Krugman: Taxing the Speculators

[depakid]

Should we use taxes to deter financial speculation? Yes, say top British officials, who oversee the City of London, one of the world’s two great banking centers. Other European governments agree — and they’re right. Unfortunately, United States officials — especially Timothy Geithner, the Treasury secretary — are dead set against the proposal. Let’s hope they reconsider: a financial transactions tax is an idea whose time has come.

The dispute began back in August, when Adair Turner, Britain’s top financial regulator, called for a tax on financial transactions as a way to discourage “socially useless” activities. Gordon Brown, the British prime minister, picked up on his proposal, which he presented at the Group of 20 meeting of leading economies this month.

Why is this a good idea? The Turner-Brown proposal is a modern version of an idea originally floated in 1972 by the late James Tobin, the Nobel-winning Yale economist. Tobin argued that currency speculation — money moving internationally to bet on fluctuations in exchange rates — was having a disruptive effect on the world economy. To reduce these disruptions, he called for a small tax on every exchange of currencies.

Such a tax would be a trivial expense for people engaged in foreign trade or long-term investment; but it would be a major disincentive for people trying to make a fast buck (or euro, or yen) by outguessing the markets over the course of a few days or weeks. It would, as Tobin said, “throw some sand in the well-greased wheels” of speculation.

<snip>

This would be a bad thing if financial hyperactivity were productive. But after the debacle of the past two years, there’s broad agreement — I’m tempted to say, agreement on the part of almost everyone not on the financial industry’s payroll — with Mr. Turner’s assertion that a lot of what Wall Street and the City do is “socially useless.” And a transactions tax could generate substantial revenue, helping alleviate fears about government deficits. What’s not to like?

More: http://www.nytimes.com/2009/11/27/opinion/27krugman.html?_r=1

Yet another example of sensible change we could have believed in.

[elleng]

1. HELL YES!!!!

[RepublicanElephant]

2. could this even make it out of any congressional committee? nt

[elleng]

3. In the House, I think so.

The Senate is another thing (and rapidly becoming a target of my 'hatred.')

[depakid]

4. Make the Senators stand arm & arm with the banksters and fraudsters

AND this time, have the administration take an active leadership role fighting for this and other reforms that have twisted Wall Street and pummeled Main Street.

In an election year, this (and other sensible reforms) would not only be popular, but merely fighting hard for them would gain a lot of populist mileage.

[elleng]

5. Senators prolly don't WANT 'populist' mileage.

Housers need it, tho, and would be the ones twisting wall st.

[jeanpalmer]

6. There's no question the tax would destroy

most trading. Taxing buys and sells at even .25% will wipe out probably 70% of trading volume. Much (50-70%) of the trading done on the NYSE is programmed trading that capitalizes on very small price discrepancies in the market. That kind of trading would be wiped out, very quickly. Even small non-institutional traders could not withstand such a tax. A round-trip tax of .5% would make very few trades worthwhile. Once short-term trading stops, the tax will fall mostly on longer term investors.

[depakid]

9. Gee, that's a strange thing to say since Britain has had a similar tax for decades

Dean Baker makes a further argument:

Just like that perfect sweater, a financial transactions tax (FTT) would look just great on those Wall Street bankers and financiers. A modest tax, which would be too small for normal investors to even notice, could easily raise more than $100bn a year. That's real money even in the land of AIG and Citigroup bailouts.

The Wall Street boys and the politicians they support just hate it when people talk about a FTT. They start huffing and puffing and get out their best indignant voices to quickly dismiss such naïve notions by those not initiated in the ways of finance. These arrogant dismissals are usually sufficient to scare reporters away from writing about the idea and to keep most interest groups and politicians from seriously pressing it.

But for those not easily intimidated by blowhard bankers and their hired flacks (which include many economists), a FTT makes a huge amount of sense. The basic point is quite simple.

A tax of 0.25% on the sale or purchase of a share of stock will make little difference to a person who intends to hold the share for five to 10 years as a long-term investment. This tax would cost someone buying $10,000 of IBM stock $25 when they purchase their shares. If the price doubles in 10 years, then they will have to pay $50 when they sell. These fees would be dwarfed by their capital gains taxes.

Similarly, if a farmer had to pay a tax of 0.02% on purchasing futures to hedge her wheat crop, the cost for hedging a $400,000 crop would be $80. This expense would have little impact on her decision to hedge her crop or on her income from farming. In fact, since the price of trading shares of stock, futures and other financial assets has fallen sharply in the last three decades, a modest transactions tax would just raise the cost of trading back to where it was 15 to 20 years ago.

A small increase in trading costs would be a very manageable burden for those who are using financial markets to support productive economic activity. However, it would impose serious costs on those who see the financial markets as a casino in which they place their bets by the day, hour or minute. Speculators who hope to jump into the market at 2pm and pocket their gains by 3pm would be subject to much greater risk if they had to pay even a modest financial transaction tax.

Similarly, the financial engineers who specialise in constructing complex financial instruments may find a FTT to be a nuisance. A FTT could cause their derivative instruments to be taxed at several points. For example, the trade of an option on a stock would be taxed, as would the purchase of the stock itself if the option was exercised. More complex derivatives could be subject to the tax many times over, substantially reducing the potential profits from complexity.

The Wall Streeters and their flacks will insist that a FTT is unenforceable and will simply result in trading moving overseas. There is a small problem with this argument called the United Kingdom. The UK has had a tax on stock trades (trades of derivatives and other financial instruments are untaxed) for decades. The revenue raised each year would be equivalent to $30bn in the US economy. Obviously, the tax is enforceable.

In fact, we can go beyond the UK and add other measures to make enforcement more fun. For example, we can give workers an incentive to turn in their cheating bosses by awarding them 10% of any revenue and penalties that the government collects. There are surely many clerical workers in the financial industry who would welcome the opportunity to become millionaires by turning in their bosses.

More: http://www.guardian.co.uk/commentisfree/cifamerica/2009/apr/27/wall-street-economy-financial-transactions-tax

[Kurt_and_Hunter]

7. Related Question: How much of our trouble is due to technological trading efficiency?

My first thought regarding a tiny transaction tax is that almost all ways of transacting have become much cheaper over the last 20 years.

The internet bubble wasn't just a bubble of internet stocks. It was also a bubble of internet trading.

When Ameritrade at al first offered $7.00 transactions it made individual day-trading and flipping possible.

Today they advertise home FOREX Trading! Geez...

These efficiencies are very good things most of the time. Many of the transaction drags and information bottle-necks of the past were restraining growth.

But when the system turns pathological it is more efficiently pathological.

One of the reasons I took and continue to take the threat of deflation so seriously is that we have never yet seen what modern efficiency can do to drive a deflationary spiral. The internet and computers in general might facilitate years worth of deflation occurring in a week.

I don't know that it would, but it is untested.

[girl gone mad]

8. Geithner is an idiot.

This tax is a great idea.

[NC_Nurse]

10. Sounds good to me.

[applegrove]

11. Sounds great!

[Sebastian Doyle]

12. I'd rather put all the filthy fucking bastards in prison

But taxing them would be a good start, I guess.