Financial Transaction Tax

Earlier this year, all of the Democratic candidates for the presidency proposed a new tax, one targeted almost exclusively at the wealthiest Americans. Such a financial transaction tax (FTT) would impose a sales tax on trades of stocks, bonds, derivatives, and other securities. The tax levels proposed differ, and range from one basis point [one hundredth of one percent] to as high as fifty basis points, although most economists seem to think the lower ranges will actually generate more tax revenue. Just to keep this in perspective, an FFT of one basis point would raise revenues of just ten cents on a transaction of one thousand dollars. A $100,000 transaction would raise just ten dollars.

That doesn’t sound like it would raise that much in revenue, but consider that annual trades in stocks alone in the U.S. are approaching fifty trillion dollars, and the total trading in stocks, bonds, derivatives, and other similar financial instruments exceeds six hundred trillion dollars, according to the Tax Policy Center. Depending on the tax level chosen, annual revenues would range from around $40 billion to as much as $210 billion.

The interesting aspect of the FTT is that the vast majority of the taxes would fall on the wealthiest Americans and particularly on high volume automated securities trades, those trades which contribute the least to economic growth and perhaps the most to the pocketbooks of hedge fund managers and the like. Over 75% of the tax would fall on the top fifth of the population in earnings, and 40% on the top one percent, but even for the top one percent, the tax would increase their overall tax liability by less than one percent, and for those in lower income brackets, the impact would be less than a quarter of a percent of income.

Some of those in the finance industry complain that such a tax would reduce trading volumes without decreasing market volatility, especially if an FTT is imposed with tax levels as high as those under consideration in Europe, but even the highest rates proposed to date in the U.S., by Senator Sanders, are well below the proposed European levels. Critics also suggest that an FTT would turn investors away from U.S. markets, but in practice that seems highly unlikely, given that such taxes either already exist elsewhere or are under active consideration.

Critics of the FTT tend to overlook several basic points. First of all, high-speed stock trading is simply using advanced technologies in order to get information a millisecond before other traders. High-speed trading doesn’t make markets more efficient, but it does increase stock prices, out of which the traders make money. It’s actually a sophisticated form of an old practice, called front-running, which was illegal. High-speed trading doesn’t create efficiency, but it does create the possibility of debacles like the “Flash Crash” of May 2010.

Second, use of high-speed computers, sophisticated algorithms, and confidential information unavailable to small investors doesn’t improve the productivity of financial markets. Such technology and systems just tilt the market in favor of those traders. Likewise, trading in ever more complex derivatives – making bets on bets – doesn’t add real value. It’s merely speculation that makes the system more vulnerable to big losses, as occurred in the financial crisis of 2008.

Third, one of the aspects of the finance sector that’s been overlooked is that it now produces a quarter of corporate profits while creating just 4% of American jobs. Who says speculation and computerized market-churning doesn’t pay?

Given all that, why shouldn’t we push for a financial transactions tax? Especially since most of those insisting that we need to balance the federal budget are the very people who’d pay most of the tax?

5 thoughts on “Financial Transaction Tax”

  1. D. Bartels says:

    I agree a financial transaction tax makes sense, and in particular at the levels proposed is one of the few taxes that would do no harm to the economy.
    However, most unfortunately, there has been no proposal to use this to balance the budget. Instead, it has been used exclusively as a prop to provide cover for promises of massive spending increases (many times larger than any possible revenue).

  2. John Prigent says:

    Why bother to invent a new tax! Politicians will only squander whatever amount it raises. That’s what politicians do.

    1. darcherd says:

      And who elects those politicians? We do. If we don’t like how our tax dollars are being spent, all we have to do is elect people who share our priorities.

  3. cremes says:

    The complaints levied in the OP would all be resolved by forcing all orders entered into the market to remain for a full 1 second before they can be modified or cancelled. That would solve all front running, put the high speed market takers out of business, and provide a more orderly market.

    However, it wouldn’t raise any revenue for the govt.

    A financial transaction tax won’t raise any revenue either. All of the trading volume would dry up domestically and move off shore as soon as the tax was imposed.

    Don’t believe me? Google for stories on Chicago considering a tax on the Chicago Mercantile Exchange. The CME has already said they would move outside of the city’s taxing authority, so not only would Chicago raise $0 in revenue, but they would LOSE out on any taxes currently paid by the CME. They can easily make good on their threat; their business continuity site (which runs 50% of the exchange daily) is located outside of Cook County. They can flip a switch and move permanently.

    Someday I hope our author realizes that we cannot tax ourselves into prosperity or equality.

    1. I’ve never believed in high taxes; I just believe that those who are in the top 1/10 of one percent should pay at least at the same rate as I do.

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