Yesterday, we posted about high frequency traders crowing about their high profits from Monday’s unprecedented stock market volatility.
Arguably, their methodology — hinging on fast data and low transactions’ costs — fanned the volatility flames.
I was surprised that Bernie Sanders didn’t seize the moment to say “I told you so” … and to pitch his Financial Transactions Tax.
Given the stock market bounces this week, I though it would be timely to reprise a post from a couple of weeks ago which has heightened relevance and timeliness …
Dem-Socialist candidate Bernie Sanders doesn’t serve up much that I agree with … but, there is one reheated idea that I half-support.
Sanders proposes that financial transactions be taxed … roughly 1/2% for most trades … slightly lower for for some categories of investments … say, Municipal Bonds.
Sanders would use the new tax proceeds to fund public college for low-income students.
Let’s dissect the proposal … then, for what it’s worth, I’ll tell you where I agree and where I disagree …
First, the basics … what’s a Financial Transactions Tax (FTT)?
An FTT is simply a tax imposed on the purchase and/or sale of financial securities. The tax may be assessed on the buyer, the seller, or both, and is typically an ad valorem tax, that is, a percentage of the market value of the security that is traded.
Bernie proposes 1/2% when buying and 1/2% when selling … total of 1% on a so-called round-trip.
According to the Tax Policy Center, proponents advocate the FTT on several grounds:
The tax could raise substantial revenue at low rates because the base—the value of financial transactions—is enormous.
An FTT would curb speculative short-term and high-frequency trading, which in turn would reduce the diversion of valuable human capital into pure rent-seeking activities of little or no social value. T
They argue that an FTT would reduce asset price volatility and bubbles, which hurt the economy by creating unnecessary risk and distorting investment decisions.
It would encourage patient capital and longer-term investment.
The tax … would primarily fall on the rich, and the revenues could be used to benefit the poor, finance future financial bailouts, cut other taxes, or reduce public debt.
That sounds pretty good to me, but the TPC that opponents have compelling counter-arguments:
Opponents claim an FTT would be inefficient and poorly targeted.
An FTT would boost revenue, but it would also spur tax avoidance, [so projected tax revenue increases are probably overstated].
As a tax on inputs, it … would distort economic activity.
Although an FTT would curb uniformed speculative trading, it would also curb productive trading, which would reduce market liquidity, raise the cost of capital, and discourage investment.
It could also cause prices to adjust less rapidly to new information.
And,opponents claim that even the progressivity of an FTT is overstated, as much of the tax could fall on the retirement savings of middle-class workers and retirees.
OK, so where do I come out?
First, like most folks, I kinda like the idea of sticking it to Wall Street’s fat cats and the hedge funds.
But, envy and spite are insufficient motivators, right?
Need to look at the economics of the proposal.
I think the $50 billion in addition taxes is probably high … maybe way high … but, so what?
There will be some increment taxes coming in … just so nobody pre-spends it.
For a variety of reasons, I disagree with using the money to fund tuitions.
I’m all for providing needs-based scholarships – but there are plenty of schools and programs on that track.
What we don’t need is more turbo-charging of tuitions … plentiful loan money is already pushing tuitions up … more free money will only worsen the problem.
Similarly, I wouldn’t want the money to go to, say, infrastructure because the Feds would simply waste it … think, no bid union contracts to build turtle crossings.
I’d put any additional tax proceeds towards debt reduction … and try to neutralize the fungibility of the money.
Which gets back to the fundamental question … “structurally” would an FTT help or hurt?
Would it create “transaction friction” and cause “market inefficiency”?
Of course it would.
That would impact FastTrades and pure arbitrage plays – which I consider a good thing – but, I don’t think that it would disrupt the overall flow of more fundamental “patient capital”.
My analogical reasoning (which I haven’t seen posted in other articles on the subject) goes back to the good old days.
I did some econometric work on the stock market a long time ago.
Back about 40 years ago, as an economist-wannabe, I co-authored a study that was published in the Journal of Finance titled “The Supply of Money and Common Stock Prices”.
The article summarized an econometric study that demonstrated a tight link between the amount of money floating around and, on a slightly time-delayed basis, the price of stocks.
One on the factors modeled in was a 1% commission rate for buying or selling securities … that was the going rate in those days … and, the real capital markets were doing just fine, thank you.
Overtime, competition has squeezed commission rates down to essentially zero.
That’s one of the reasons that FastTrading is so financially attractive.
A 1% tax might slow the FastTraders, but I don’t think that it would freeze the capital markets.
Bottom line: Good for Bernie Sanders for putting the issue in the spotlight.
Let’s see if it catches any traction.