9171,970673,00.html
September 16, 2008 9:41 AM | Reply | Permalink
Ha!
How does Nicholas Brady expect the banks to rebuild their balance sheets if Da Boyz aren't allowed to play -- play with FRB money?
The equities division was affected by a drop in stock prices, less trading by clients and "very weak results" from the firm's proprietary traders, Goldman [Sachs Group Inc.] said.
Oops!
September 16, 2008 2:39 PM | Reply | Permalink
Max is on the money again. Bring back Bush 1!
September 16, 2008 9:43 AM | Reply | Permalink
Amen! Brother
September 16, 2008 9:52 AM | Reply | Permalink
You can't be serious, the big arbitrage players (who generate most of the volume) will just move to foreign exchanges.
I'm sure Dubai or some other up-and-coming state will be happy to set up an exchange specifically designed to attract the traders away from the US.
Just like labor or environmental regulations, financial controls now have to be international if they are to be effective.
If you really want to go after hidden wealth have the US invade Switzerland, the Channel Islands and the Caribbean tax havens and close down the shadow banking operations there. The taxes that are being uncollected will provide the funds you hope to capture.
On the other side, one can get lots of money for social programs if we just stop spending 54% of the federal discretionary budget on building bombs and blowing them up. Try looking at the real elephant in the room.
Pie Chart
September 16, 2008 9:53 AM | Reply | Permalink
Your tax haven recommendation is closer to the mark.
This transaction tax proposal comes from a wolf in sheep's clothing. Stake in the heart? Slap on the wrist.
The correct answer was: Maoism and Guillotine.
September 16, 2008 3:22 PM | Reply | Permalink
"You can't be serious, the big arbitrage players (who generate most of the volume) will just move to foreign exchanges."
...and that's a problem because...?
September 16, 2008 7:40 PM | Reply | Permalink
Because jobs and taxes go with the transactions. The current tax code already favors foreign corporations over domestic corporations. Using tax policy to favor foreign exchanges over domestic exchanges makes no sense at all.
September 17, 2008 9:49 AM | Reply | Permalink
September 16, 2008 10:35 PM | Reply | Permalink
Apparently html markup doesn't work, despite claims to the contrary, the Pie Chart URL:
http://www.warresisters.org/piechart.htm
September 16, 2008 9:55 AM | Reply | Permalink
Family housing is military spending?
September 17, 2008 9:54 AM | Reply | Permalink
Actually, we can tax foreign trades of U.S. nationals and U.S. corporations, if we want. (I love it when the big boys get real wimpy when they tell you how hard it is to confront the Cayman Islands.)
To make enforcement really easy, we just give people 10 percent of the tax take when they report untaxed trades. There are plenty of administrative assistants at Goldman Sachs, Citigroup, and other such places who would be happy to make millions of dollars turning in their bosses.
September 16, 2008 9:59 AM | Reply | Permalink
So this tax would apply to US exchanges and US corporations, but not not foreign corporations on foreign exchanges.
Why do you think the business would not simply flow to foreign corporations operating on foreign exchanges since your proposal would give them a cost advantage?
September 17, 2008 1:57 PM | Reply | Permalink
Ummmm.... No.
I would think a better prescription to fight for right now is a STRICT mandate setting LOW debt limits for Corporations, Municipalities, and Households.
Deregulation & Debt caused this.
September 16, 2008 10:14 AM | Reply | Permalink
Taxation Trade is not enough. They will pay the tax, transfer money holdings...
Only an established (Governmental, grounded by legislation) Monitoring system on the banks is the thing that will assure the same or other arrogant speculants and Bank Owners and Conglomerates won't keep on sinking the ship.
I wrote on the campaign aspect of it in my response to Mr. Rotwang's last post.
It should be explained as proper and also essential to the country's and People's Security.
Also, reality has prooved that whoever is claiming that the public does not need protection from irresponsible financial conduct to an extent that risks people's savings and the whole country's stability- Is probably not the Patriot that he claims to be.
September 16, 2008 10:23 AM | Reply | Permalink
Why not go all in and propose a general transaction tax to replace income and other taxes. It would be much simpler, fairer and easier to understand than the hodgepodge of complicated and difficult to enforce regulations we currently have.
See Congressional Research Service Report: "Transaction Tax: General Overview", December 2, 2004(pdf)
A tax rate of ~5% sounds pretty good, especially if you 'split' it between buying and selling. For example, 2.5% when you get paid and 2.5% when you spend.
September 16, 2008 11:19 AM | Reply | Permalink
I like it.
So, let's underestimate the value of CDS at 20 trillion, times .025, carry the 1, we get: $500 billion in revenue? You could fund a good-sized Pentagon for that, on an annual basis!
OK, I'll sign onto a national Sales Tax, at 2.5% for all transactions, so long as ALL transactions are taxed. I guess I could live with food/clothing being excluded, up to, say $5000 annually per household member.
I'm not familiar with the transactional annual totals of various US markets and exchanges.
How long would it take to pay off the national debt at that rate?
September 16, 2008 11:41 AM | Reply | Permalink
I confess I have more questions than answers about a general transaction tax and don't know why it is not promoted more by economists. No doubt it would change economic behaviors and maybe they thought if the economic system wasn't broke, why fix it. Well now it is definitely broken so why not take the opportunity to really fix it.
One of the problems with the progressive tax system is that it is really difficult to persuade most people that it is fair and fairness counts for a lot. Another is that like so many of the programs favored by progressives (eg EITC, FMLA, etc.) it can make people feel poor and excluded if they are in the lower brackets. Is sticking it to some rich guy worth feeling like an object of pity? Not.
I learned that one year when I prepared my retired grandfather's tax return and thought I was doing him a favor by zeroing out his tax liability with various loopholes and credits. He explained to me that poor people don't pay taxes and he wasn't poor.
While he may be in a disappearing demographic, I do think progressives have a way of making poor people feel poorer than they really are and that excluding people from any tax liability decouples them from interest in the political process.
All that was a roundabout way of saying I don't think there should be any exemptions from a general transaction tax. I'll just add that I have no problem with a federal property tax.
September 16, 2008 12:54 PM | Reply | Permalink
Yes. This transaction tax proposal has been kicking around for months. One needs some escape for market-makers or a replacement for the market-maker function, but this tax would cut down on non-productive investing.
As an engineer, I also want something done about s0-called financial "engineering." So could the tax be progressive in the sense that derivatives of derivatives are taxed more highly than derivatives? If WarrenB thinks the instruments are toxic and if JohnQTaxpayer sometimes has to clean up the spills, let's get some revenue.
Finally, let's put a tax on leverage. If you want to leverage something 20-1, you pay the government some interest on the 19 borrowed dollars.
September 16, 2008 11:38 AM | Reply | Permalink
BTW. How did we ever come to call these people financial wizards? Near as I can tell they've never shown the slightest inclination to wizardry or to financial smarts. They are good at making the numbers come out in a predetermined way though. And then selling those numbers to people. Maybe that is where the wizardry comes in. Actually, I happen to think it's more like bullshit.
One more thing before I forget. Did Cindy McCain buy CNN or something? I swear John McCain's face is on there all the time. Maybe he's a wizard. Must be one. All the stuff he's saying he'd have to be to make it happen. Like making Palin ready to take over. Gotta be a wizard.
September 16, 2008 12:24 PM | Reply | Permalink
A financial "Tobin Tax"...
interesting. But not with the current regime.
September 16, 2008 1:26 PM | Reply | Permalink
Eliminating truly long term capital gains, while beefing up the short term (and maybe even adding a really short term rate) might help avoid in and out trading.
I have to say, however, that one GOP point I sometimes hear sounds right to me: eliminate the corporate income tax. apportion any profit to shareholders and include this (as well as dividends) to their income yearly (of course they don't usually add this last bit).
September 16, 2008 1:29 PM | Reply | Permalink
A transaction tax would have done nothing to prevent the current "crisis": it was created by a Garbage-In-Garbage-Out mortgage market (that escaped traditional depository institution regulatory oversight) compounded by excessive leverage that created exceptionally perverse incentives from top to bottom. The trading in the instruments created by this system was not done on exchanges, so where and how would you have imposed the tax? I really don't think I should "pay" for these sins every time a put $5 or $10 thousand in a mutual fund or stock, even if I plan to hold it for months or years.
And even if the tax were to be imposed, why spend for health care rather than covering the costs of financial regulation? I am not reflexively opposed to any taxes/fees on specific activities, but the revenue should be reserved for governmental expenses related to that activity.
September 16, 2008 1:39 PM | Reply | Permalink
I really like this idea, because we need to reemphasize as a society that the only way to create real wealth is patient investment of time&effort&money in worthy projects and organizations, not some scam or the other.
September 16, 2008 7:11 PM | Reply | Permalink
I agree.
"Real wealth" is created by people with good ideas and good enterprise management skills helped along
1) in startups by intelligent bankers and venture capitalists who invest privately, and
2) in established businesses by the retention of profits for reinvestment primarily in R & D.
The purchase of shares in public companies in the casino known as the stock market creates nothing except perhaps in the case of IPOs, those end-of-the-road owners' "cash-outs" which, at the outset, may act as distant goals inducing the initial efforts.
September 16, 2008 8:21 PM | Reply | Permalink
Ellen,
I think those who participate in the stock market serve a function, and it may be unfairly dismissive to equate stock exchanges with casino. They are the ones who provide a market both for stock granted before the IPO and for stock options granted after the IPO, hence providing a corporate performance-based incentive system, to extend your valuation. More generally, do not financial items of value swim in the sea of buyers and sellers (Mao?)?
On the other hand, I used to compare equity investing to a horse race in which the tote board partially determines the winning horse. So, I would prefer to replace casino with rigged race track.
September 17, 2008 1:01 AM | Reply | Permalink
. . . a corporate performance-based incentive system . . . .
Change performance-based to creative accounting based and I'll agree wholeheartedly.
As an example -- Richard McGinn and Carly Fiorina booking $700 million of profits on contracts which the company lendor-financed and never had a chance of collecting on. Result: Lucent market value goes from $258 billion (12/1999) to $2.5 billion (10/2002).
September 17, 2008 7:08 AM | Reply | Permalink
Ellen,
Thanks for that story. I guess that was the performance that propelled Carly to the helm of H-P. Where if I heard correctly, when she managed by walking around, she felt the need to be accompanied by bodyguards to protect her from engineers. And now her straight talk has gotten her kicked off the straight talk express.
Change creative-accounting based to "sometimes fraudulently based, sometimes short-sighted manipulation based, occasionally wise" and I'll agree.
September 17, 2008 10:19 AM | Reply | Permalink
You know little about capital markets, you should stop commenting on them. Without access to capital, companies could not be created, grow, develop new products. There would be very few jobs available, very few new products.
September 17, 2008 10:09 AM | Reply | Permalink
Yes, "Less Than Clever Bulldog," but where do you think companies get that capital?
If you say it's the stock market, kindly provide evidence of what percentage of company capital is raised in that venue.
If you can and if it turns out that the percentage is significant, then, you'll be the CleverBulldog.
I'm not holding my breath.
September 17, 2008 10:24 AM | Reply | Permalink
Have you heard of secondary stock offerings, bond offerings, or rights issues? Most companies obtain nearly all their money this way. They sell corporate bonds, or issue new stock, to fund expansions or meet short term obligations. Look at KMP, which issues new units on a continual basis to fund acquisitions of other pipelines. Barclays and other banks just did a 'rights issue' which solicited new funds from current shareholders. This is how the markets work, and why they exist.
September 17, 2008 10:56 AM | Reply | Permalink
Can't help noticing, "Less Than Clever," you didn't answer the question.
A couple of irrelevant anecdotes ("The plural of anecdote is not data") just won't cut it. Try again.
September 17, 2008 11:17 AM | Reply | Permalink
I answered your question. The answer is most companies obtain funding from the market. As far as what percentage of the funds raised for all the companies on the market, I have no idea how to obtain that other than going through every companies financial statements. I pointed to a couple I am familiar with, if you want to spend a few years researching, go ahead. Maybe talk to a broker, they will tell you the same thing. You could request info on the total dollar amount of corporate bonds, and new stock issues floated. Where do you think capital is raised, from uncollaterialized bank loans? Obviously you just don't understand.
September 17, 2008 11:30 AM | Reply | Permalink
Show the fraction of transaction volume that finances company investment through equity placement versus volume of straight buy/sell transactions.
I am too busy building real products to be a "financial expert", so I don't have the statistics ready at hand.
If the fraction of volume due to equity placement rises to even 1% of total volume, I'll be surprised. The rest of it, whatever fraction it really is, is only minimally useful as a measure of performance. Equity pricing is affected by so many factors *other than* performance, that its value as a measure of performance is very limited.
Though I like Ellen's point that it's much like a casino, I would narrow it down to a very very serious game of Texas Hold'em: It's a game of poker, and it's being played among two basic classes of players: The Real Players versus the rest of us.
So answer Ellen's question honestly: What fraction of transaction volume constitutes actual raising of capital, and what remaining fraction is simply moving money around in the great poker game?
September 17, 2008 12:34 PM | Reply | Permalink
That was not her question or her point. She asked what percent of companies raise monies from the stock market. The answer is all of them at one point, and most of them on a continuing basis. Nearly all public companies issue stock or bonds to raise capital for expansions, acquisitions, or short term needs. She thinks only IPO's are used to raise money, which shows she has no clue how/why the markets work.
September 17, 2008 1:12 PM | Reply | Permalink
"She asked what percent of companies raise monies from the stock market."
No; she didn't. She asked, "what percentage of company capital is raised in that venue [stock market]."
And I should know; I'm "she."
Note: My original assertion was that entities raise capital from banks, venture capitalists, and generate it internally (cash flow and/or profits). I challenge anyone who thinks that the stock market is a substantial source of entity funds (and even IPOs are mostly nothing but sources of entrepreneur rewards) to come up with some figures.
September 17, 2008 2:29 PM | Reply | Permalink
In 2007, U.S. corporations retired a record net $677 billion of their own equities. Paul Kasriel (March 2008)
If you click on the link and go to Chart 3, you'll see that corporations have, for most of the past two decades, not only not raised capital in the stock market by issuing equity, they've actually spent their capital by retiring equity.
September 17, 2008 2:53 PM | Reply | Permalink
But what about my problem?
And now I read in the NYT that AIG was bailed out because of these complicated things.
It is very bad if insurance thingamajigs increase risk.
September 17, 2008 4:45 PM | Reply | Permalink
The key word is "potentially."
The insured debt hasn't defaulted and if it did, would have been paid off (perhaps not at 100%) by a bankrupt AIG which has and would continue to have great businesses.
Note how quickly Lehman was able to sell part of its firm to Barclays.
September 17, 2008 7:59 PM | Reply | Permalink
Ellen,
Lehman was allowed to go bankrupt, but I don't think the liquidation sale is going so well. Barclay's is cherrypicking the good parts (real estate and profit centers) of Lehman. The bad parts (where money is owed) may not sell. Which means counterparties will be writing down assets.
By potentially, did you mean that the US rescue of AIG prevented a very big write-down on a global scale? AIG has about $900 billion of the $60 trillion CDS shitpile. So even if nobody besides AIG went poof and vanished in a cloud of sulfurous vapor, several percent of $900 billion would have vanished. That is is a serious withdrawal.
What I am driving at is that the Phil Gramm regulatory structure for the CDS market has made the world a very dangerous place in which if things go bad, there is potentially huge positive feedback. Enron will downgrade to a tiny disaster. Someone has got to regulate this market with strict capital requirements and Glass-Steagall firewalls and whatever else is wise. The monoline insurers had a nice little business until they became duoline insurers. Some people made a little spare change on MBIA and Ambac puts and shorts -- probably not the not-clever-not-bulldog.
z2v
September 18, 2008 7:13 AM | Reply | Permalink
Folks, comeon; what have financial corps been doing for the last 3 years? Moving to London. And what does London already have? A Transaction Tax. This argument that companies will just go elsewhere is a red herring.
September 16, 2008 8:43 PM | Reply | Permalink
What we need to do is to eliminate the Fed and go back to gold.
September 16, 2008 10:27 PM | Reply | Permalink
The greed and incompetence of the Wall Street crowd has thrown the economy into a recession . . . . Dean Baker
A new myth to join Baker's original "The Dot.com Bubble Caused the 2001 Recession" one!
That recession was caused by businesses concluding they'd bought enough routers and fiber for a lifetime, and this recession is caused by American consumers concluding they have enough granite countertops, whirlpool baths, and Hummers to last them for years.
"Frugality" is the new mantra and recession is the result.
I'd drink a Latte Venti to that, but I've joined the frugal crowd, myself.
September 17, 2008 8:33 AM | Reply | Permalink
It is amusing to hear leftwing nuts discuss the capital markets. Except for the fact that their insane ideas could become law if an inexperienced dolt like Obama gets elected. The major problem in the markets today is unrestricted short selling by hedge funds. Increase taxes on shorting or ban it all together and the markets will stabilize. Make short term cap gains high and eliminate longterm gains and the real estate and stock markets will stabilize.
September 17, 2008 10:12 AM | Reply | Permalink
What's amusing, clever, is that our financial markets, for the last 15 or so years as homestead and mortgage regulation laws began being dismantled, have been built on a foundation of debt collateralized by more debt. With the failure of AIG, we have now gotten to the point where the only real value attached to those ephemeral financial packages, the insurance which companies bought to cover them, has been wiped out. When one realizes that AIG's default securities business has collapsed under the weight of pay outs to their consumers, and that the FDIC is almost tapped out from similar payouts, it starts to become clear how much of the 'wealth' of the Bush years never existed in the first place.
And we haven't even gotten to the point where credit card debt, and all the securities and derivatives built on it, starts to crumble. These same people who couldn't cover their mortgages aren't going to be able to pay off their CC balances either. This is just the beginning.
September 17, 2008 11:52 AM | Reply | Permalink
And your opinion on short sellers shows just how little you understand finance. Short sellers aren't the problem; they're the canaries that tell us when the mine is about to explode.
September 17, 2008 11:56 AM | Reply | Permalink
Wrong. Shorts destroyed LEH and BSC. LEH was 200% short when they collapsed. Unrestrained naked shorting drove them out of business by dropping their share price to the point that their credit ratings were dropped and they were forced to raise more capital, just like AIG yesterday. Giant hedge funds working as teams can now destroy any company by naked shorting it into ruin.
September 17, 2008 1:08 PM | Reply | Permalink
Not-so-clever-bulldog,
You and Christopher Cox seem to have short selling on the brain. I'm not sure what naked means here. I know about selling naked calls. I doubt that any of the big players in these markets place bets without hedges. So if we have the transaction tax, we can restrain the market, because these people often do 2 or more transactions to place 1 bet.
And no, Lehman and BSC were not insolvent because their stock price collapsed. Their stock price collapsed because they were insolvent or so nearly insolvent that no one wanted to trust them enough to do business with them.
And no, it is bone-headed to eliminate long-term capital gains taxes and it is evil. Warren Buffett has spoken and he knows.
And no, eliminating puts and short-selling is stupid.
September 17, 2008 5:03 PM | Reply | Permalink
Dean Baker says “In the best "kick em, when they're down" spirit of American politics, now is a great time to be pushing a financial transactions tax.”
He might be right but let us also remember that we do not knock down the economy either, and that we wish for it as soon as possible to stand on its feet again.
No matter how optimistic we can be about that all the assets the US government acquires during the current financial crisis will be fairly priced, there is no doubt that the whole crisis is going to be extremely expensive for the public sector. The costs will have to be paid by taxes or, in its absence, by inflation.
In this respect society has a vested interest in finding new equitable ways of how to pay for it, and that these are aligned with the new global realities and interfere as little as possible with the recovery of the economy.
The following are but two ideas:
http://perkurowski.blogspot.com/2007/05/human-heritage-intellectual-property.html
http://perkurowski.blogspot.com/2008/08/keeping-big-lean-tax-market-rate-based.html
October 12, 2008 10:55 AM | Reply | Permalink
I am a professional trader considered by the exchange a "liquidity provider". At any given time during the trading day I have 100+ orders bidding and offering stock. These are the orders that your broker, mutual fund, pension fund etc. use to buy or sell stock. This market making service is the reason you can buy or sell a stock at any given time on any given day. I trade over 2,000,000 shares per month on average, and there are several thousand people like me in the makets accounting for billions of shares (on exchange floors, and in offices around the country). Most of us are self employed or work for small outfits NOT wall street banks. This and other forms of short term high frequency trading activity make up the majority of the volume in the market while providing incomes for tax paying families like mine, not to mention more consistant returns on investment in pension funds, endowments, charities, family trusts, etc.
This tax would put me and just about every active trader like me out of business overnight. Profits margins in this business are razor thin when you net out winning vs. losing trades. This tax would amount to 100% tax on my income, and destroy returns of the pension funds, endowments, charities, family trusts, etc. mentioned before. Penalizing small business operators, retirement funds, and other productive organizations.
For those bitter souls who do not care about adding thousands more to the unemployed workforce consider this: the tax would generate only a fraction of what you suggest because much of the annual volume used to come up with these figures would disappear. With that volume goes the short term capital gains tax we pay currently as well.
My industry had nothing to do with the meltdown in the CDO, CDS, Mortgage, market. In fact part of the current problem is the lack of a centralized, transparent, liquid, market for the assets that the banks are trying to unload. (TARP's original intent was to make a market for these) Gentlemen, this is exactly what the US stock market has done successfully for over 100 years. It is the envy of every foreign exchange on the planet. And for the past 20 or so years the barriers to entry have been taken down making it possible for non wall street small "mainstreet" participants like myself or anyone with the inclination to fairly compete.
Furthermore, the next time you suggest we do not provide a service ask someone trying to sell real estate in Florida, California, NV, or any other hard hit area in this country how nice it would be to have a ready buyer in a liquid, robust, market that would complete the transaction within seconds of submitting property for sale! Or ask the any commercial bank, the Treasury Department, Congressman, Senentor, or taxpayer forced to buy assets because they have no central liquid marketplace how nice it would be to have thousands of willing participants ready to purchase within seconds of submitting the offer for sale.
The centralized, liquid, transparent, stock, futures, and options exchanges and the 1000's of traders, members, floor brokers, pension funds, endowments, charities, around the country would be significantly hobbled buy this type of tax. This is something we can not afford to let happen.
January 24, 2009 11:10 AM | Reply | Permalink
Excellent post. Thank you. A breath of fresh air.
February 22, 2009 9:40 PM | Reply | Permalink
By the way, if tax was ever enacted large wall street institution would be exempt claiming "Market Making" privilages (which is the case in London and other exchanges who imposed this dreadfull tax on the investing public), leaving the tax burden on the small independent traders, investors, retirement accounts, and other main street participants already picking up the tab for the folly of big business and far reaching government.
Be carefull what you wish for sir, by trying to kick wall street when its down you will end up kicking the little guy who resides on "main street" the capital markets version of mom and pop business owners. And the end result will be increased barriers to entry, and the return of the good old boy nepitism that we have successfully eliminated over the past 20 or so years with the advent of electronic direct access to the floor and decimalization in the stock, futures, and options market.
January 24, 2009 1:03 PM | Reply | Permalink
Here is a link to an article discussing the findings of several extensive studies done on the impact a transaction tax had when implemented in other countries.
Scroll to the bottom section of the article.
http://www.thehindubusinessline.com/2008/08/08/stories/2008080850270900.htm
January 28, 2009 3:04 PM | Reply | Permalink
Excellent link! Thank you.
To summarize for those too busy: studies found that transaction taxes actually INCREASE volatility and lead to revenues significantly smaller than originally promised.
Dean Baker, if you are so smart, why didn't you know this? Hmmmm?
On reflection, it is easy to see why this would be so: Removing the thousands of small trades which can only occur when transaction taxes are low or non-existent, leaves in place only the BIG trades. Big trades always move a market more, thus increasing volatility. Or think about it this way, an analogy: take the profile of a rocky beach versus a sandy beach. Which one has more sudden and extreme ups and downs? Which one has those smooth and gentle curves? Exactly. Small trades are the "smoother-outers".
Also, the tax revenues are lower because the original estimates are based on a false premise, to wit: that tranaction volume will not materially decrease. Yet, it always does.
A triumph for empirical research over ideological hate-mongering.
And here is the kicker: traders didn't cause the problem to begin with, the banks did. Where are the banks headquartered? Not Wall Street. The troubled banks are in the booster-ville of all booster-villes, Charlotte, NC.
Thank you yet again, "Liquid Markets".
February 22, 2009 10:33 PM | Reply | Permalink
The posts by "Liquid Markets" are completely correct.
Mr. Baker may be an honest man, or he may be a shiftless and tenure-protected bully, but he simply doesn't have the deep understanding of the human-and-mechanical underpinnings of our markets which is demonstrated by "Liquid Markets".
There is a reason that the American market is the most dynamic in the world: we are flexible. It is true that recently regulatory over-sight has been lacking. But, this has nothing to do with the absence of a transaction tax and such a tax would not fix the system.
Read "Liquid Markets" posts. Learn.
Who am I? Just a small trader with an IQ of 150, a Phi Beta Kappa ring, and honors status in economics. Not a big, fancy, tenure-protected (welfare for eggheads) guy like Mr. Baker.
I am a liberal and work hard for my market "wins". I consider this idea to be a direct attack on myself and my wife and our future security. As such, Mr. Baker and I will be meeting if Mr. Defazio's bill H.R. 1068 passes. I promise you that.
February 22, 2009 9:34 PM | Reply | Permalink
The purpose of a tax which taxes, not the profit of the activity but the activity itself, even when profitless, is to shut down the activity.
In other words, the purpose of this tax proposal is to put an entire population of small trader out of business, leaving only the big traders (who will necessarily be exempt, as they are in London) in business.
Is it any co-incidence that it is these big trading houses who made massive donations to the Democratic Party and who have put top officials into the Obama administration? Things that make you go, "Hmmmmm....?".
And here is Dean Baker, with no original thoughts of his own, toeing the party line.
I'm a Dem, but if this tax goes through, I won't be for long. My family depends on my trading for about one-half of our retirement savings development.
February 23, 2009 2:32 AM | Reply | Permalink