Bernie Sanders says that he, when President, will bring in a financial transactions tax. This will tax the plutocrats on Wall Street and he'll use the money to then pay for free state college for all. There's a number of things wrong with this idea: one being that there's no real reason why the plutocrats should be taxed to pay for college, another being that there's absolutely no connection at all between what you could, or even want to, tax the plutocrats has any connection at all with how much you might want to spend on state college. Hypothecation of revenues in such circumstances just isn't a good idea.
However, there's a much more basic reason why it's not going to work. The entirely absurd estimations of how much revenue such an FTT would actually bring in. The WSJ refers to this today:
Bernie Sanders says the U.S. can easily afford free college tuition at state universities by levying a small tax on Wall Street trading.
The Tax Policy Center, a leading think tank on tax issues, says his revenue estimates from such a tax are vastly overstated. If the TPC is right, forget about that free college.
Figuring out how both sides come up with their estimates is crucial to understanding whether Sen. Sanders is economically deluded or a visionary. Mr. Sanders’s economic advisers and the TPC have been fighting over these estimates since at least last fall, and have fired recent salvos.
They have indeed fired such salvos and of course the result that one gets is determined by the assumptions that one makes in reaching the conclusion. The most important is how much trading declines as it gets more expensive. I tend to think a lot but then that is just me thinking that. Although I can point to how to test that assumption: we can model an FTT is being the same as a bid ask spread. In economic terms of the effect upon traders they are indeed the same thing. So, we look at the FTT, then work our way back in time to when the bid ask spread was that size. We then ask ourselves, OK, what was market turnover at that bid ask spread and there we have it, an estimation of market turnover with an FTT of that size. My suspicion is that it was an awful, awful, long time ago that the bid ask was 5 cents on a $10 trade (Bernie's suggested FTT is 0.5%) and the US stock market turnover was pretty small at that time. However, that is the most obvious modelling method to use.
In the absence of anyone doing that (and my lack of technical skills will stop me doing it) we need to look at what those supporting Bernie's plan have to say about it.
Based on this
generate about $340 billion per year, assuming that a combination of trading volume
evidence, we conclude that a US FTT operating at the tax rates stated above would
decline and tax avoidance generates the equivalent of a 50 percent fall in trading revenue.
That's not actually possible.
A little trick of the trade for you. You can be bumbling along in a model and making what appear to be entirely reasonable estimations of the various parameters you're dealing with. Fine: but sometimes you've just got to look up and benchmark these assumptions against reality. One way to do that is to look at whether the end numbers you get look reasonable against the rest of the economy. And that number there, $340 billion just isn't reasonable at all. In fact I will guarantee that no FTT trying to tax Wall Street will ever be able to raise anything near that sort of sum.
To our reality checks. Quarterly profits at all the Wall Street banks run around $40 billion a time. So, call it $160 billion a year. We're trying to tax Wall Street, right? And the big banks are a proxy, even if not a perfect one, for Wall Street. And we're going to get more than twice as much in tax as the banks currently make in profit? Pull the other one, the IRS actually answers the phone if you do.
We can try this another way.
These numbers simply aren't going to happen, they're impossible. What that means is that those estimates in there of being reasonable about parameters are simply not being reasonable. We've tested the end result against reality and that real world won: do the calculations again.
We might say that well, OK, it won't just be Wall Street paying the tax, that's how we'll get such heaps of cash! Well, OK, but isn't taxing Wall Street the whole point here? We can get heaps of cash to pay for state college by taxing politicians too, but that doesn't really deal with the Wall Street problem, does it?
My own one and only piece of peer reviewed research is on this very subject. And the answer to "how much will an FTT raise?" is "less than zero". We know that taxing transactions lowers the price of stocks. This is the same as saying it raises the price of capital to corporations. A higher cost of capital leads to less investment and that in turn leads to a smaller economy. Given that Uncle Sam gets around 35% of the economy each year if the economy is smaller by, say, 1% at some future date then Uncle Sam will be getting 0.35% of GDP less in tax. If the economy is that 1% smaller as a result of the FTT then tax revenues are about 0.35% of GDP smaller than they would have been in the absence of the tax.
The European Union's estimates were that the economy would be 1.75 to 2% smaller after the FTT than it would have been without it. So, using that tax revenues for the US would be roughly 0.7% of GDP less after the FTT. But, of course, we need to add the actual revenues from the FTT itself. But that $340 billion (that number we already know is vastly too high) is some 0.2% of GDP. So, we gain 0.2% of GDP from the FTT and lose 0.7% from the effects of the FTT. This is not an increase in tax revenues collected.
The specific arguments about how much the FTT will raise aren't quite the point because the total revenue effect will be negative. But even ignoring that, there is no way that the revenues will be anything like Bernie and his supporters would have it. It simply won't be possible to tax Wall Street, through this FTT, twice the total profits of all the Wall Street banks, nor near all the profits of the entire financial sector. Any analysis purporting to show such an outcome needs to be checked against the universe, a reality check it will fail.
The FTT is a bad idea, let's not do it.
And if you really do want to gain more tax revenue from finance then you simply subject it to sales tax: or, as we usually describe such specifically designed for finance, the FAT. the problem with that being that it becomes obviously you and I, the consumers of financial products, which pay that, not the Wall Street traders themselves.
