Home > Uncategorized > Don’t believe Wall Street’s scare stories about a financial transactions tax

Don’t believe Wall Street’s scare stories about a financial transactions tax

from Dean Baker

Thanks in large part to Sen. Bernie Sanders, the Democratic Party recently added a financial transactions tax to its platform. In his run for the presidential nomination, Sanders had promoted the idea of an FTT — a small sales tax on the purchase of stocks, bonds or other financial assets — as a way to finance free college for everyone, with money left over for infrastructure and other important needs. The idea has currency beyond the platform, too: Rep. Peter A. DeFazio (D-Ore.) recently reintroduced an earlier proposal for a tax of 3 cents on every 100 dollars on most financial transactions.

Talk of FTTs scares the financial industry: They would significantly reduce the industry’s revenue and profits. As soon as anyone starts taking FTTs seriously, the industry immediately begins issuing dire warnings — which, unsurprisingly, almost always amount to nonsense.

Of late, the industry has taken to pretending that the real victims of an FTT won’t be the high rollers on Wall Street, but rather middle-class families. If families have 401(k)s, industry complainers say, they will have to pay more for the trades done by the people who manage their funds. Likewise, if they have a traditional pension, each trade made by the pension will cost more.

There’s a basic problem with the industry’s logic. A great deal of research shows that trading of stock and other financial assets is hugely responsive to the cost of trading. In fact, most research shows that if the cost of trading goes up by a certain amount — say 20% — the number of trades will fall by an even larger amount, say 25%.  

The implication is that however much a tax raises the price of trading, it will reduce the volume of trading by even more. That means the total amount that a typical manager of a 401(k), mutual fund or a pension fund spends on trading will actually fall as a result of the tax.

In the example above, families would find themselves paying 20% more on each trade ordered by their fund manager, but the manager would order 25% fewer trades, meaning the total trading expenses charged to their 401(k) would fall by roughly 10%. (They would be trading 75% as much as they had previously, but paying 120% as much on each trade.) It follows that, in this story, most families end up saving money as a result of the tax, at least assuming that they aren’t giving up anything by trading less.

That, by the way, is a pretty safe assumption. Some people will win on a trade, for example, by selling a stock at a temporary high. But that means someone else lost, by buying an over-valued stock. On the whole, trading is a wash.

Nor should we worry that an FTT would make the market dramatically less vibrant. Trading costs have plummeted in the last four decades as a result of computerization. The FTTs on the table would just raise trading costs back to where they were 10 or 20 years ago; they won’t shut down financial markets.

Of course there is one group that does stand to lose in this story: the financial industry. The lost trading volume is money directly out of their pockets. If a tax like the one proposed by DeFazio raises $40 billion a year, as projected by the Joint Tax Committee of Congress, it would reduce the revenue of the financial industry by at least this amount.

Look for scare stories about FTTs in the coming months. They may not make a lot of sense to those familiar with the issue, but they can go far in shaking the public’s confidence. Legislators shouldn’t lose sight of the bottom line: FTTs can raise a lot of money by making the financial industry more efficient.

See article on original site

  1. July 25, 2016 at 6:00 pm

    “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism

    These tendencies are a scarcely avoidable outcome of our having successfully organised “liquid” investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges. That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmorton Street is, compared with Wall Street to the average American, inaccessible and very expensive. The jobber’s “turn”, the high brokerage charges and the heavy transfer tax payable to the Exchequer, which attend dealings on the London Stock Exchange, sufficiently diminish the liquidity of the market (although the practice of fortnightly accounts operates the other way) to rule out a large proportion of the transactions characteristic of Wall Street. The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.”

    John Maynard Keynes, General Theory (1936)

  2. David Chester
    July 26, 2016 at 11:08 am

    Such a tax on shares transfer scares me too! The right thing to tax is land values, because the result of it is to make land speculation less practical and provide greater opportunities to use land properly.

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