There is a growing movement in both the U.S. and around the world for taxing financial speculation. The logic is simple: even a very small tax on trades in stocks, options, credit default swaps and other derivative instruments can raise an enormous amount of revenue.
Even assuming large reductions in trading volume due to the tax, the country could still raise more than $100bn a year in revenue or more than $1tn over the US's 10-year budget horizon. Trading costs have plummeted over the last three decades due to improvements in computer technology. Therefore, modest taxes on financial speculation, such as a 0.25 per cent tax on the purchase or sale of a share of stock, would only raise trading costs back to the level of the 1970s or 1980s.
The U.S. already had a vibrant, well-developed capital market in these decades, so there is no reason to believe that raising trading costs back to earlier levels would prevent these markets from performing their economic function. Higher trading costs will merely act to discourage speculation.
Furthermore, the bulk of the money raised through the tax would be coming out of the pockets of the Wall Street crew, the same folks whose greed brought us this economic disaster. What better holiday gift could we give Wall Street than the opportunity for make up for some of the damage that it has caused the country?
There is not much of an argument against a speculation tax on the merits, so most of its opponents focus on enforcement issues. The claim is that if we put a tax in place unilaterally in the U.S., then all the trading would go overseas -- therefore we would not collect any revenue.
There are three problems with this argument. First, we already have a model that disproves the basic claim. The UK has had a tax on share trading for decades, known as stamp duty. Relative to the size of its economy, it raises the equivalent of more than $30bn a year in the US from just taxing stock trades. Obviously the trading has not simply fled overseas.
If reality is not a sufficient refutation of this argument, we can also turn to the basic logic of the claim. The leaders of most other wealthy countries have already indicated their support for imposing financial transactions taxes in the wake of the crisis. If the U.S. were to join with the leaders of Germany, France, the UK and other countries whose leadership has public called for financial transactions taxes, it is difficult to believe that they could not craft an international agreement. This is not a necessary condition for successfully imposing a speculation tax, as the example of the UK proves, but international coordination would nonetheless be desirable.
Then there is the question of places like Lichtenstein and Cayman Islands, which can ostensibly operate as tax havens, allowing speculators to escape the tax. This argument also strains credulity. Can these tiny countries really act in ways that are harmful to the interests of the world's largest and most powerful countries?
What would happen if instead of being tax havens, these countries allowed themselves to be used as arms conduits to al-Qaida? Would President Obama and other world leaders just sit back and complain that there is nothing that could be done. The reality is that these tax havens can only exist with the willing cooperation of wealthy nations. If they were cut off from access to the international banking system, their usefulness as tax havens would quickly vanish. The tax evaders of the world will not fill ships with gold to hide their income in the Cayman Islands.
We can also be a bit clever about cracking down on evaders. Suppose that we gave a reward of 10% of the tax collected to workers who turn in their bosses. There are few Wall Street billionaires that physically do the trading themselves. They have assistants for this task. And many of these assistants would be happy to make themselves rich by turning in their bosses.
In reality, the idea that a tax on speculation is unenforceable is laughable on its face. Compare the difficulties of enforcing a speculation tax with enforcing copyrights. In the case of a speculation tax, the issue is a relatively small number of very large transactions. No one cares if trades involving a few thousand dollars go untaxed. The real issue is a relatively small number of trades involving millions, or even billions, of dollars.
By contrast, copyright enforcement is all about billions of small transactions involving movies with a copyright-protected prices of $15 or $20, or songs with a copyright-protected prices of less than a dollar. The problem of enforcing copyrights is several orders of magnitudes greater than the problem of enforcing a financial transaction tax. Yet, none of those insisting on the impossibility of enforcing financial transactions taxes have said that copyrights are unenforceable. The issue is clearly what they want to enforce, not a question of what is enforceable.
The U.S. does not need to let itself be ripped off by the Wall Street crew indefinitely. We can make them pay a price for the damage they have caused. We just have to stop listening to the Wall Street apologists and get serious.
How does CEPR feel about state banks?
As you said--the country was the strongest it has ever been when taxation on the wealthy was at its highest--and our Middle Class was the strongest and most productive the world has ever seen.
Why is that so hard for the neos to get?
it will cripple our markets, making them much less efficient, ripple thru the economy, cause massive job losses and prove to be revenue net negative for the state. there is no evidence being put forth that this insane experiment will actually work out.
using the UK as an example is laughable as all the big wigs are exempt and charge outrageous fees for others to trade thru them to have a workaround. they create CFD's, contracts for difference, and trade via counter parties; causing dealers to have bloated balance sheets. all of this increases systemic risk (as we witnessed last fall with OTC markets) and decreases efficiency.
look at what happened in Sweden, India, and China when similar measures were imposed. volumes plummeted and went elsewhere, big surprise.
if you must tax securities, tax them at time of securitization, that's when the real crooks responsible for this debacle are dreaming them up as complex and opaque as they can, just to rake in massive fees on something that can't even be traded or marked to market. that's the kind of reckless lunacy that should be levied; not the act of making markets better and more efficient!
The period you are referring to was in the decades following WWII. Of course America was the most productive country on the planet, we were industrialized and weren't bombed to pieces. Half of Germany was being shipped to the Soviet Union the rest of Eastern Europe wasn't permitted to accept US aid but had nothing to build or farm with England, France and the Benelux had been turned into rubble and their chief concern was housing and food. In the Olympic games in London after the war spectators had to bring their own food. Japan had been literally burned to the ground, china had to come to grips with the massive murder that took place there and Korea had that and been arbitrarily split in two.
Who else was going to produce anything? We had no competition and our products were in great demand.
Why is that so hard for the neos to get?
The majority of people this tax will hit are those who have 401k / IRA or money markets that constantly buy and sell stocks in those funds to keep them balanced. Fund managers are constantly doing that and you see an op to 'get your share'.
No no no, all this is is a money grab from overspending big governments and their syco-phant supporters.
what the hell does that mean?
its not a bluff, its an undeniable fact of mathematics! hedge funds, money managers, and individual traders trading their own accounts will either have to close shop or move overseas; this tax is simply too large to be able to coexist with. the ones that are getting exempt are small operations and highly mobile, so they can move if they need to survive. their employees that stay behind will be jobless as well. all businesses that support their activities but don't directly place trades will be out of buisness as well. even the small business owner that runs a hot dog or newspaper stand on the streets of chicago is going to feel a squeeze. for new york and chicago this could be like what happened in houston in the 80's oil bust, where 70% of jobs in the area were somehow related to the oil industry. not to mention the 100,000 individual traders spread out all over the country making main street middle class incomes trading the markets everyday.
Once again, traders had nothing to do with the crash last fall, it was crooks on the sell side of investment banks and insurance companies that made bets they couldn't cover. wall street banker and trader don't mean the same thing; why is that so hard to understand?
These small investors provide diverse liquidity to the markets that has been helping to drive down transaction costs for decades.
The concept that short-term traders create volatility is as absurd as it gets. They do exactly the opposite.
Compare stock market liquidity last fall to the OTC credit markets (where short-term investors don't trade because Wall Street has such a hammer-lock on the trading and charges very wide spreads to participate) and you tell me which markets failed and which markets had the most unreasonable volatility.
If you want our exchange-traded markets to look like and lock up like our OTC markets, go ahead and impose a transaction tax that will drive out the liquidity-providing short-term investors and cause any remaining market-makers to pass on the tax to the end-users.
Not to mention the fact that when markets lock up, corporations beg to not have to use mark-to-market accounting because nobody knows how to value their assets and liabilities. It is easy to mark-to-market the stocks and futures positions, but the OTC securities and derivatives become much harder to value because the lack of short-term investors and speculators results in an extremely illiquid trading environment in which many securities are virtually un-markable.
an individual retail trader with a mere 10k in his account and a average holding time of a month per trade that uses the standard retail margin can generate 240k in trades per year. As it is .25% PER SIDE of his trades, or .5% of the value of his trades. Therefore he loses 12% of his original investment, 1.2k, to this tax!!!! And that's before and capital gains... 12% a year is more than 95% of funds can achieve, and that is the size of the hole that our brave individual is starting out in. No wonder, Mr. Bogel of Vangard wants this passed, he'll have so many new customers with no alternatives to gouge with fees!
How is this guy a wall street fat cat? Obviously he's not, he's only participating in the markets thanks to the democratization of the markets that computers and the internet gave to the average investor, why should this democratization be taken away and why should this individual get punished for trusting chimself over some fee gouging mutual fund? Did he cause the collapse, hell no; he's just trying to keep his job and get his portfolio back in order. Don't kick him while he's down!
He has been noticeably quiet of late with respect to the transaction tax. I think he might be realizing that, even with a mutual fund exemption, the overall drop in volumes and liquidities will cause much higher costs for his firm to do business.
Likewise with Warren Buffett, I believe.
Then, more tellingly, and just in the past week, Bogle's Vanguard partner George Sauter, in two editorials written with Burton Malkiel, have come out strongly opposed to the transaction tax in the WSJ and FT.
http://online.wsj.com/article/SB10001424052748703558004574579903734883292.html
http://www.ft.com/cms/s/0/1513400e-e8cf-11de-a756-00144feab49a.html
.005*$10000=$50
plus most commisions are cheaper than 10 dollars now anyhow.
even if the tax was the same as the brokerage fee, oh which it is more like a factor of 5-10x larger, and even more so on larger stock purchases, which believe it or not plenty of retail folks make. why would you ever advocate higher frictional costs for average investors that are simply trying to make a living risking their own capital, supplement existing income or simply secure a decent retirement?
You've suggested a modest and reasonable tax "on financial speculation, such as a 0.25 per cent tax on the purchase or sale of a share of stock."
OK.
But let's be more reasonable.
Tax all decedents' estates with values of $5 million or more at 50% unless the decedents used a portion of their wealth to create jobs in the United States within a three-year time period before their deaths. Adjust the tax and use a sliding scale based upon the amount of additional employment that was created.
Tax all decedents' estates with values of $1 billion or more at 90%. If they amassed that type of wealth, they were greedy enough during their lifetimes and, if they haven't given a sufficient portion of their wealth to their natural heirs before their deaths, their wealth should be turned over to the Treasury to correct some of the problems that they created.
Tax all decedents' estates with taxpayers who sought to hide their wealth in foreign countrys or offshore islands at 100%. We have the most powerful military and mercenaries in the world. Let's use them.
Why do you assume that someone that accummulates wealth has done something harmful to the country? Do you feel you are a detriment to society since you must receive support from somewhere?
Obviously, government is necessary to provide for roads and highways, universal education for the young, agencies to enforce the law for the benefit of society as a whole, etc.
It should also be obvious that good governance requires that such services be paid for, and preferably paid for by the generation that has enjoyed such services.
The super rich who have enjoyed the benefits of such services and the protection of our laws should pay their fair share. If they have been able to accumulate billions, particularly if they have done so while driving this country into further debt and helping to ship our manufacturing jobs to foreign countries, an estate tax upon the super rich will help undo some of the harm that they've caused.
I can give you an explanation. I can't give you understanding.
Often,... the estate has gained a significant portion of previously unrealized gains. For example - a stock investment portfolio that has gained 5-10%/year over the course of 20 years, where the deceased who held that porfolio mostly without selling the stock & bonds in that portfolio has built a very large amount of gain.
If the stock has not been cashed out or rolled over in the meantime before being passed to an heir, that gain has never been taxed. The initial input has been taxed (if not a non-Roth IRA). Any sales for a gain during the 20 years has been taxed as a capital gain. But the value of stocks that haven't been rolled over has never been taxed.
Second,... the gain to the heir is an absolute gain for that heir. That gain has never been taxed.
I am for an exemption for an estate tax for at least the first few million in inheritance,... That would make sure that the small business owner, farmer, or wise lifetime investor did get to pass off some gain to his/her heirs.
But what about the Waltons? The Buffetts? The Gates'? or the other billionares? Their heirs have already gotten a leg up riding on the coatails of their rich relatives.
I strongly disagree.
The Wall Street crew is just going to pass these taxes along to the retail investor - meaning people's 401K plans, pension funds, Mom & Pop's retirement account, Grandma's annuity and so forth.
In the final analysis, this is a tax on every American that directly or indirectly owns equities.
So, what was your point?
Banking creates nothing, and yet that is our prime driver of our economy, the prime determining factor of our culture (money/greed). Bankers should take their proper place--in the backseat.
Stock transactions have absolutely NOTHING to do with the financial crisis. It was caused by people overleveraging on credit default swaps and mortgage backed securities. If you want to punish "Wall Street", why don't you tax only credit default swaps and mortgage backed securities? The Tobin tax that Mr. Baker endorses to get back at Wall Street is equivalent to fining bat boys when Major League Baseball players get into a brawl.
The unintended consequences of this tax will be a combination of the following: liquidity in the stock market will dry up overnight, stock prices will tank, companies will have a harder time accessing the capital markets for funds, every investor regardless of economic standing will lose 0.5% of their investment guaranteed everytime they participate, and the institutions that Mr. Baker wants to get back at will find loopholes around the rules leaving the middle class investor to pay all the penalties.
No thanks. Anyone who endorses this tax either does not save money for their retirement via investment vehicles or is just plain ignorant of how the capital markets work. Either way, they should be ignored.
Big corporations bought the government. Why is it some people think that after spending all that money big corporations weren't going to use the government to its own advantage.