If Europe Adds a Financial Transactions Tax, Will We Follow?
by Linda Beale
If Europe Adds a Financial Transactions Tax, Will We Follow?
Has the time come for the US to impose a financial transactions tax? It would have several positive features. First, it would raise revenues, which are sorely needed for everything from climate change action to infrastructure improvements to aid for needy families. Second, it would raise revenues from those who are most responsible for the financialization of the economy–investment bankers, fund managers, and high speed traders interested in bigger and bigger profits no matter the result for ordinary folks. Third, it would act in some small way to discourage excessive trading that contributes to the volatility of the stock market.
Of course, such a tax (frequently called a “Tobin Tax” after the Nobel economist who recommended it) would be best if applied by all sophisticated nations. It appears that the European Union is getting closer to making a financial transactions tax a reality in at least some of the participating countries. See James Kanter, Tax on Financial Trades Gains Support in Europe, New York Times (Oct. 10, 2012). Britain will remain exempt so the City of London (Europe’s parallel to Wall Street) would continue on its merry way (or even increase the financialization of the UK economy as trades moved from participating countries to London). Wall Street has lobbied heavily against any tax on its activities, and would fight bitterly if the US were to impose such a tax while London remained exempt.
So my guess is that even if the EU finance ministers approve the measure for some participating European nations, it will take some time before it spreads to Britain and the United States. Like climate change, we seem determined to put off addressing real problems until they are upon us with such force that we cannot possibly continue as before. Thus, our financialized economy rocks along pretending that derivatives are safer and banks are fine and life can go on as before, and Congress debates climate change as a “she said, he said” matter rather than looking at the breadth and depth of scientific evidence supporting man-made effects that are reshaping the globe while we watch.
cross posted with ataxingmatter
Hi Linda:
I think a transaction tax on CDS, naked CDS, CDOs, and similar constructs which have little labor interwined in the investment would go a long way. It still remains that much of this is without transparency in the US and no different than when Glass-Steagall was repealed and the National Banking Act changed to accomodate investment firms and commercial banking. I think it would be difficult to tax these transactions until a clearing house(s) was established.
No Tim Worstall yet?
Grover Norquist won’t allow it.
I’d be happy if they just brought them under some sort of regulatory umbrella that was able to make public the risk factor without government intervention and who was holding what. A financial tax transaction would have to be universal in order to work. Although I could see doing a trade-off between criminalization of fiduciary irresponsibility in lieu of a tax. Pay the tax or do the perp walk seems like a balanced approach to recognizing risk
Sorry I’m late, I was stuck in an airport coming back from a meeting to plan the rape of the natural resources of a small town. You know, us capitalists have it so easy all the time.
“First, it would raise revenues, which are sorely needed for everything from climate change action to infrastructure improvements to aid for needy families. Second, it would raise revenues from those who are most responsible for the financialization of the economy–investment bankers, fund managers, and high speed traders interested in bigger and bigger profits no matter the result for ordinary folks. Third, it would act in some small way to discourage excessive trading that contributes to the volatility of the stock market. “
The only problem with those three statements is that:
1) People have theorised that speculation increases volatility, yes. But the empirical evidence seems to be that speculation reduces it.
2)Those who pay transaction taxes are the consumers of the goods or transactions being taxed. So it will be us, the consumers of financial services, who pay the tax.
3) What revenues? Even the European Union itself has reported that an FTT will shrink the economy. So much so that general tax revenue will be lower by more than the amount of FTT revenue. That is, an FTT reduces revenue collection.
Assuming the existence of a capital gains tax an FTT raises the basis of the security when purchase and reduces the proceeds when sold. Thus for short term trades up to 35% (using current rates) of the tax is offset by capital gains tax reductions (or loss increases).
The FTT is ususally viewed from the point of view of a trader but from a long term perspective it is not as much of a big deal with a long holding period.
Lyle:
Can you explain further? Why would taxing CDS be a good idea for example?
If you look at it the FTT is essentially an add on commission. Now if you look at it from a long term point of view its the toll to play the game. If you are looking at holding for a long term period 1% should be a small part of what you make (in particular with dividend stocks).(50 bp each side of the round trip). Commissions used to be far higher and did the market fail back before they were deregulated?
Now the tax for CDS is in the neighborhood of 2 to 3 bp as I recall less than the tax on equities, so it should almost fall into the noise of the commission also. (I would put the tax on the real price, not the nominal value of a CDS).
To make clearer if you view CDS as a form of insurance it would be a premium tax.
There is no reason to view CDS as a form of insurance since the seller has no ownership (or insurable) interest in the subject of the CDS. In short, you are talking about betting, pure and simple. Rather than looking at it as a premium tax, look at it as a gambling tax.
Make that the buyer has no interest required, all be it that some do have the bonds referenced.)
Actually neither the buyer nor the seller have an interest required. One might just as well go to an off track betting site.
When ever does the seller of insurance have an insurable interest in the holder of the policy, take life insurance for example. Instead they make a bet, because by its very nature all insurance is betting, life insurance is one where you bet you die early and the insurance company bets you die later (although this is one bet you may well hope to loose)
Re: Tim Worstall.
So, yeah, um, no.
1) People have theorised that speculation increases volatility, yes. But the empirical evidence seems to be that speculation reduces it.
This may be the stupidest thing I’ve ever read. Unless you mean that volatility is reduced because speculation tends to drive prices in a distinct direction, but then that would be even more stupid.
2)Those who pay transaction taxes are the consumers of the goods or transactions being taxed. So it will be us, the consumers of financial services, who pay the tax.
Nope. My understanding is that the high frequency trades are in-house games. But I suppose that means you are technically correct, as in the vast, overwhelming number of instances the consumers of the financial services are the same as the producers. But if that is what you meant, refer to my above.
3) What revenues? Even the European Union itself has reported that an FTT will shrink the economy. So much so that general tax revenue will be lower by more than the amount of FTT revenue. That is, an FTT reduces revenue collection.
With no data available, I got nothing for this, unless shrinking the economy in this case is removing an economic activity that most often harms both honest agents in an equity transaction by taking a bite from each.
As far as I can tell, high frequency trading is just a scam to grab the buyer and seller surpluses.
And non-stakeholder derivative trading is just a way to make a bad joke out of the reserve requirements of banking.
Mere mortal:
Try reading this.
http://www.iea.org.uk/publications/research/the-case-against-a-financial-transactions-tax-web-publication
My one and only peer reviewed publication to date.
OK, Lyle, but in the insurance world, the insurer is not allowed to sell to a non owner. In other words, for example, I can’t buy a policy on your life. The CDS/CDO markets were simple casinos for participants, and they were the overwhelming majority, who were not actually hedging. That’s how AIG went belly up: the sheer volume of its”policy holders”.
Jack:
I would add the insurance company also keeps part of the premium as a reserve to later invest to payout. Floods, hurricanes, stock market collapsing can force premiums upwards because of payouts.
When the Financial Service Modernization Act was passed, Wall Street was supposed to establish a voluntary clearing house. The Frank-Dodd bill (I believe) calls for the same clearing houses. Key to the collapse of AIG and other investment firms was no one knew who held what in either CDS, there was no reserves, and the holders of the CDO insured by CDS and counter insured by naed CDS could not return to the bank or the originator the failed tranches. Thank god for financial engineering.
This was a good conversation though. I would suspect a good way to tax these would be the moment they are brought to a cearing house.
lyle:
“Commissions used to be far higher and did the market fail back before they were deregulated?”
Perhaps LTCM? which was leveraged well beyond 100:1 as described by the Fed which had great difficulty untangling the mess.
The issue is not so much the commissions, it is the reserve kept in place to cover a failure which insurance companies do keep as well as banks. AIG had none to speak of which placed it in a precarious situation. The same as AIG, LTCM did not have enough capital and the market dried up. AIG was anxiouly awaiting to buy up LTCM positions.
LTCM’s colapse was a forerunner of the larger WS collapse. Yes/No?