Nader Argues for a Financial Transactions Tax
by Linda Beale
Nader Argues for a Financial Transactions Tax
Ralph Nader provided an op-ed on the question of a financial transaction tax, “Time for a Tax on Speculation,” Wall St. Journal, A17 (Nov. 2, 2011). He ties the need for the tax as a curb to speculation to the growing concern among ordinary Americans about corporate power and Wall Street excesses.
A financial transactions tax would impose a small charge on the value of stock, bond and derivatives transactions–probably somewhere around 0.25% to 0.5% (the latter is the figure pushed by Nader and groups like National Nurses United). Such a tax would raise a considerable amount of money and at the same time serve another important function–curbing speculative and high-frequency trading.
[This tax] has the potential to curb risky speculative trading that contributes little real economic value. The Capital Institute’s John Fullerton has stated that a financial speculation tax could have a significant impact on the high-frequency trading and other ‘quant’ trading strategies that now comprise an astonishing 70% of vastly bloated equity-trading volume. Over the past few decades, trading volume has grown exponentially. In 1995, according to the historical charts on the best stock trading apps, the total shares of stock traded on the Nasdaq and the NYSE, not including derivates and other options, was 188 billion. By the peak of the financial crisis, in 2008, this annual number had skyrocketed to three trillion.
*** Sen. Harkin, Rep. DeFazio and others in the past few years have proposed protecting ordinary investors from the direct effects of the tax by providing exemptions for mutual funds, retirement funds and for the first $100,000 in trades made annually by an individual
originally published at ataxingmatter
It won’t do much to curb risky speculative trading IMHO. After all, the the hole idea of risky speculation is that when you guess right and succeed you generate high returns. 0.25% wouldn’t disencentivize this. High frequency trading on the other hand…A significant number of the trades these days aren’t properly characterized as casion bets, but more as a sort of financial robot wars, with trading programs fighting amongst themselves at speeds that people can’t even follow, much less make informed decisions based upon. The wonder of the flash crash isn’t that it happened, but that it isn’t common. And these do nothing to spur actual investment, rather they end up being drag on actual investment decisions because they allow people to “get out in front” of any actual buy/sell decisions.
It won’t do much to curb risky speculative trading IMHO. After all, the the hole idea of risky speculation is that when you guess right and succeed you generate high returns. 0.25% wouldn’t disencentivize this. High frequency trading on the other hand…A significant number of the trades these days aren’t properly characterized as casion bets, but more as a sort of financial robot wars, with trading programs fighting amongst themselves at speeds that people can’t even follow, much less make informed decisions based upon. The wonder of the flash crash isn’t that it happened, but that it isn’t common. And these do nothing to spur actual investment, rather they end up being drag on actual investment decisions because they allow people to “get out in front” of any actual buy/sell decisions.
It won’t do much to curb risky speculative trading IMHO. After all, the the hole idea of risky speculation is that when you guess right and succeed you generate high returns. 0.25% wouldn’t disencentivize this. High frequency trading on the other hand…A significant number of the trades these days aren’t properly characterized as casion bets, but more as a sort of financial robot wars, with trading programs fighting amongst themselves at speeds that people can’t even follow, much less make informed decisions based upon. The wonder of the flash crash isn’t that it happened, but that it isn’t common. And these do nothing to spur actual investment, rather they end up being drag on actual investment decisions because they allow people to “get out in front” of any actual buy/sell decisions.
The real problem with an FTT is that it won’t raise any revenue. It’ll lose it in fact.
This interesting bit came from the EU report into it. This is the EU’s own report, the official one. It said that the FTT would collect 0.1% of GDP in tax. But that it would shrink GDP by 1.76%.
And at the margin, 40-50% of GDP turns up in tax revenues. So we’d lose 0.7% of GDP in tax revenues to gain 0.1% of GDP in tax revenues.
That’s a fall in tax revenues, not a gain.
Tim
1.76% hmm.
not 1.75% or even “almost 2%.”
good to know we know these things so precisely.
on the other hand I got a little lost with “at the margins” turning up to mean “the whole thing.”
I have a hard time believing a transactions tax is going to reduce GDP at all, but if Worstall is right and it would reduce GDP by “1.76%”, that’s a good argument for giving up GDP addiction.
“We could remove the three pound tumor in your brain, but that would reduce your body weight by 1.76%”
Worstall uses numbers the way a three year old uses the “ingredients” she finds in the kitchen to bake a cake.
So much for that good idea. If Nader if for it I am against it.
Just kidding!
Yup, computers day trading with themselves. It is a wonder IBM doesn’t reprogram Big Blue to crush these computer upstarts and rule the finacial world.
Where is the snark tag???
How ’bout reducing the CapGains Tax ??
25% for one year or less, 20% 2 years, 15% 3 years 10% 4years — 5 years or more –free.
Wonder why the EU wants the transaction tax if that is so. They want it and the US is blocking it.
The SEC already imposes a $25 per million fee on stock transactions. This has been going on since the inception of the SEC. Ostensibly, it’s to offset the cost of running the commission.
The CFTC does not impose a fee on futures contracts, however, the National Futures Association (NFA) does impose a fee on each round turn contract. This fee ranges from a few pennies to tens of cents. It has been doing this since its inception.
Neither fee seems to have hurt the exchanges in the least. One could argue that it has enhanced the attractiveness of the exchanges by imposing proper regulations and having the financing for enforcement in the case of the SEC and standards in the case of the NFA.
I have no problems with increasing the SEC fees and starting one for the CFTC with the sole purpose of raising revenues. It might be sold as offsetting the costs for investigation, prosecution and incarceration of those that break the law. The only question in my mind is how much, not whether.
Because, and I know this will surprise you, the EU’s idea is that the revenues from the FTT go directly to the EU.
Currently, the EU has no “own resources”. They have to agree a budget with the national governments every few years. The national governments then send them the cash that they’ve agreed.
If the FTT went direct to the EU (the proposal) then the EU would not have to beg national governments for the money. The bureaucracy would have its own money without any democratic oversight.
Pure public choice economics, that’s why the EU likes the FTT.
Those are the numbers from the EU’s own report on it. The range is 0.5 to 3.5% of GDP.
Do note, not my numbers, these are the numbers of the people proposing the tax.
Jim A.
It helps to think about how speculation is financed. In many cases, there is a lot of borrowed money involved. If my stake is a buck, the bank’s stake is 29 bucks, but the bank only collects 3%/year, no matter the result of the investment, I’m in good shape if the investment returns 3.5%. If, however, there is a 0.5% transaction tax, an investment which pays 3.5% doesn’t net me a dime. That’s how the transaction tax cuts down on speculation.
More importantly, it cuts down on leverage. “Speculation” has long been villainized, but leverage often causes more problems, including systemic risk, volatility and the like.
Tim W.
Ya know, you have to give the EU credit for pointing out that its gain is the countries’ loss and the national governments’ loss. If corporate America were pushing for some policy, the analysis would be all chocolate drops and ponies.
The issue is that commissions pre de-control were far far higher than now when in some cases the commission is zero. Compared with commissions back then the tax is still small. Did the market not work during the period of fixed commission rates? Was the market not supplying capital to folks that could use it? Of course there were not computers to play with each other.
Actually for productive investments (held for at least a few months the cost of such a tax is low) for short term it would be (for a high earner) 65% of the stated tax as cap gains tax would pay the rest, for a long term holder 85%. No one recalls the old days and asks if the market worked back then?
Tim
we are having a failture to communicate. i was objecting to the bogus precision of the numbers. I also think the concept is … uh … non intuitive.
and i am still lost at how “at the margins” turned into “the whole thing.”
kharris,
How does it cut down on leverage?
My dislike is not of the tax but of the expectation that it is going to solve the social morality and ethics problems of those in control, or even slow them down at this point.
Bearsense, your proposal to offer a sliding scale capital gains tax mirrors much of my own thinking, but I disagree with the timing you propose. For one thing, the capital gains tax on transactions which are substantially shorter than one year should be some multiple of the equivalent tax on labor, like 3X or 5X for very short transactions. The point at which capital gains tax hits zero should be something like 7 or 10 years. We want patient capital in the economy, not the hot stuff the investment banks specialize in. Just as the conservatives always state that subsidizing something will produce more of it, even if unwanted, then taxing something which is toxic to the economy should reduce the quantity of it, which will be a societal good as well.
Further, the issue of a transaction tax is just bogus. This is nothing more than the equivalent of a sales tax on consumer products. Shares traded on the stock exchanges are nothing more than glorified beany babies being traded on e-bay, no matter what spin the financial community might try to give to them. Buying a share or bond once it’s been issued is not “investment” but speculation, and society does not need rampant speculation to function efficiently and effectively.
Cuts down on leverage by cutting into returns. Let’s say you are happy with a trade at zero leverage that returns 7%. To get that same return with 7-to-1 leverage, you only need a return of 1% (-ish). That’s a pretty low bar to clear. Higher returns to leveraged trade encourges the use of levergae. The risk is partly born by the lender, rather than the investor,, so the risk/reward ratio is skewed toward greater risk. Risk-adjusted returns are always better when it’s the other guys money at risk.
By imposing a transaction tax, the tax rate is taken out up from on the borrowing, as well as on the initial capital. That reduces the return to the use of leverage.
Tim,
the European governments are democratically elected governments, responsible to their voters. It is their job to serve the peoples interest. The EU bureaucrats are responsible to the European governments, that is why they have to agree a budget with the national governments, even if they have funds from the FTT.
Well, yes, except the statement is on page 1100 of a 1200 page report (seriously!).