Robert Reich is using his pulpit today to try to convince us that the Financial Transactions Tax which Bernie Sanders is proposing is a really good idea. So, why on't we all get behind it then? A good answer to this being that Bernie's FTT is an objectively silly idea. It won't cure the financial markets, it won't raise revenue, there are vastly better ways to tax finance if we should wish to and given that my only piece of peer reviewed research is on exactly this subject I'm the one who is going to tell you all this too.
Why is there so little discussion about one of Bernie Sanders’s most important proposals – to tax financial speculation?
Buying and selling stocks and bonds in order to beat others who are buying and selling stocks and bonds is a giant zero-sum game that wastes countless resources, uses up the talents of some of the nation’s best and brightest, and subjects financial market to unnecessary risk.
No Professor, just no. It is not true that buying and selling capital assets or shares in them produces nothing. It produces a rational and efficient (or as close to those things as we humans can get) allocation of societal capital to those things that society wants to get done. No one at all thinks that the current system is perfect but so far all of the other ones we've tried have been worse.
High-speed traders who employ advanced technologies in order to get information a millisecond before other traders get it don’t make financial markets more efficient.
Yes, yes they do. They increase liquidity: which given that more liquidity is defined as more people trading more often seems obvious enough. But what more liquidity does is makes trading cheaper. The average 401 (k) trade is now substantially cheaper than it was before the rise of HFT. And it's cheaper because of HFT. The difference is in the turn, or the bid/ask spread. This is the difference between what you can sell a stock for (say, 100 MSFT) at any one moment and what you can buy that same stock in that same size for. The margins here have declined so much that the traditional equity market makers are pretty much out of business these days. There's just no profit in that area of the market. And guess what? This is one of those times when there being no one in the middle making a profit makes consumers better off. The current arguments about how much those spreads have shrunk is over whether it's one, two or three orders of magnitude.
And yes, reducing costs by one, two or three orders of magnitude is known as increasing efficiency.
Wall Street Insiders who trade on confidential information unavailable to small investors don’t improve the productivity of financial markets.
Amazingly there's a rather large number of economists who would disagree with you. Sure, such insider trading is rather rigging the market but that can also happen while it still improves productivity. Eugene Fama won the Nobel for his "strong" version of the efficient markets hypothesis and that strong version does include the idea that even the information which comes from insider trading increases the efficiency and productivity of that market.
Bankers who trade in ever more complex derivatives – making bets on bets – don’t add real value.
Again, this is untrue. If derivatives didn't provide value then no one would buy or use them, would they? And the value that derivatives provide is simply the shifting of risk. Say, in a futures market, the speculators are there to lift the risk of the shoulders of the physical traders. That's what it's all for. And that we go back a step (or forward) and trade risk itself, or interest rate futures, or options, doesn't change this basic fact. A derivatives market only succeeds when there's a market out there that wants to be able to shed risk. That derivatives market then allowing the speculators to assume that risk. That's what they're for and that's what they do.
All of which makes Bernie Sanders’s proposal for a speculation tax right on the mark.
No, it's a very silly idea indeed.
Another big plus: Given the gargantuan size of the financial market and the huge volume of trading occurring within it every day, this tiny tax would generate lots of revenue.
Even a 0.01 percent transaction tax (a basis point is one-hundredth of a percentage point, or 0.01 percent) would raise $185 billion over 10 years, according to the nonpartisan Tax Policy Center.
Sanders’s 0.5 percent tax could thereby finance public investments that enlarge the economic pie rather than merely rearrange its slices – like tuition-free public education.
Try reading that paper of mine (here, not the peer reviewed version but an earlier one). The FTT won't in fact raise any net revenue. The misallocation of capital coming from the FTT will make the economy smaller than it would otherwise have been. So much so that the direct revenues from the FTT will be smaller than the revenues lost from the other taxes we would have got from a larger economy.
After all, Americans pay sales taxes on all sorts of goods and services yet Wall Street traders pay no sales taxes on the stocks and bonds they buy.
Here Reich's basic economic illiteracy is shining through. An FTT is a transactions tax. A sales tax is a consumption tax. The difference is that a transactions tax is applied at each stage of the process. Dealer A sells to Dealer B who sells to stockbroker who sells to retail saver. That's four chunks of the transactions tax, four times it is applied. A sales tax is applied once, at that final retail level. This is why another Nobel Laureate, Sir John Mirrlees (doing so with the American Laureate, Peter Diamond as I recall), so insists that a transactions tax is a really, seriously bad idea. He also says that if you want to get more tax revenue from the finance industry then why not, why not apply sales tax to it? At least that would work.
Naysayers led by the financial industry’s lobbyists (the Financial Services Roundtable and Financial Markets Association) warn that even a small tax on financial transactions would drive trading overseas, since financial trades can easily be done anywhere.
Baloney. The U.K. has had a tax on stock trades for decades yet remains one of the world’s financial powerhouses. Incidentally, that tax raises about 3 billion pounds yearly (the equivalent of $30 billion in an economy the size of the U.S.), which is pure gravy for Britain’s budget.
Stamp Duty, that UK tax, is a sales tax, not a transactions tax. And it's only on stock itself: which is why we have a thriving trade in contracts for difference which do not pay it. OK, it's not offshore but it's avoidance of that tax. And as to it being pure gravy, well, the IFS looked at this once and they said that the UK would gain more tax revenue in the absence of the tax. Because, like the FTT, it makes capital more expensive for companies and thus, over time, shrinks the size of the economy. The FTT also shrinks pensions as pensions savings would have to pay the tax.
Industry lobbyists also claim the costs of the tax will burden small investors such as retirees, business owners, and average savers.
Wrong again. The tax wouldn’t be a burden if it reduces the volume and frequency of trading – which is the whole point.
See above, it's the liquidity that comes from the volume and frequency of trading which makes it so much cheaper for those small investors.
Americans are fed up with Wall Street’s financial games. Excessive speculation contributed to the near meltdown of 2008 – which cost millions of people their jobs, savings, and homes.
Yet another Nobel Laureate, Robert Shiller, actually attributes the Crash to a lack of, an absence, of speculation, not an excess of it. Because people couldn't speculate that house prices would fall therefore the bubble in house prices got out of hand.
So why is it only Bernie Sanders who’s calling for a financial transactions tax? Why aren’t politicians of all stripes supporting it? And why isn’t it a major issue in the 2016 election?
Because a financial transactions tax directly threatens a major source of Wall Street’s revenue. And, if you hadn’t noticed, the Street uses a portion of its vast revenues to gain political clout.
So even though it’s an excellent idea championed by a major candidate, a financial transactions tax isn’t being discussed this election year because Wall Street won’t abide it.
Well, no. The reason that the financial transactions tax isn't being talked up by all and sundry is that it's a very silly idea. It would shrink the economy, reduce tax revenues, make pensions smaller and make using the financial markets more expensive for Joe Sixpack. given that that's not a list of public policy outcomes which we would regard as desirable the policy of an FTT is not desirable.
As before, there could be a reason that Reich isn't a Professor of Economics but is one of Public Policy instead.
