The passion and commitment of financial transaction tax (FTT) proponents is commendable. Just a few years ago, the idea of an FTT in most developed countries was laughable. Today, it is making its way through the legislative process in 11 European countries. It is still unlikely to pass in the United States, but the likelihood has significantly increased in the past two years. Indefatigable legislators Senator Tom Harkin and Congressman Peter Defazio plan on reintroducing their previously DOA bill, the Wall Street Trading and Speculators Tax, according to a fawning op-ed piece by Jesse Eisinger on Propublica and posted on Dealbook.
The oft-cited merits of an FTT are hard to resist: If the tax could collect $352 billion in additional federal revenue, what better way is there to redistribute wealth than through collecting taxes on rich people trying to get richer? But the great beauty of the FTT is that it does not depend on anyone making money to collect revenue. Why punish people who actually know how to invest by raising the capital gains rate? It is an elegantly regressive tax because no one cares if the loser traders pay a little more for the privilege.
In fact, proponents believe the tax will also return our ADHD casino trading market to the mythical period inhabited by long-term investors when no one tried to make a quick buck flipping a stock. Publicly traded companies will no longer need to manage their businesses on a quarter-by-quarter basis because the tax will encourage folks to hold on to stocks through thick and thin. As the FTT works its magic in changing human nature, the tax revenue will fall, making it moot anyway. All of this good from a mere three basis points!
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15 Comments to "The Fool and the Financial Transaction Tax":
ltabb
08 February 2013
I really wish FTT backers would understand that costs of these taxes will not hit the folks to whom they are targeted (banks, HFTs, and or even the rich). Banks and HFT will just pass them back to investors and thr rich will figure out ways to get around them.
The bulk of these taxes will hit retirement accounts, peoples pensions, and the cost of hedging which then translates into the cost of products and services - which increases the cost of things folks buy.
If government really wanted to raise taxes on banks, just levy a bank tax, or the rich increase income tax or pass an asset-based tax, or a VAT. All of these are bad ideas and would have a hard time getting passed - so why are they proposing a back-handed tax that will just be a surrogate for one of these other bad ideas?
Comments (312)
Anonymous
08 February 2013
This is the NYTimes piece referenced here: http://www.nytimes.com/2013/01/13/magazine/should-we-tax-people-for-being-annoying.html?ref=itstheeconomy&_r=0
crammond1964
11 February 2013
I wrote a brief article in 2011 that Politics would demand a FTT ; Tobin tax ; in our markets and we would have to accept it !
My conclusion was to offer "a cancellation TAX " as an alternative , therefore not punishing our retail players but hitting the systems that cancel 97 % of their trades .
None ever thought FFT would succeed or provide any decent monies to the governments purse BUT because of May 6th 2010 we have to take some medicine ! My view still stands .
Comments (257)
John Harris
11 February 2013
Ah, yes - the free lunch. The most actively traded securities on earth are U.S. Treasury issues. This tax would lower the net yields on these issues substantially. Proponents fail to consider that instead of accepting lower yields on these instruments, purchasers would demand higher coupons to offset the tax, thereby costing taxpayers higher interest payments on federal debt. But the higher coupons would not merely offset the tax receipts, as the tax collection and accounting requirements would exact a huge cost throughout society. So everyone loses!
What a great idea.
kennymcb
11 February 2013
Adam if I gave read this correctly - this could be good for American markets driving more liquidity from Europe to the US should the 11 countries - got first - the probability the bill passing is slim. So there is a potential upside!
Comments (49)
Anonymous
11 February 2013
To all the Wall Street cheerleaders - why do we have to pay a transaction tax when we buy/sell an old car but not when we trade a stock or bond?
John Harris
11 February 2013
Anonymous: you make a fair point, but this is a case of two wrongs not making a right. People shouldn't be taxed to buy bread or IBM stock.
asussman
11 February 2013
Kenny, I believe the benefits of a disparity between a European and US FTT would favor the US but would be marginal. I am not sure how it would impact the ADR market for example.
Anonymous: A sales tax has been traditionally the domain of the states -- since that is where the transaction is exacted. In that case, let New York and Illinois decide to implement an FTT, not the Feds. Also, sales tax in many states does not apply to Internet sales (though this is changing). So does that mean we could exempt e-trading but not voice? No matter, purchases and risk transfer has always been treated different under tax law, so I don't see the relationship at all.
Comments (159)
John Harris
11 February 2013
Adam: like you, I oppose this tax, and I agree that "sales" taxes are typically a state issue. But I think the purchase-versus-risk-transfer distinction is spurious. If I run a garden center and reduce my long position in peat moss courtesy of a willing buyer, I've just engaged in risk transfer. I simply oppose extending taxes into new domains or product categories.
asussman
11 February 2013
While I understand that all transactions have a risk transfer component and that most transactions involve the delivery of goods and/or services, there is a fundamental difference in the utility of trading versus traditional goods and services transactions. While I would like to keep the two categories separate, I also oppose a federal sales tax.
As an aside, it annoys me that the proponents of FTT often forget that financial transactions get taxed indirectly, including the SEC sales tax and capital gains.
Comments (159)
Anonymous
11 February 2013
Investor already do pay US fees/taxes
Regulatory Fee - AKA Section 31 fee currently set at .00224 per $100.00 of sale procees (Funds SEC budget) http://www.sec.gov/news/press/2012/2012-232.htm
Trading Activity Fee (TAF) set at $0.000119 per share, with a corresponding increase to the per-transaction cap for covered equity securities set at $5.95. The new rate applies to any sale of a covered equity security subject to the TAF occurring on or after July 1, 2012 (Funds FINRA budget)http://www.finra.org/Industry/Regulation/Notices/2012/P127211
Exchange trade options pay and Options Regulatory Fee (ORF) currently set at around 1.5 to 4.8 cents per options contract depending on if executer is a memeber of the exchange or not but investors must (pay each collecting exchange ) regardles that trade occured on XYZ exchange. Approved by SEC on Dec 23, 2008 and CBOE began collecting on Feb 1, 2009 to which most other exchanges have followed (Funds exchanges "regulatory budget"). https://www.cboe.org/publish/RuleFilingsSEC/SR-CBOE-2008-130.pdf
BATS does not charge ORF
Anonymous
11 February 2013
I'd be interested in your thoughts on Hong Kong, which has a transaction tax and is still a very competitive/attractive market with vibrant retail and institutional markets.
ltabb
11 February 2013
The issue with sales tax is, sales tax are for things you consume and they generally depreciate. Financial transactions don't (hopefully) depreciate, they hopefully appreciate. That is where capital gains comes in. Also unless in a tax deferred account, (or you are a broker), investments are paid in post tax dollars. So the money invested has already been taxed and any appreciation will be taxed.
So the only reason for a FTT is either punitive - like taxing booze and cigs cause they are something deemed bad, or an absolute overreach by government (which you can argue both of these taxes are). Hopefully investing isn't deemed bad - building companies and reducing the burden of government by increasing your net worth for you later years.
That said - governments aren't rational and they are revenue starved. So who knows what they will pass.
Comments (312)
John Harris
11 February 2013
As an anarchist, this is easy for me: I oppose all taxation on principle. And, as noted above, I oppose the extension of taxes into new domains, including securities trading. But states levy sales taxes on other appreciable assets such as fine art, jewelry, and - in some cases - bullion coins. And substantially all goods subject to sales taxes are purchased with post-tax dollars. So I have my doubts that opposition grounded on those arguments will prove effective.
Hopefully Congress will have the wisdom to leave this alone. We have horrendous problems with capital formation because of the Fed's insane zero-interest-rate policy. And our tax code already makes us poorer because of its complexity. This will add needless friction to the capital markets and never achieve even a small fraction of the benefits touted by its proponents.
lberke
12 February 2013
The point that strikes me most is Adam's reference to the fact that taxes and revenues collected are inversely correlated. That means that, as he says, investment and trading activity, including both long-term and short-term, including both hedging and speculation, move elsewhere. As if capital formation wasn't already in trouble in the US. This is a perfect example of poorly considered action with unintended - but not unexpected - consequences.
Comments (129)